James Surowiecki has a very interesting column arguing that this bubble was different because unlike the earlier banking booms, there was no point to the wild spending. The bubble didn't bring us railroads and electrification; it brought us . . . houses. Lots and lots and lots of houses.
I'm of two minds on this. On the one hand, I think that this is an interesting point. On the other hand, of course, the bubble in the 1920s was not limited to electric stocks, or even stocks. Lots of money was wasted on railroads, Florida real estate, mining concerns, and many other unrelated phenomena. And if you look at the history of the 1920s, you see the same thing we see in the 1998-2008 era: markets awash in too much money.
So I wonder if there isn't a sort of post-hoc, ergo propter hoc reasoning to these "explanations" of the previous booms and busts. A market bubbling over wtih too much credit will end up plowing a lot of money into some technology or industry which ends up being really, really important twenty years later. (The electric revolution continued, surprisingly rapidly, in the 1930s). We look back and interpret the bubble as having been "about" that technology. But at the time, when it's not obvious what the big winner is going to be, it just looks like a giant mess.
Copyright © 2010 by The Atlantic Monthly Group. All rights reserved.
Years from now, this will be called the nano-tech bubble.
Or maybe we haven't YET found the utility of all those extra houses.
Seems to me lots of cheap housing made with at least halfway decent construction might turn out to be handy.
Or maybe not.
Lots of houses is useless? I doubt that is the case for people who couldn't afford one. Houses are a long term durable good. Hell, this boom might end up creating a new middle class.
Considering that virtually everyone (ignoring the mentally ill and drug addicts) is already middle class, I think it would be pretty tough to create a new middle class.
There are plenty of people who can afford houses. Especially in CA and Florida.
And where did you get that nonsense from?
Facts to support such a claim are needed.
For a very quick google shows 35.9m people living in poverty in the US in 2004, 37.5 million in 2007. More than 10% of the population with the trend line going up.
Like "we just made 30K off grenner tech", right zic? lol
yep, that trend in the NotMyPresident economy. Nice job, liberals.
Consider a person described as follows:
"[He]...has a car, air conditioning, a refrigerator, a stove, a clothes washer and dryer, and a microwave. He has two color televisions, cable or satellite TV reception, a VCR or DVD player, and a stereo. He is able to obtain medical care. His home is in good repair and is not overcrowded. By his own report, his family is not hungry and he had sufficient funds in the past year to meet his family's essential needs."
Sounds middle class to me. But in fact, the person just described is the typical "poor" person as defined by the US government.
The government's definition of poverty (the one you use to get your figure) is broken. Your number of people in poverty includes huge numbers of individuals who, under any reasonable definition, are middle class.
http://www.heritage.org/research/welfare/bg1713es.cfm
Note: all data is taken from the census and other government agencies. All heritage did is aggregate it. Just mentioning that in advance, to avoid the typical "I dislike the source, therefore it must be all lies" argument.
"35.9m people living in poverty in the US in 2004, 37.5 million in 2007. More than 10% of the population with the trend line going up."
Please define "poverty". My guess is many people around the world would cry with joy at being poor in America relative to what they face in life. Walk into "poor" homes in America and you often--but not always, I admit--find big screen televisions, closets stuffed with clothes, at least one car parked out front, a few overweight (i.e., well-fed) residents, a 99.9% literacy rate, and an utter absence of chronic bacterial or viral disease.
In sum, American poverty circa 2009 is unimaginable wealth by any relative measure of human existence except comparisons against 2009 developed economy income levels generally.
guys, no fair arguing with facts! zic is a liberal, this is about what she "feels" is right!
A surplus of housing isn't particularly useful if jobs aren't close by.
Maybe what was different was that the bubble was widespread. Every town, touching everyone directly. One either made serious money (on paper at least) on your home, or were aghast at how expensive living was going to be from now one. This wasn't a bubble of bankers only.
A couple of years ago I went to Colville Idaho to pick up something I ordered. Small town, sawmill. Beautiful place to raise a family if one had a job. The locals were talking about how expensive homes had become. They said that the local wages couldn't support such high prices, and it would hurt the town in the long run because people wouldn't be able to afford to live there on what you could make.
