The movie, Boom Bust Boom, addresses the Achilles’ heel of capitalism where Terry Jones through animation describes how the nature of human beings can drive the economy into crisis time after time. Specifically, the film looks into the economic collapse that occurred in the year 2008 and utilizes to address the financial panics and depressions that have happened in the past. In the movie, a clear description of how economic models have been proved wrong and how both emotions and money can cloud economic sense has been addressed to detail.
What are bubbles &; why do they always occur? Why can’t we seem to learn the lessons of past bubbles?
From the film, a bubble refers to a phenomenon in which an asset’s price run-up but of which is not justified by factors of supply and demand. Bubbles reflect the frailty associated with human emotion. For instance, investors can allocate high demand of a stock such that its price is driven beyond the actual or rational reflection of its worth. However, such bubbles are discouraged because they are not established on anything substantial, and therefore the money invested goes to waste.
Economists have conducted experiments with the aim of identifying the reason why people fall for economic bubbles. Among the reasons discovered is that human beings do not have reason rationally in such cases. A closer look in the movie identifies why people can’t seem to learn lessons from past bubbles. Some of the reasons why people can never learn from their past bubbles include overconfidence, envy, and relying on past performances as indicators of what the future might unfold.
Envy can be likened to a scenario whereby a neighbor may sell their house at a profit and the other person next door imitates them because of the perceived benefits. On the same note, the neighbors who have made the successful sale could think that they have mastered the nature of the market and believe that they can do the same thing at some other time, in this case, reflecting that they are overconfidence. The two victims, with the thought that the market is increasing and never ending, they focus on the recent gains instead of thinking rationally or even looking at the historical averages, in this case, reflecting that they are relying on past performance.
One other reason why people always fall for bubbles and cannot learn from past events is the comfort associated with numbers. For example, an individual is most likely to enter in a hotel that is most populated than in one that is empty, regardless of whether the latter has better services and good food. The example shows the irrational nature of human beings and that in uncertain situations, they are more likely to follow or imitate what other people do. At the very core, the same thing happens in bubbles; people tend to react what the majority people do.
The nature of regret also makes people not learn from past mistakes associated with bubbles. When an individual cashes out on a particular investment, their minds automatically calculate the amount they would have made if they had kept riding on the bubble. Fear of regret, and eventually seeing another benefit from what one had cashed out from make people invest more. Equally important, in the chance that one had invested 50 percent of the total amount they had and enjoy profits from that amount, they start imagining of how much they would have made if they had invested everything.
Why do bubbles always burst & cause financial crises? Pay particular attention to the role of leverage.
In the year 2008, the financial system of the entire world experienced a complete meltdown, and no one looks forward to such a repeat. However, to avoid the incident from reoccurring, the cause of the meltdown has to be identified. Looking deep into the matter, there was not a single factor to be blamed because the financial institutions had embraced the idea of investing into risky investments since the mid-1990s. The key to understanding the 2008 meltdown lies behind understanding the concept of leverage, which refers to the practice of borrowing money for purposes of investing.
An economic bubble can, however, burst because of some reasons, with one of them being a rise in the rate of interest. In this case, interest refers to the value associated with money. Therefore, when these rates are to nothing, investors must come up with risky investments to avoid the erosion of capital. When the value of money is low, risky investments become more attractive and profitable. On the other hand, when the value of money rises, conservative investments become profitable, and investors are forced to deleverage and limit their reliance on borrowed money.
The housing bubble and the financial crisis of 2008
The financial crisis of the year 2008 began in the year 2006 when there were increased mortgage rates in the United States of America. In the year 2006, the mortgage defaults led to decreased prices of houses, which had initially registered an exponential growth for more than one decade. The increased growth was attributed to the irrational exuberance in the housing sector, and many people bought houses they could not afford because they anticipated that the house prices could go up. The housing bubble is attributed to the low-interest rates. Also, irrational exuberance also contributed to the recession because many investors used the situation to buy more homes to resell after the interest rates had gone up.
The financial crisis spread to other institutions through trade and financial linkages. Foreign banks had invested in the US housing at the time their values were rising, and this was made possible through the collateralized mortgage obligations (CMOs). Later on, the mortgages that backed the securities fell, and the investors attempted to liquidate their properties with no success. With no buyers in the market, the assets were frozen.
Why were traditional economists unable to explain bubbles &; their instigation of financial crises?
The economic bubble that took place in the year 2008 has been considered the greatest among other crises. The problem is however blamed on the financial institutions on fomenting the crisis through the creation of risky products and encourages consumers to engage in excessive borrowing. The failure of the traditional economists is attributed to the fact that they cling on capitalism. The vision of capitalism could however not work because there was a lot of unemployment. However, after the effects of the crisis faded, the economists began falling back to capitalism where rational people would interact with perfect markets. Their focus on capitalism made them ignore the setbacks associated with the crisis. For example, they ignored the adverse effects associated with the rationality of human beings, the imperfections related to the markets and the unpredictable crashes the economic operating system can undergo.
What was Hyman Minsky’s explanation of financial crises?
Hyman Minsky proposed that the financial crisis that occurred in the year 2008 could be attributed to financial instability. Further, he explained that financial crisis was as a result of capitalism in that during economic prosperities, both the lenders and borrowers lose a sense of financial responsibility. The increased optimism during these periods encourages the creation of financial bubbles and later bursts. Therefore according to Hyman, capitalism promotes an economic shift from stability to instability. In his explanation of how this change occurs, he advised that increased lending causes a rise in the price of assets which encourages the borrowers to borrow more with the expectation that the prices of assets would increase further. He identified these sentiments s irrational exuberance where people believe that the crowd can never be wrong.
In conclusion, the Movie Boom Bust Boom clearly gives a description of how economic models have been proved wrong and how both emotions and money can cloud economic sense. Though the movie is animated, the message is well passed. It has been observed that the primary cause of economic bubbles is the value of money. In the film, we are also able to identify some reasons why people never from the past financial bubbles. Some of the reasons why people can never learn from their past bubbles include overconfidence, envy, and relying on past performances as indicators of what the future might unfold.
Boom Bust Boom. Directed by Terry Jones, Benjamin Timlett, and Bill Jones, IMDb, 2015.