FINANCIAL "BUBBLES" AS A MODERN ECONOMIC POLICY CHALLENGE

FINANCIAL "BUBBLES" AS A MODERN ECONOMIC POLICY CHALLENGE

Elena Shavyrina

Student, Faculty of "International Economic Relations", Financial University under the Government of the Russian Federation,

Russia, Moscow

It is assumed that in an ideally efficient market, all investors are given access to all available information about future stock prices, inflation rates, interest payments, interest rates and many other economic factors that may affect current stock prices in one way or another. Because of this, the valuation of financial assets must always be evaluated correctly, and therefore, according to the theory of an efficient market, deviations from this correct stock price are an illusion. But our world is imperfect, and crisis processes are an integral part of the economic development of any country. In theory, they are represented in the form of wave oscillations. These crisis processes are often preceded by financial or stock "bubbles".

The financial bubble in the stock market is one of the oldest anomalies. Since the appearance of the first exchanges, they cause large-scale negative consequences due to the inability to identify them. These "bubbles" disrupt the efficient distribution of investments, and if their collapse suddenly destroys them, then bidders will lose confidence, and an economic downturn is possible [1, pp.5]. As a result of the difficulties of preventing stock market bubbles, regulators are hesitant to determine whether a financial bubble really exists in the stock market and whether measures should be taken to destroy it.

The term "bubble" in the context of economics usually refers to a situation when the price of an individual stock, financial asset, or even an entire market significantly exceeds its fundamental value [1, pp.5]. Since it is not the intrinsic value, but speculative demand that underpins the overpricing, the bubble eventually inevitably bursts, and mass sales lead to a rather sharp decline in prices. In most cases, the speculative bubble is followed by an impressive collapse of the securities in question. The stock market bubble is caused by raw speculation. The formation of a bubble begins when it happens that the price growth of an asset far exceeds its intrinsic value. It turns out that people are willing to pay more and more for a security or other asset based on factors such as demand, profit, income, or growth potential.

The main characteristic of financial bubbles is the cessation of distrust on the part of the majority of participants when there is a speculative jump in prices. For the convenience of determining the regularity of the growth and fall of the bubble, Economists have identified five stages [2, pp.5] that can predict bubbles but, unfortunately, don’t prevent their appearance: displacement (big change or series of changes affects how investors think about the markets), boom (attracts speculators, which helps to increase the price of an asset as rumors spread about its profits), euphoria - as the (people's ardor increases and caution is drowned out), profit-taking (the price increase turns out to be too good to be true and people start selling off almost everything they have purchased in attempt to lock in profits) and, finally, panic (comes a desire to sell the asset in a panic and the fall in prices quickly negates profits and encourages more panic sales).

In the Russian market, due to the peculiarities of the structure of the stock market, the moment of identification of financial bubbles is almost impossible and there are reasons for this. Due to the high volatility of prices on the world market and unstable price dynamics, it does not allow the analysis to divide in the movement of stock prices. Another thing is the dividend policy of Russian companies. In Russia, dividends on shares are paid regularly mainly only by large companies, when others do it on a case-by-case basis [3, pp.5]. Therefore, it is impossible to use this data for a correct assessment. These signs show the inefficiency of the Russian stock market, which is the main prerequisite for the formation of financial bubbles, and we can conclude that the probability of their presence in the market dynamics is high.

As history shows, the burst market bubbles were able to undermine the economy of an entire country. Let's look at the most famous historical examples that clearly demonstrate this economic phenomenon.

Tulip mania in 1627 [4, pp.5]. Tulips came to Europe from Turkey. Since these flowers perfectly tolerated the not too mild Dutch climate, they decided to use it for commercial purposes and the popularity of exotic flowers began to gain popularity. European connoisseurs of tulips were ready to pay generously for new varieties and even a rumor went around that one bulb costs an entire estate. Trade in tulip bulbs began to take place on the exchanges of the largest cities and, due to multiple purchases and resales, they did not even have time to get out of the ground. The year-round snobbery of tulips led to the fact that they began to speculate on contracts for the sale of future bulbs. Prices continued to rise- flowers were sold almost 15-20 times more expensive, and by 1625 one bulb of a rare variety of tulip could already cost 2,000 florins. Such stories of successful investment inflamed the imagination of ordinary Dutch people. Tulip bulbs began to be considered not just a profitable commodity, but a successful investment object that can be bought today and sold profitably tomorrow with a good profit. But things couldn't go on so flawlessly any longer. At one point there was a crash, and prices fell not even tens, but hundreds of times.