I know quite a few who sold high, downgraded and are sitting pretty right now. And quite a few who built or bought at the peak and are very worried right now. And many who are paying elevated property taxes due to the inflated valuations. And we didn't see the stupid rise in this area compared to elsewhere.
Which also tells me that it will take a while, no matter how much money is thrown around or how many Wall Street bankers get stimulated, before things get back to normal.
Derek
I think he has a point but that we won't know for sure about this bubble until some time has passed. In the 20s, you too much money sloshing around, so of course some went to terrible investments like Florida real estate, but some went to investments in high-tech industries of the time that helped build out a new high-tech electrical infrastructure. (It should be noted that the U.S. government stepped in in the 30s to complete this build-out to rural areas.) Ditto with railroads, ditto with high tech/internet. In that boom, lots of money went to Pets.com style fiascos, but lots went to innovative persons and companies who created real value. Even companies that were basically criminal enterprises like Global Crossing laid down lots of fiber-optic cable that is still in use.
So the question is, has this current bubble created anything of lasting value? Are all those houses in Phoenix and Las Vegas the equivalent of a continental railroad system, national electrification, or an intercontinental data-transfer infrastructure? I find it hard to see that much value (obviously houses have an intrinsic value, but I don't see added value like the network externalities we saw created in the three earlier booms).
The electrical grid wasn't expanded to blanket the nation until after the 1920's bubble burst; the change and rebuilding of our economic culture followed. Now, 90 years later, I suspect changes in the energy grid will again be the basis for rebuilding our economy; but it is too early to tell. But it seems obvious that the room for growth in microchips, cell phones, automobiles, and toaster ovens is saturated and we're in a replacement market, not a growth market.
But there's plenty of room for growth in solar panels, wind mills, geo-thermal heat pump, and battery technology. There's also plenty of growth in products that help manage and deliver better health care.
But I do agree with Suroweicki; banking grew too large, and needs to shrink. The up side is this creates more room for investors, both angel and venture, to profit on greener technologies in both energy and medicine.
zic once again proving why liberal economics is a failing department.
"Greener" technologies means 1 of 2 things:
1) Company wants to jack up the price while getting stupid hippies like zic to buy it;
2) Company wants to get government grants to build crap that doesn't work and removes jobs from the economy.
The money quote: "There's also plenty of growth in products that help manage and deliver better health care."
---lol. this from a left winger who wants socialized medicine. Earth to hippie: if medicine is socializined, few will innovate health products, because it won't be profitable.
Laugh all you want, Lurker. We made 30k yesterday on Greener tech.
So go laugh your heart out.
zic: "We made 30k yesterday on Greener tech"
What does that even mean?
Why should I explain that to a head-in-the sand fool like you? We did our due diligence, and I'm not about to share that with you. You want that kind of reward, go do your own homework.
lol zic. I see you just made a "profit" because NotMyPresident and his killing biddies has promoted "green" industry. So you made a killing off of a corrupt practice. Nice job.
And when the corrpution train runs out, and when the technologies prove futile and it puts good people out of work because they work in "non-green" industries that NotMyPresident has promised to bankrupt, will zic giver her hard earned liberal cash to pay for their lives? Something tells me she'll be heading off to live on a private island, leaving those common folk to die.
And zic, were I an investor, I would be putting my money into "green" stocks----or, what they really are, companies that are personal pets of the Dems in office, since they're going to get a bunch of pork and not have to produce anything. Then pull it out in a few years when the techs fail and the government realizes its supporting the Unicorn Breeders of America. So, zic, congrats; you're profiting off of stupidity: America's.
You spin lots of fantasies, Lurker. You should take up writing fiction.
But you don't have a clue what you're talking about, you don't know anything about me, my investments, or my life. And you don't know anything about economic growth.
You live a little life filled with making yourself feel better by putting others down. You're like the football star who's life goes nowhere after high school. I feel sorry for you.
But not so sorry that I'll respond anymore; my time is too valuable. I love a good debate, but you don't debate, you call names and shout insults. The epitome of the sad state of conservatism these days.
