The Bubble Machine: Relative Capital Valuation, Distributive Shares and Capital Gains
The largest part of any explanation of large capital gains must certainly put at center stage the manic hypothesis, most humorously discussed over decades by John Kenneth Galbraith ([1954] 1961; 1994), and dissected most recently, in its psychological dimension by Robert Shiller (2005). Manic asset psychosis develops when, for whatever reason, an asset class acquires some tenable reason for earnings' gains, which in turn, motivate investors to jump in generating capital gains that persuade others now the size of a herd to follow. Losing sight of earnings, the herd, running madly in a deeply leveraged gallop inevitably run off the cliff, when for whatever reason bad news starts to spread or when some of the herd moves off in another direction. The New Economy hype of the 1990s, so adequately described by Shiller, and so nicely captured by Alan Greenspan's term, "irrational exuberance," exemplifies the manic situation completely. More recently, the rapid rise in housing prices to income and rents suggests at least the possibility of another manic psychology associated with still another bubbly asset class. The manic hypothesis of capital gains involves feedback loops of demanding herds. It is a "demand" hypothesis that requires some explanation exogenous to the manic hypothesis itself of the "origins" of whatever prospective earnings the herd eventually loses track of. In contrast, the present essay inquires into the "supply side" of recent bubbles by examining institutional and historical factors that tend to further the phenomena of capital gains surrounding stocks and housing the two main asset