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New Left Review 5, September-October 2000


Andrew Glyn on Robert Shiller, Irrational Exuberance and Andrei Shleifer, Inefficient Markets. Have even the most critical professionals fully explained the record Wall Street bubble?

ANDREW GLYN

UNDERSTANDING THE BUBBLE?

Since the middle of the 1990s the US stock exchange has played a pivotal role in the expansion of the world economy. With Europe stagnating until recently and Japan stagnating still, the American economy has been the OECD’s locomotive. The long US boom, dissected by Robert Pollin (NLR 3), has been underpinned by very rapid growth of household consumption. Rising share prices have allowed the well-off to increase their spending by realizing capital gains or borrowing against them. If the stock market continues rising, then capital gains will continue flowing, consumption will remain buoyant and the growth of the US economy will be limited only by the growth of its productive capacity. If the stock market stops rising (as it has in recent months) American economic growth will slow and a ‘soft landing’ to a more moderate growth path is possible. But if the stock market falls to much lower levels, it would precipitate a severe recession. Spending would drop as households rushed to repay borrowings and build up depleted savings, just as happened in many countries at the end of the 1980s, when consumption booms based on credit collapsed spectacularly. The upsurge in US corporate investment would falter. The government’s budget surplus would disappear as tax revenues declined. The dollar would plummet as investors sought safer havens elsewhere—vainly, as bourses abroad would fall in sympathy. The medium-term perspectives for the world economy literally rest on the Dow Jones index.

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