Is the next financial crisis brewing in the asset bubble?

Larry Elliot in the Guardian: “….a time traveller would see remarkable similarities between the unfolding of the Roman crisis of almost two millennia ago and the 2007-09 crash. The calling in of loans led to a credit crunch. Debtors went to the wall.” “Prices fell. The emperor arranged for the most heavily indebted to get interest-free loans for three years. A “bad bank” was set up. Tiberius financed his own version of quantitative easing, not by selling imperial bonds but by confiscating wealthy Romans’ assets.
All of this is documented in an excellent new book by Bob Swarup called Money Mania*, which looks at booms, panics and busts down the ages. His message is that nothing is really new. Put together people, credit and structural fragility and you create the perfect conditions for a crisis.
Swarup’s book comes out at an opportune moment. The past week has seen a shudder pass through stock markets as investors have taken a closer look at some of the more highly valued technology stocks. Easter traditionally marks the start of the British house-buying season, and this year’s begins with sales at a six-year high and prices up almost 10% on a year ago. The appetite for risk was highlighted by the demand for the five-year bonds issued by the Greek government.
Inevitably, the talk is of bubbles about to pop, of a new speculative mania, of lessons not learnt. This talk is a bit premature but the warning signs are there.
History suggests that certain conditions have to be in place for a crisis to develop. The first is that a decent period of time has to elapse after the previous crash. When bubbles burst, a cavalier approach to risk is replaced, almost instantaneously, by risk aversion. It takes time for those burned by their losses to forget. In the UK, for example, there was a property boom in the early 1970s, another in the late 1980s and a third in the early to mid 2000s. A 15-year gap is the norm.
The second condition is a sustained period of solid growth, by the end of which individuals convince themselves that the good times will go on and on. Accordingly, the property boom of the early 1970s came after 25 years of strong growth; the overheated market in the late 1980s stemmed from a belief that Thatcher’s reforms had eradicated all the economy’s problems; that in the 2000s came amid a period of uninterrupted growth lasting more than 60 quarters.
A third crucial factor is belief in those running the show. The runup to the Great Recession of 2007-09 was the heyday of independent central banks, which preened themselves on their ability to deliver solid non-inflationary growth. ….Central banks, no matter how clever, cannot prevent crises.
….Whip these three ingredients together and you have the recipe for a crisis. As Swarup notes, humans don’t like to stand still. “Growth is a strong psychological impetus, and if we are not growing in our lives in some way, we feel trapped and miserable.” So a recent period of growth plus confidence in policymakers allows us to extrapolate the past into the future, even if that means ignoring inconvenient facts.”