Good bye, lurker. Insult me all you like; it reflects you, not me.
Gotta love zic, hippie that she is:
"You spin lots of fantasies, Lurker. You should take up writing fiction."
---But you liberals do it so well in your political stances.
"But you don't have a clue what you're talking about, you don't know anything about me, my investments, or my life."
---said the woman who just claimed "We made 30k yesterday on Greener tech" without explaining who "we" are, what she means by "Greener tech" and how she made "30K" off of it. But apparently she thinks liek Obama: just say the words and everyone should believe you.
"You live a little life filled with making yourself feel better by putting others down."
---said the leftists who spent 8 years making up lies about Bush just to make themselves feel good.
"You're like the football star."
---thank you, but this is not your fantasy on Cinemax late night.
"But not so sorry that I'll respond anymore;"
---said the hippie who makes nonsensical statements about profiting personally on green tech and refuses to explain them.
"I love a good debate, but you don't debate, you call names and shout insults."
---its not hard with liberals, since they think like and act like children. See: elections of 2006 and 2008.
"Insult me all you like;"
---don't need your permission, lib.
"it reflects you, not me."
---you promise to leave, hippie? Back to making 30K off greener tech, lol? Then its a good day. ;)
Subsidy check showed up. Payroll was paid. Rinse, repeat next month.
Lurker: The government is often involved in infrastructure/industrial build-outs. It heavily subsidized the expansion of the railroads; it heavily subsidized the expansion of automobile use by building highways and freeways; it subsidized and in some cases outright owned the electrical infrastructure of the U.S.
I have no idea if zic's prediction will come true, but we can see historically the effect of the highly visible hand of government in the railroads in the 19th century, in electrical generation and transmission in the 1920s and 30s, and in the building of the parkways in the 30s and interstate highways in the 50s. That effect is that government intervention spurred private commercial and technological innovation respectively in the railroad industry, the electrical generation and electric products industries, and the automobile industries. (I guess saying this makes me a socialist, huh?)
RWB, if you think that the government taking care of the roads is the same as "greener", your brain is seriously fried. Governments provide affordable avenues for commerce---roads, shipping lanes, etc. Claiming that "subsidizes" commerce is stupid; its merely making the lanes on which to ship commerce safe and open, something that has long been a job of government.
That's a far cry from "creating" jobs or "creating" techonologies. Electrical innovation began way back in the 19th century--remember Thomas Edison and Westinghouse? Thinking that locals wouldn't have gotten electric power without "government intervention" is the kind of cart before the horse thinking liberals are famous for.
Its worth reminding that the only railroad company to survive any respectable length of time was the one that refused to take gov't loans to finance construction. Once you take the kings shilling...
Electric power for locals = Tennessee Valley Authority, Grand Coulee Dam, Hoover Dam. Plenty of government involvement!
Brad, that's assuming those locales would not have ever gotten electric power via demand. Why do you assume its only government, and not development of new progress, that made us want a washing machine? The TVA did nothing that ordinary free markets would have brought at an appropirate time, and did nothing to alleviate the Depression.
And it's worth remembering that investments in the highway system had a huge impact on diminishing rail use.
I know, hippie; its so sad we're not beholden to Big Corporate Trains anymore, and can buy individual cars and ride around with a freedom our ancestors never enjoyed. We should have enjoyed the benevolence to Big Corp. After all, that's why you libs love, right?
But trains must've been superior, that's why people spurned cars for them even after the highways were created, right? (/snark)
And government arresting highwaymen and train robbers put a severe crimp on the Pinkertons.
zic probably believes the new "high speed" Nobama trains will put Evil Big Cars out of business and make us JUst Like Europe (the liberal dream). Perhaps her hippie brain might hurt to hear this---most Europeans *prefer* American highways to Euro rails, precisely because of the freedom they provide to the individual.
But Liberals hate those words. Freedom. Individual. Plus they can't lecture us about the glories of train travel if we ain't on the train to listen.
Anyone as delusional as zic has never seen the Raving Success that is Amtrak. (/snark)
Thanks to the bubble, laptops are now cheaper than desktops. They practically give MP3 players away with happy meals. Most TV is legally available on demand for free. Most car companies offer hybrid options. You can find free wifi and good coffee just about everywhere in the country.
