What is a financial bubble? Too many people believing in their own cleverness as the structures they create slowly but surely depart from reality.

Here is Michael Jennings at Samizdata musing on the comparison between the telecoms sector overcapacity bubble of a few years ago and the current plight of Spain:

So here we are. The EU vendor finance bubble has ended. The French and (particularly) the Germans created this mess, because their banks and their industrial companies were benefiting in the short term. Blaming the Spanish is beyond the point. The Spanish let the Germans lend them money and then build them stuff with the lent money, and they were foolish to do this, but it appeared they were having a rapid miracle of modernity, and given the history, I can see why they wanted to believe this.

The German banks are screwed, after doing the bidding of the German government. If the German government has to bail them out, well they created the mess.

The market gives us a mechanism for such situations: bankruptcy, contumely, and then the long painful trudge back to credibility.

Our problem is that the political class don’t do bankruptcy for themselves. Rather they use our money to come up with even more reckless schemes, which they run:

In the case of the vendor financed telco bubble that I discussed earlier, the companies that did the lending and the borrowing generally both went bankrupt, their assets gobbled up by new and more sensible companies.

In the case of governments that have done the same thing, cleaning up is messier. The German and Spanish political classes are not just going to go away, however much we wish they would.

For a look at what this scary fact means on a grand scale, try this superb piece of work by Stephen Balch:

Conventional bubble imagery captures the stance of an outsider who watches it swell, vent, and collapse. But to genuinely appreciate bubble dynamics the insider’s perspective is better. The bubble experience, from within, is more like that of being in a closed universe, wherein lines of sight curve back upon themselves, and recycled expectations reinforce one another until surrounding realities are eclipsed.

Realties, of course, cannot forever be obscured, however hyped hopes or blinkered perspectives become. When their force proves irresistible, bubbles break, revealing the true dispensation, all the grimmer for its long denial…

The anomaly consists in this: whereas in the overwhelming majority of societies the dominant route to wealth and status has been through political control, essentially the use of force or threat of force to extract value from others, in the West it has generally been through exchanges in which the parties have choices, and in which value must be returned for value received if the transaction is to consummate.

We’re so conditioned to this, to the fact that our great fortunes belong to entrepreneurs, inventors, magnates, entertainers, and athletes, people who make (or do) things that others want, rather than to royalty, nobility, high priests, mandarins, court favorites and military leaders, people who take in taxes and booty things that others would prefer to keep, that we — very much including historians, journalists, and social commentators of almost every stripe — give little or no thought to it, considering it pretty much the natural order of things.

But our exchange-oriented social order does not  represent the natural order of things, and what it anomalously results in is of enormous –though perhaps ultimately self-destructive — consequence…

Now that’s a profound idea – that there is a ‘deep’ natural order of human things which is effectively hierarchical and oppressive and inefficient. But is it true?

Yes, the Chinese want to make us think so – a Communist self-appointed elite keep power, while the rest of China is given a lot of rein subject only to not challenging the hierarchy. What could go wrong?

But maybe the Middle East drama suggests something different.  Too many countriues run by corrupt and inept royalty, nobility, high priests, mandarins, court favorites and military leaders which are just seizing up. From inside their Islamo-national-socialist bubble the world for decades has looked quite attractive:

… a closed universe, wherein lines of sight curve back upon themselves, and recycled expectations reinforce one another until surrounding realities are eclipsed…

Even if they somehow manage to survive the current storms, the fact that the storms are happening with such vehemence (and driving the Chinese elite to crack down, just in case) suggests that this balance is not quite as balanced as it seemed? 

Stephen Balch gloomily concludes:

As with the preservation of all things hard-won vigilance is necessary. But with extended enjoyment an easy smugness may instead take hold, fostering frivolousness about what should be held dear and veiling threats toward which less favored ancestors would have been continually alert. To translate this into bubble-talk: the distance between the bubble’s point of origin and its circumference becomes too great.

… Desires too regularly satisfied are desires likely to grow, a process that may carry them beyond what even the most cosseted optimism ought to think possible.

Politicians with short time horizons and the ability to pass along, and thus hide, costs, are tempted to play upon such false hopes, bidding them ever upward. To translate into bubble-talk: the bubble’s surface becomes too insubstantial.

I suspect that at the root of my instinctive objection to AV voting in the UK is that in fact it will make that latter unsustainable trend even more pronounced, by implicitly or explicitly boosting the soggy centre.

Back to the beach.