Was kostet die Bubble??

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Ralph hat gestern beeindruckende Zahlen in den Raum gestellt und Vergeichsmaßstäbe gesucht und gefunden. Um welche Horror-Beträge ist die Nasdaq leichter geworden. Ist nur Schein-Vermögen, das einmal kurz wie in einer Fata Morgana erschien wieder verschwunden. Wohin eigentlich ist diese gigantische Vermögens-Verschiebung gegengen? Ich denke, es ist wichtig die Folgen und Konsequenzen anzudenken, die dieser noch anhaltende Tornado anrichtet.

Daher hier eine ausführliche Arbeit die sich mit dieser Thematik beschäftigt. So lang wie lohnend.

he Costs of the Stock Market Bubble


By Dean Baker



Executive Summary


Most economists who have examined the run-up in stock prices over the last four years have concluded that it is experiencing a bubble which cannot be sustained. The ratio of stock prices to corporate earnings peaked earlier this year at more than thirty to one. This ratio is more than twice the historic average, which has been approximately 14.5 to 1 over the last fifty years. The record high price -to-earnings ratio appears even less justifiable given that most mid-term projections show very weak profit growth. For example, the Congressional Budget Office (CBO) projects that profits will actually be 10 percent lower in real terms in 2010 than at present.

If this CBO projection is anywhere close to being accurate, then it implies that the stock market is hugely over-valued. Using a variety of assumptions on future profit growth and long-term equity premiums for stocks relative to government bonds, this paper shows the extent of the over-valuation to be in the range of $8-13 trillion. An over-valuation in the stock market of this magnitude is going to have very serious consequences for the rest of the economy. This paper examines some of the likely effects of this over-valuation.

The most obvious effect of the stock market bubble has been the decline in national savings due to the wealth effect. It is generally accepted that every dollar of wealth in the stock market generates 3-4 cents of additional consumption. According to standard economic theory, this additional consumption crowds out investment and net exports in exactly the same way as a government budget deficit would. A simple extrapolation implies that the consumption induced by the bubble has crowded out between $460 -$960 billion of both investment and net exports over the last six years. At present, the additional consumption attributable to the bubble is having the same negative effect on national savings as a $320 billion budget deficit.

According to standard economic theory, this loss of savings has reduced the amount of investment in the United States. More importantly, it has been a major cause of our trade deficit, which in turn has led to large U.S. borrowings from the rest of world. At present, the United States is borrowing close to $450 billion annually from abroad. This is money that otherwise could have gone to support investment in the developing world. This implies that people in developing nations are paying a high price because of the stock bubble in the United States.

A second potentially large cost associated with the bubble is the effect of misperceptions of the value of the real wage. There are two ways in which the bubble can cause misperceptions. Many higher paid workers, particularly in the high tech sector, are receiving a substantial portion of their compensation in the form of stock options. In a rapidly rising stock market these options have a high value. If workers include the anticipated value of stock options in their wage expectations, then they will be expecting a much higher real wage than firms will be able to provide when the market corrects. Estimates from a recent Federal Reserve Board study imply that the stock market run-up may have added 2.0 percentage points to labor compensation over the period from 1994 to 1998.

The second way in which the bubble can lead to a misperception of the real wage is through its impact on the value of the dollar. The huge trade deficit implies that the dollar is over-valued by between 20-30 percent. This has the effect of raising the real wage as long as the high dollar holds down the price of imports. However, when the dollar eventually corrects, this effect will be seen in reverse, as the falling dollar will lead to higher import prices and a lower real wage. The decline in the dollar could lower the value of the real wage by between 1.5and 2.2 percent.

The potential impact of these two effects is quite large. The standard theory of the Non-Accelerating Inflation Rate of Unemployment (NAIRU) was based on the view that workers came to misperceive the true real wage in a time of rising inflation. According to this theory, if they came to expect a real wage that was too high, it was necessary to have an unemployment rate that was above the NAIRU for a period of time in order to force down expectations. The standard rule of thumb is that to lower expectations by 0.5 percentage points, it was necessary to have an unemployment rate that is 1.0 percentage point above the NAIRU for a year. Combining the impact of stock options and the over-valued dollar, real wage expectations may be more than 3.0 percent higher than what can be sustained after the adjustment in the dollar and the stock market. According to the standard NAIRU theory, this would imply a need to have an unemployment rate that is 1 percentage point above the NAIRU for six years (or six percentage points higher for one year), in order to get wage expectations back in line with the economy's potential. While there are very good reasons for questioning the basic tenets of the NAIRU view, economists who accept this theory should be very concerned about these implications of an over-valued in the stock market.