They're not durable, but we're different people now. Going back to 2001 would change a very significant portion of my life for the worse.
Yeah but if you are like me, you'd at least be a few pounds thinner... I's sacrifice my iPod for that!
You remember what grocery stores were like back then? All white flour and hydrogenation! Not like today! You may weigh more, but it's *good* fat.
Heh, I wish! Besides, all those advances in video game technology have made me even more of a couch potato than I was before!
Don't sacrifice your ipod. Instead, consider sacrificing those delicious kettle cooked potato chips and an hour in front of the TV/internet.
Actually, thanks to modern technology, you don't even need to sacrifice the TV/internet. You can now get cardio equipment with the internet or TV built in!
The root cause is social engineering gone wrong - like it always does.
If the liberals were right then we wouldn't be seeing all of these empty homes. Mortgages were given to people who "just needed a break." Banks were directed and even pressured to give mortgages to people who would have never qualified, since every good liberal (including Dubya) knows that the only reason poor people are poor is that they've never been treated fairly.
It's not that they can't hold a job, or don't know how to save, or are socially unstable, or any of the other 50 reasons.
There *are* real tragedies out there. Good people *do* fall on hard times and tragedy, and they lose their homes/jobs/etc.. But these are the exceptions.
The vast majority of people who couldn't qualify for mortgages didn't qualify for good reasons, and not some fluke tragedy.
Liberals reject that. Liberals believe that "these people just need a break," so they mandated it. They rammed it down our throats and suddenly the country was flooded with new home owners who couldn't afford the houses they bought.
Were some of them "preyed upon" by banks? Of course.
Were MOST of them? Of course not.
Most of them were simply too dumb or naive (or both) to realize that they were getting in WAY over their heads.
And now the land is littered with the reminders of yet another liberal social experiment gone awry...
Give me a break.
What an epic display of strawmen and misdirection. I'm surprised you didn't work in the CRA and ACORN.
Prattle on about us evil liberals all you want. You sound like my dad blaming the shifty negroes and mexicans for all our problems.
Most of the country is just staring at you with this weird look like you're a homeless guy ranting on the street corner. And running far, far away from any candidate you might want in office.
And the best part is, you don't even have the first clue.
Privately held profit-maximizing financial institutions offering subprime mortgages to customers they evaluated as credit-worthy is about as far from liberal social-engineering as you can get.
"You sound like my dad blaming the shifty negroes and mexicans for all our problems."
---lol. now we know that Adam's unintellectual liberalism is just his Freud-fight with dear old dad.
"Most of the country is just staring at you with this weird look like you're a homeless guy ranting on the street corner."
---you see the liberal mindset: if you're not popular, you're wrong. Be like us! Join the herd!
"And running far, far away from any candidate you might want in office."
--again, Adam's logic: we won 2 elections, we will always win.
"I'm surprised you didn't work in... ACORN."
---That's NotMyPresident, you tiny brained liberal.
I haven't heard any facts from you guys.
In fact, to the degree that there was predatory lending, I'm pretty sure that this is (and was) illegal. There have even been a few law suits.
Where are the others?
C'mon, genius, why don't you cash in? Get yourself some lawyers (never a hard thing to do) and "git some." You can sue these banks for millions and millions and millions of dollars, and never have to work another day in your life.
The only trouble is: you need to actually be correct... and you ain't.
>93% of all home mortgages given in the last 10 years are still being paid. That's a fact.
2-3% of those mortgages were expected to default because, as I say, historically there are always tragedies.
The other 5%? Welcome to Social Engineering Gone Awry. Those people should have never gotten loans.
Glass Steagle should have never been repealed, either, btw. There are other causes for this debacle, but Social Engineering - and speculation on the crap-loans that resulted - is at the heart of this.
You've got a nation that doesn't like to hear the truth. Want proof? Look: credit card use is coming back, even though the economy is still weak. People don't want to believe that they can't have what they want. Welcome to the disease that is your political party.
