Today on NPR, Michelle Norris interviewed Lloyd Blankfein, the CEO of Goldman Sachs. When asked what Goldman might do in the future to prevent Financial Crises, Blankfein said "...recognize bubbles." On April 27, NOVA presented "Mind Over Money" asking "Can markets be rational when humans aren't?" Taken together, the Blankfein interview and the NOVA program beg a lot of questions.
First, it's not difficult to recognize bubbles (see earlier posts here). Even if Goldman were smart enough to recognize bubbles (I assume they are since they are the "smart money"), it's not their job. What would they tell the "dumb money"? Sorry, we won't place your bets! What would remain of investment banking? In fact, Matt Taibbi thinks Goldman Sachs is "The Great American Bubble Machine." If we wait for Mr. Blankfein and Goldman to recognize and do something about bubbles, we'll be waiting a long time.
How about the Federal Reserve? The Fed also failed to recognize past bubbles since it is the Fed's job to create growth rather than keep the economy from growing too fast.
How about the short-sellers who recognized the bubble and bet against it? They did their job and made a lot of "smart" money, but short-selling neither created nor defused the bubble.
Are there any other institutions that have the power to recognize and control bubbles? I can't find any and I'm not sure that breaking up Goldman would actually solve anything.
As with a lot of political issues, we probably aren't looking at the root cause. Since, 1990 there has been a sharp increase in the share of pre-tax household income held by the top 1% in the US. In 2005, it had almost reached 20%, the same level it had reached in 1929 before the Great Crash. There's a lot of money being held by people who's only objective is to make more money and Goldman is there to help them out (smart) or relieve them of their burden (dumb).
Even Alan Greenspan thinks income inequality is a problem (but doesn't connect it with bubbles) and the cause appears to lie in US politics.
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