Another cost of the bubble is the amount of mis-investment that may have been caused, since not all shares were equally over-valued. If many of the Internet stocks were significantly over-valued, as now appears to have been the case, it means that tens, or possible hundreds, of billions of dollars that could have been invested productively were instead wasted in poorly conceived ventures. This mis-investment probably came at the expense of many firms in more traditional industries who have found it difficult to raise capital in recent years. This effect was exacerbated by the run-up in the dollar which made it more difficult for many of these firms to compete with foreign firms. It will only be possible to estimate the quantity of this mis-allocated investment after the market has corrected, but it is likely that it has been large.

The bubble also has led to a substantial redistribution of wealth and income, both within and between generations. Within generations, those who were directly employed in the bubble industries were best situated to gain. However, many others ended up being losers as a direct result of the former group's gains. The most visible manifestation of this effect is the soaring housing prices in places like Silicon Valley and Seattle, where many of the high-tech firms are headquartered. Those without big stakes in these firms had to cope with the run-up in housing prices driven by those who had substantial stock holdings.

The generational effect is likely to be quite large. A generation of workers is being allowed to sell their stock at inflated prices to younger workers, who will receive an extraordinarily bad return on their investments. Reasonable assumptions about the size of this effect show that for middle income workers, the losses from buying stock at inflated values are likely to dwarf any costs incurred from higher Social Security taxes at any point in the foreseeable future. For example, a worker who began placing $1000 a year in the market beginning in 1995 would lose between $4,000 and $17,000 by 2010 as a result of the bubble. The worst scenario for this worker is a gradual adjustment by 2010 to the market's proper value. A quick crash would significantly reduce these losses. In spite of the size of the prospective loses facing