Make hay while the sunshines, dude, because between now and 2011 this ponzi that you call Economic Policy is going to result in a wreck that will make Jimmy Carter's disaster look like a day at the beach. China, just yesterday, said "no mas" to buying our debt. Can you think of anyone else with a few trillion dollars lying around, stupid enough to lend it to Chauncey?
Or will the Inflation Monster have to be woken up again?
"I haven't heard any facts from you guys. In fact, to the degree that there was predatory lending, I'm pretty sure that this is (and was) illegal. There have even been a few law suits."
You taunt people for lack of facts, and then offer an opinion on an issue of law as "fact". You even go the extra step and preface the opinion "In fact..."
"Glass Steagle" Um, you mean Glass-Steagall?
Spartee, attacking misspellings on a message board? For shame.
Sweet comeback there. I'm reeling with the facts you're tossing my way...
And re: a surname, with about 7 legitimate phonetic spellings? Sorry, I didn't have time to google it. I just happen to understand what it was about, as opposed to whether Mr. Steagle, Steagal, Steagall, Steegal, Steegle, etc. wrote it.
Happy Cinco Di Cuatro, btw. Make sure not to take a subway to Mexico, during your celebration.
Social Networks might be the unprofitable, overhyped technology that survives the bubble. But Japan's real estate bubble was just that, and nothing new came out of it. Japan has had a stagnant economy, and essentially flat stock market for over a decade.
George Parker: Come and Get Your Social Networks… Free, For a Limited Time Only!
Social networking seems to be a really cool technology that no one found a use for as of yet. Sort of a solution in search of a problem.
I think people are over-thinking this. I think this recession is different because it's really two recessions. There were two bubbles (at least): a housing bubble and a financial-industry bubble. In both cases, there was a gross excess of capital (and hence human effort) directed to those industries, and a lot of that capital (and human effort) now needs to be redirected to other areas. Redirecting all that capital takes a while and leaves a lot of people out of work and unproductive.
The housing bubble burst, which would have resulted in a fairly standard recession. However, in the midst of that recession, the finance bubble burst. That was going to happen anyway, but bursting the housing bubble hastened it. So right now we are experiencing essentially two recessions at once. One or two more, and we have a depression.
I view the houses as wasteful because they're done so stupidly. While previous bubbles, like fiber optic, railroads, might have been ahead of their time, they weren't as stupid as the McMansions we see everywhere, entire neighborhoods of isolated houses that are exactly alike, where you have to use a car to do anything, no sidewalks or front porches but huge garages, 3 hour commutes, etc. it just feels so unnatural. I'd rather have a smaller apartment closer to work/shopping personally.
That said, I always thought that the way to fix this would be to take people from China/India and place them in the houses. Hell, technically they own them anyways through Fannie Mae bonds.
Martin,
I don't understand it either but it's not some kind of false consciousness - people actually prefer to live that way.
well, it's unsustainable and wasteful in a macro sense too, which is the point of the topic. previous bubbles at least left something of value. the far out exurbs will be tomorrow's subdivided ghettos.
Is there a correlation between previous immigration booms and economic growth?
Just wondering, because who ends up living in those houses may tell us more about our economic future than anything else we currently consider.
A liberal, trying to claim illegal immigration helps the economy?
Like those greener jobs will make us money? lol. 30K. lol.
zic, here's a clue: immigration booms *are fueled by* job growth, not the other way around. When there is a surplus of jobs, employers push for importing new workers and impoverished people come for jobs.
Of course, liberals think more immigrants lead to more jobs, because the opposite is RACIST.
I thought immigrants lead to jobs because free trade of labor causes economic growth?
To the extent that it is illegal immigrants that are illegally employed for less than a legal worker can be employed, doesn't that possibly create jobs. Jobs that would have to be moved overseas for the cheaper labor end up in the U.S. as a result of immigrants working illegally for less than mimimum wage. Couldn't even legal immigration keep jobs in the U.S. by driving wages down for low skill natural born citizens?
Except for the fact that they seem to favor illegal immigration over simply having a sensible immigration policy that allows more immigration and more foreign workers, isn't this one of the issues that liberal get right, despite the fact that it makes good economic sense?
