> I don't think financial assets are non-scarce in quite the same way as
> money. It's true that they take negligible amounts of labour and material
> resources to 'produce' and their value is not linked to these at all. But
> they are scarce because linked to anticipated future monetary flows. The
> creation of a financial asset means borrowing by the unit emitting the
> asset. So the supply of assets is limited by anticipated future income
> flows. Admittedly that is a flexible limit because, as you say, expectations
> fluctuate, as do required margins of safety.
>
Everything you say here is true - but you're burying the lede. You're right to say that the supply of financial assets, though not scarce in physical terms, is nevertheless bounded by expectations of future income streams. But then you go on to mention "fluctuations" in these expectations in a parenthetical way, as if these were merely a secondary, complicating factor. But the fluctuation of expectations is not secondary - it's the whole ballgame.
The question that interests Fitch and Brenner and you and me is: What caused this crisis, and crises generally? The answer lies in these "fluctuations" (a term that doesn't really do justice to the phenomenon it describes). The point is, the future is unknowable. Therefore, agents must price financial assets on the basis of a lot of missing information. This, combined with human psychology, leads to periodic manias where people assign completely outlandish prices to assets, prices that imply completely outlandish streams of future income.
As a result, the people and firms who own these assets, participating in the illusion, feel incredibly wealthy and borrow enormous sums against their new wealth - sums that would have made them blanch if not for thee false comfort of their inflated asset portfolios. When the mania finally ends (also for psychological reasons, ultimately) the asset values collapse but the debts are still there, fixed in nominal terms. People and firms, shocked to find themselves with little or negative net worth, start behaving accordingly - they all try to save more, all at the same time. Hence, crisis.
Where Fitch and Brenner go wrong is in supposing that the original run-up of financial asset prices must have been a sign that capitalists found real investment to be unprofitable. This idea is based on the assumption that a greater volume of speculative financial transactions must mean a lesser volume of real investment transactions. That's why I emphasized that financial assets are non-scarce. Their supply is limited not by any physical scarcity, but only by the state of people's expectations. Though you're right, the latter limit is real.
> It's possible for a dynamic to develop in which the size of
> demand for financial assets exceeds rational borrowing by productive units,
> putting upward pressure on the valuation of financial instruments such that
> the valuations get out of touch with their real potential future fruition.
>
Hmm. I think if you look closely enough at this scenario, it may turn out to be just another way of describing a recessionary shortfall in total spending. After all, savings deposits are financial assets too.
SA