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implied by the NAIRU (Baker, 2000; Eisner 1996; Fair, 1996). However, NAIRU continues to command significant support within the economics profession, and those who believe in its implications for other aspects of economic policy must also accept them when applied to a stock market bubble.
The Misallocation of Capital
In addition to shifting the composition of output towards consumption and away from investment or net exports, the stock market boom has also affected the allocation of capital between sectors. At present (or in the recent past), stocks in the technology sector often sold at prices that were several hundred times current earnings, and in many cases corporations that had never shown a profit had market capitalizations in the billions or tens of billions of dollars. This implies that it has been very cheap for high tech firms to raise capital through the stock market.
At the same time, many of the firms in more established sectors of the economy saw their stocks selling for multiples of less than ten times annual earnings, even at the peak of the market. This means that the stock market would not be an attractive source of investment funds for these firms. It is also reasonable to infer that their borrowing costs in the bond market or on bank loans would have been lower if so much money had not been diverted to the high tech sector. In this sense, the booming stock prices in the high tech sector diverted capital that would otherwise have been invested elsewhere in the economy.
It may still be too early to assume that the shift of investment capital to the high tech sector amounted to a misallocation of capital. It is at least possible, if not terribly plausible, that profits in this sector will rise enormously, at the expense of the traditional sectors. In this case, if the future earnings of firms in the traditional sector are sufficiently eroded, it may turn out to be the case that—even at low price to earnings ratios—the stock of firms in the traditional sector was over-valued by as much, or more, than the stock of firms in the high tech sector.
Nonetheless, it is likely that the over-valuation in the market has not been evenly divided across sectors, and that most of the over-valuation is attributable to stocks in high tech industries. If this is the case, then it means that capital is being pulled from more productive uses in high tech industries that are less productive. This has the potential to impose a very significant cost to the economy in future years. For example, if 10 percent of gross investment is misdirected over a period of five years, to sectors where the return on capital is half the economy-wide average, then the ongoing cost to the economy would be approximately $35 billion a year in lost output. Since the capitalization of the high tech sector has soared well into the trillions of dollars, these firms clearly have control over a significant segment of the capital available for investment. Combined spending on information processing equipment and software was $530.5 billion in the second quarter of 2000, more than half of all spending on equipment and software. Given these figures it is certainly plausible that more than 10 percent of gross investment has been misdirected in the high tech sector, when it could have been more productively used on more traditional forms of plant and equipment.
There is little point in speculating at present about the actual extent to which the current pattern of stock prices has led to mis-investment. It will require far more information than what is presently available to make this determination. The point worth noting is that the amount of mis-investment is potentially quite large and that its future impact on national output could be significant for a considerable period in the future.
It should be possible ex post to quantify the extent of mis-investment attributable to the stock market bubble. The most over-valued shares will be in the industries that have the largest negative returns on their stock in the period where the correction takes place. The difference between the return on capital investment in these industry groups and the overall average will reveal the extent to which mis-investment took place as a result of the stock boom. Multiplying this difference by the volume of capital investment in these sectors will give an approximation of the loss to the economy.
There is a second channel through which the stock market bubble can lead to a misallocation of capital. By temporarily raising the value of the dollar, the stock market bubble will depress profits for many manufacturing industries that directly face foreign competition. Since current cash flow is an important determinant of investment (Fazzari, 1993), the reduced cash flow will lower investment in these sectors. It should be possible to estimate the size of this effect, by first estimating the impact of the rise in the value of the dollar on corporate profits in various sectors. Using the research on the relationship between cash flow and investment, it would be possible to estimate the extent to which this reduction in cash flow leads to a reduction in investment.
There is one-countervailing factor that is worth noting here. Many major manufacturing firms still have large defined-benefit pension plans for their workers. These plans have been helped enormously by the surge in the stock market over the last decade. This rise has allowed many firms to avoid making annual contributions to their pension plans, since they can obtain the needed money from capital gains on their existing assets. The savings on the pensions get added into profits, which then can fuel investment. To estimate the size of this effect it would be necessary to first determine the extent to which firms reduced their pension contributions as a result of the stock market boom. Then, by applying estimates of the relationship between cash flow and investment, it would be possible to estimate the extent to which the stock market may have spurred investment through this channel. However, given the evidence on the size of these effects, it is unlikely that these countervailing factors would significantly alter conclusions about the impact of the over-valuation of the stock market.
Redistribution Among Households
One result of the stock market bubble is a massive re-distribution of wealth and income among households. There will be a systematic redistribution both within and between generations. Within generations, the most obvious redistribution is from non-stockholders to stockholders, during the period that the bubble is in place. The bubble will increase the potential purchasing power of households who hold large amounts of stock. If goods are in fixed supply in the short-run (e.g. housing in certain locations, desirable vacation spots, airline seats on crowded routes) the increased purchasing power of stockholders will push up the price. This will hurt the households who own little or no stock. This is the sort of redistribution that has created a housing crisis for many moderate and low-income families in areas where newly created stock market wealth has been especially concentrated, such as the Silicon Valley, San Francisco, and Seattle.
While it should, in principle, be possible to identify the categories of goods that have been subject to this sort of run up in prices as a result of the stock market boom, it will be difficult to try to determine who exactly has gained or lost. In the case of housing, for example, existing homeowners will benefit greatly from an appreciation in the price of their home due to wealth created by the stock bubble, if they sell at a point when housing prices are still high. However, if housing prices follow a path similar to stock prices, then those who hold onto homes through the peak and bursting of the bubble will end up as big losers. During the period of the bubble, when both purchase and rental and prices are very high, those who are forced to rent will end up as losers until a collapse of the bubble brings renta