Credit bubbles are always the same- there is more borrowing than the underlying, productive capacity can support. We saw that in the 1930s, and we see it today. The debts must be written down to a level our actual, real incomes can support. Instead of this, however, our leaders encourage even greater excesses of credit creation to pay off the unsustainable debts created by the previous bubble. The growing bubble in government finance (worldwide, now) is the endgame of this stupidity, and fail it will, and sooner than you think.
As brad says, nothing useful came out of the Jap real estate bubble; just as nothing useful came out of the South Sea bubble. Some bubbles do leave useful physical or intellectual capital behind them. The Victorian railway mania in Britain (which was largely a criminal enterprise)is a good example of the one, and the dot.com bubble of the other. But what a bubble leaves behind is an accident, Bubbles are about something else.
Asset price bubbles arise because an essential part of the price of an asset is how much it is likely to produce in future. Assessing that is often difficult and costly. Therefore we choose a strategy of free-riding on others' assessments; relying on the wisdom of crowds. When something -anything - happens to make a crowd over-estimate a price, a bubble arises when the crowd follows itself.
Bubbles are part of the more general tendency of economies to accumulate mis-pricings (and claims that are never likely to be paid in full which are the other side of the mis-pricings coin) faster than the corresponding corrections. Accurate pricing of assets is costly and perfect pricing is impossibly costly. Economic downturns occur when the pending corrections of prices start occurring as a chain reaction, and people and corporations find they are less well off than they thought. The process is roughly analogous to earthquakes. The greater the number of pending corrections, and the more closely the latent strains are connected with one another, the greater the disaster.
We will probably work out how to eliminate the accumulation of mis-pricings in our economies before we work out how to avoid earthquakes; and the economist who solves the problem will deserve her or his Nobel Prize. The consolation for those of us alive today is that reducing the accumulation is a much more mundane task that we can get on with now. A good starting point is making it more costly for the crowd to follow itself.
Yancey,
"Credit bubbles are always the same- there is more borrowing than the underlying, productive capacity can support. "
Couldn't you also say that there is more saving that the underlying productive capacity can support. If everyone started saving 20% of their income there wouldn't be enough suitable investment oppertunities to soak up all the excess capital.
No, but you should apply for a position with the Fed, since that is their wrong-headed theory, too.
The key to understanding what goes wrong and why it goes wrong is to first understand the difference between real savings and synthetic credit. Here you will find a completely lucid description of the two.
As to the last part of your comment, if the market alone set interest rates across all time domains, you would never have an a long-term imbalance between real available capital and profitable investment endeavors. The central bank/government extra-market setting of interest rates creates such imbalances the same way that government set price ceilings or price floors creates chronic shortages or surplusses.
Yancey,
But even interest rates of 0% aren't going to convince the average Chinese family not to save 50% of their income.
How would your system react to a nation with a 50% savings rate?
Unless you are saying that at some point banks would start to charge you to hold deposits - a form of negative interest rates...?
If you're defining the bubble as starting in 1998, the industry was IT, not housing. Housing was a side effect. Even in the reflating of the bubble after 2001, a lot of the money still went into IT.
But ultimately, it is a post-hoc rationalization. Bubbles occur because the money supply increases faster than real production, and the details of the bubble depend on how the moeny gets into the system. The popularization of mortgage-backed securities essentially eliminated the reserve requirement for banks, allowing monetary expansion to proceed without any of the previous limits.
Now I know why the Atlantic Monthly keeps Megan McArdle in spite of her pointless, sloppy, and frequently outright stupid output: She can sling Latin with the best of 'em.
p.s.: Yes, that was an ad hominem attack, but there was nothing post hoc, ergo propter hoc about it.
A couple of points
a) Surowiecki's point is not exactly recent. It was, for instance, made by Krugman a year and a half ago (within the first 10 minutes of the video), and it has been repeated by others since.
b) There's no need to look back after the fact to characterize the dot-com bubble as an information technology bubble. It wasn't the case that investment was diffuse and the dot-coms happened to do better; on the contrary, investment was very concentrated on IT at the time.
So this is kind of a wrong point based on old news.