Who would be stealing from whom? Blackstone, the huge hedge fund (actually a holding company for hollowed out, debt laden, former publicly traded companies) is going public. Just watch as US public employee pension fund managers buy up Blackstone’s worthless IPO shares. It will be another huge transfer of wealth form Joe Public to corporate insiders and Wall Street rentiers.

A credit bubble can be proven to exist, but only if the observer understands basic economics.

Signs that we’re in the midst of a great artificial boom abound: the price and supply of housing–first and second homes–have been boosted way beyond the limits of income, savings, and prudence; asset prices of all classes, from farmland and rural tracts, to stock prices, to high-risk junk bonds, to foreign stocks, to government bonds, have been pushed so high that yields are by historical standards abnormally low. Appreciation for financial risk has shriveled in step with yields.

But how does one know that these signs indicate an artificial boom, rather than a new era of prosperity and material abundance? By grasping essentials of Austrian business cycle theory.

Today’s roaring bull markets in nearly all asset classes–except housing, now on its way down–results from massive Federal Reserve manipulation of our money supply, which depresses interest rates. However, artificially low interest rates caused by the Fed’s boosting bank reserves is only the most obvious of such manipulations. Also important is the Fed’s long-implied promise to bail out any financial institution “too big to fail”.

The Fed’s coercive interventions into the money market (interventions that could not be effected without various government regulations and edicts) has promoted a great inflationary wave over the past 70 years. Today, almost no one doubts the power and ability of the Fed to prevent an unplanned meltdown of highly leveraged speculative holdings by banks, hedge funds, and individuals.

Because the illusion that the Fed has all this under control is widespread, it is easy to fall into the fallacy that everything’s safe and normal. But basic economic theory makes clear that the massive misallocation of scarce capital that is the financial bubble is unsustainable.

The nose dive in housing now in progress is merely the first signs of impending financial distress that will culminate in a nasty recession. It is entirely possible that the recession will snowball into a calamitous financial and economic meltdown.

Years ago, establishment gurus opined that Soviet Masters were men of great practical stature, 10 feet tall, destined perhaps to rule the world. Today’s mainstream thinkers attribute identical power and prestige to the bureaucrats who run the Federal Reserve System. Sooner or later, however, events will prove that the Fed and its Financial Masters are as helpless to prevent a collapse as were the ten foot tall giants who “ran things” in the USSR.

So even when the credit bubble does pop, housing prices will not fall down to pre run-up levels.

Isn’t that what they said about the Nasdaq?

(the answer is yes)

A credit bubble – lending that is not 100% financed by real savings.

Real savings – income that people choose not to consume, but (rather) choose to lend out (or have other people lend out for them). Interest rates are decided by time preference – i.e. how much money from a borrower will you accept not to have your money for a period of time (and for the risk that the borrower will never pay back the money at all), and how much money is the borrower willing to offer you to borrow your money (i.e. to have the money now).

Real savings do not include the smoke and mirrors of the fractional reserve system.

“But then we will not have so much money to lend”.

Oh dear, how sad, never mind.