Coppola Comment

Here is a very familiar financial bubble, in pictorial form: And this is what it looks like, charted: In those days, of course, tulips at least had to be able to flower. But things have changed since then. There are three key stages in the lifecycle of a financial bubble: The "Free Lunch" period. A long, slow buildup of price distortion, during which investors convince themselves that rising prices are entirely justified by fundamentals, even though it is apparent to (rational) observers that they are buying castles built on sand. The " This is nuts, when's the crash? " period. Everyone knows prices are far out of line with fundamentals, but they carry on buying in the irrational belief they can get out before the crash they all know is coming. Speculators pile in, hoping to make a quick profit. Prices spike.  The " Every man for himself " period (sorry, FT, I couldn't find a reference for this one) . Prices crash as everyone run...

Ten years ago today, Chuck Prince, then chief executive of Citigroup, dismissed fears of a financial crisis. “When the music stops, in terms of liquidity, things will be complicated," he said in an interview with the Financial Times in Japan. "But as long as the music is playing, you’ve got to get up and dance. We’re still dancing". He wasn't dancing for long. Less than a month later, the first bank failed . Over the weekend of 27th-29th July, IKB Deutsche Industriebank AG, one of Germany's key "Mittelstand" lenders, was bailed out by a consortium of German banks after credit markets refused to provide it with liquidity. The music had stopped.  The reasons for IKB's failure are now all too familiar. Anxious to diversify beyond its traditional core market of German small and medium-size businesses, IKB had set up an SPV called Rhineland Funding Capital Corporation. Rhineland issued US dollar-denominated commercial paper, and invested t...

Over at VoxEU, Philippe Bachetta and Ouarda Merrouche have a surprising take on "countercyclical" lending. They show that lending by US and European banks in US dollars to European non-financial corporates massively increased from 2007-2009, and that this helped to soften the effect of the European credit crunch on employment: Over the period 2004 to 2009, we find that foreign credit denominated in dollar to non-financial corporates is countercyclical – it increased sharply (relative to domestic credit) in response to the sudden tightening of credit policies at domestic banks (Figure 1) Here is their Figure 1 chart showing the growth of US$-denominated syndicated lending: Well, ok. US$-denominated syndicated loan issuance did indeed increase massively from 2007q1 onwards. And European banks did indeed tighten credit standards from late 2007 onwards, in response to the failures of IKB and Northern Rock due to the market freeze in August 2007. The chart appears to sho...

"I don’t think that the -coins we are seeing now are the last word in digital currency. They are experiments. And I do think there is a bubble in the making, which will burst noisily at some point. But  unlike others , I don’t regard this as a bad thing. Just as the dot-com bubble and bust was an essential part of the evolution of the Internet, so the bursting of the -coin bubble, when it comes, will enable a new digitized financial architecture to emerge. "So bring on the -coin bubble and bust. I want to see what grows in its place." Me, at Forbes .