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Other Fallout From the Crash
There are several other ways in which the bursting of the stock bubble is likely to impose costs on the economy. For example, a sudden, or even gradual, correction of stock prices is likely to disrupt financial markets for many years to come. Recent customer surveys conducted by brokerage houses have regularly shown that stockholders anticipate returns averaging in the vicinity of 18 percent annually. Seeing their expectations completely shattered will have an unpredictable effect on these people's behavior. It is reasonable to expect that many will assign excessive risk to the stock market and be reluctant to place their money there in the future. This is what happened to the great depression, resulting in a severely depressed stock market for several decades after the crash. This reaction will make the stock market a more costly source of financing for new investment, thereby depressing some types of investment, unless alternative institutions fill the void.
Some shareholders may also have an opposite reaction to a stock market correction. If they have to come to believe that 20 percent returns are normal in the economy, they may seek out more risky options, rather than accept the lower but safer returns available from bonds or other financial instruments. This attitude could lead investors to speculate in financial derivatives or other risky ventures. Such a turn may not only lead to losses for investors, it may also increase the amount of waste in the economy. A sharp increase in the volume of trading in derivative markets would provide no benefits for the economy; it would simply consume resources. Similarly, shifting funds into speculative ventures that cannot be financed through traditional means is likely to lead to a considerable amount of misallocation and possibly many incidents of outright fraud or theft. When large numbers of individuals use bad judgement in their investment decisions, it is not only harmful to them, but to the economy as a whole.
Another potential cost from a stock market correction is a major bout of litigation over corporate disclosure. Many stock market analysts have already complained that firms are using questionable accounting procedures so that they can exaggerate profits. This may appear to be of less consequence when stock prices are still high. However, after there has been a major correction, it is likely that many stockholders will scrutinize corporate accounting and disclosure practices, in the hope of recovering some of their loses through legal actions. This will directly consume resources in the form of the lawyers and the legal staffs engaged in contesting these suits. However, there could be even larger costs, if the top management of major corporations are distracted by such suits. Since these types of lawsuits are already common, in principle it should be possible to estimate the extent to which they affect corporate performance. It is at least plausible that these costs could be significant. It is also likely that they will be many lawsuits directed at the financial industry on the basis that customers were misled about the safety of the stock market. The laws have been written to make it extremely difficult to win such suits, but in a post-crash political environment courts may interpret these laws with more flexibility.
It is also possible that many of the creative accounting procedures used on corporate balance sheets may involve criminal violations. While this sort of crime is rarely prosecuted at present, it may be viewed differently after a stock market correction. The prosecution of these cases could involve a significant cost to the economy, if it results in the removal of many experienced, and presumably highly skilled, executives from their positions. The long-term benefits from deterring questionable accounting procedures in the future may provide a strong argument for pursuing such prosecutions, but the short-term costs may still be considerable.
Conclusion
If the stock market is significantly over-valued, then the over-pricing will impose large costs on the economy. These costs will both affect aggregate growth and distribution, with the distributional effects having a strong generational dimension. While it will be necessary to further develop estimates of the specific costs noted here, relatively simple calculations suggest that they are quite large compared to other issues that have occupied the attention of economists, as well as policy-makers and journalists.
Specifically, the consumption boom caused by the wealth effect has essentially offset the increase in national savings that resulted from the transformation of 1980s budget deficits to the present surpluses. This decline in national savings would be expected to lead to a decline in both investment and net exports. Standard assumptions about the impact of consumption on investment and net exports suggest that the United States is losing close to $200 billion a year in both investment and net exports because of the stock market bubble. The reduction in net exports amounts to capital that the United States is borrowing from the rest of the world. This is capital that could otherwise be invested in the economies of developing nations. It also is causing the United States to build up foreign debt at an unprecedented rate.
The stock market boom has also created a potential basis for future inflationary pressures through two channels. First, through stock options the boom has in effect allowed a portion of workers' wages to be paid out of the excessive capital gains in recent years. When the bubble corrects, these capital gains will no longer be available. Similarly, the over-valued dollar, which has accompanied the stock boom, has given workers the opportunity to buy imports at prices that are temporarily depressed. When the dollar falls back to a level that is more sustainable, the prices of imports will rise significantly. Together these two effects can easily add more than 3.0 percentage points to the underlying rate of inflation. According to standard views of the NAIRU, it would require 6 years in which the unemployment rate was a full percentage point above the NAIRU to squeeze this inflation out of the economy. Although the NAIRU view should be treated with skepticism, economists who accept this theory in other contexts must recognize the costs implications of a collapse of a stock market bubble and the dollar within the framework of their theory.
The stock market bubble also leads to substantial redistributions both within and between generations. The transfer from younger generations of workers investing in an over-valued market to the older workers cashing out; are probably larger than the potential increase in payroll taxes associated with a shortfall in the Social Security trust fund. Research on the impact of increasing Social Security benefits on labor force participation among older workers suggests that this transfer is also likely to have a significant effect on the labor supply of older workers.
There are a wide variety of other potential negative consequences from the current over-valuation in the market. As basic economic theory and common sense would suggest, when a major market diverges in a large way from its proper value, it creates significant economic distortions. An over-valuation in the stock market, which could be more than $13 trillion, should be a cause for concern. The longer it persists, the greater the costs become. For whatever reason, economists have so far largely neglected this topic.
Appendix
The numbers for excess value that appear in Table 1 were derived from the corporate profit data in the national income and product accounts (Economic Report of the President, Table B 26) and the data on the market value of corporate equities in the Flow of Funds (Table L.4, line 10). The earnings data are after-tax corporate profits, with inventory valuation and capital consumption adjustment. The "proper" values were calculated under three scenarios.
In the scenario show

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