The Japanese financial bubble in 1989 [4, pp.5]. After World War II, Japan began to pursue a policy to create conditions for stimulating exports to the country. Credit availability has increased, and trade surpluses have led to a significant strengthening of the yen against other currencies. This allowed Japanese companies to invest in the production of technologies cheaper and export them, increasing competitiveness and thereby filling trade deficits. The further strengthening of the yen has made financial assets extremely profitable. In the 1980s, a targeted price crackdown by the Japanese government provided everyone with cheap money. However, by the second half of the 1980s, financial euphoria about the prospects of the economy and the monetary easing carried out by the Bank of Japan led to speculation in an aggressive form on the stock market and the real estate market. Real estate prices reached sky-high limits - in many parts of the city, real estate prices reached their peak and it turned out that people had to give 100 million yen (about $ 1 million) per square meter. Of course, by our time commercial real estate in Tokyo began to cost less from its peak price, but still, according to real estate prices, Japan remained the most expensive in the world until the second half of the 2000s. The welfare of the Japanese, since the bubble deflated, has decreased by billions of dollars and only by 2007.

Currently, a similar situation is typical for the American stock market. So, against the background of a record fall in GDP, which, according to estimates, fell by 30% in the second quarter of 2020 and the budget deficit by almost -15.5%, shows an extreme growth in the shares of companies engaged in high technologies. Such indicators were provoked by several factors [5, pp.5]. The first factor is a soft monetary policy, which, as it was in Japan, is associated with the need to service the rapidly growing public debt. The second factor is a huge amount of liquid resources, which are feverishly looking for a way to make a profitable investment. And the third factor is the speculative hype that was caused by the fourth technological industrial revolution. Also, at the end of the year 2020, American digital brands: Apple and Microsoft computer companies and Amazon and Google^[1] Internet companies exceeded $6 trillion. It is believed that another inflating of the financial bubble may occur. Their share in the capitalization of the American stock index currently stands at 23%. Many people say that such an increase in the exchange value is directly related to the activity of investing in their funds around the world. For example, Tesla is estimated to have become the most expensive car company in the world with a capitalization of $ 210 billion, thereby putting the sales leader Toyota in second place and ahead of the company by $ 4 billion. This is since Tesla incurs more losses and has less revenue from sales.

Studying such an unusual and unpredictable anomaly as "bubbles", I came to the conclusion that they always exist in the economic market. While the economy is booming and people want to earn as much money as possible easily and quickly, bubbles will grow, burst and be cyclically replaced by new ones. Each of them is a beautiful picture, invented by people with an entrepreneurial streak, whose ideas were supported by investors, and in modern society are also picked up by the media and social networks. Of course, there is no escape from this, because the world stands still and cannot consist only of Old Believers who will be against any development and progress. Many researchers are trying to find a suitable model and tool for regulating bubbles in the economy, but in practice we will be able to verify the accuracy of estimates only after a few years, unfortunately, faced with the collapse of the financial machine. Unfortunately, in the conditions of the modern market economy, we live in crisis conditions and do not have the opportunity to truly identify the presence of financial bubbles.

References:

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2. Stanik N.A. (2012). Bubbles can be different: soap, financial and explosive. Financial Analytics: Problems and Solutions, (44), 38-46. URL: https://cyberleninka.ru/article/n/puzyri-byvayut-raznymi-mylnymi-finansovymi-i-vzryvoopasnymi
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5. Zeltser M. (2022, May 11). The US market has collapsed, and GDP has shrunk — and what will the Buffett method say now? URL: https://bcs-express.ru/novosti-i-analitika/rynok-ssha-rukhnul-a-vvp-sokratilsia-i-chto-teper-skazhet-metod-baffeta