On The Bubble

Are financial bubbles good for us? Daniel Gross, a superb business journalist, thinks so. His latest book, Pop! Why Bubbles Are Great for the Economy, is a compelling read. Gross views bubbles as a competitive advantage—they create an environment ripe for innovation and growth in their wake.

But bubbles are not so great, counters Eric Janszen, who was inside the dot-com bubble when it burst. He was the CEO of two tech start-ups at the time. In the cover story in February’s Harper’s magazine, “The Next Bubble,” Janszen argues that the nation has fallen into the hands of a vast and powerful bubble machine that does not serve us well.

Effervescent Estimations
Who’s right? If we’ve moved into a new boom-bust era, well, that promises to be a different experience from “The Great Moderation.” That’s the term Federal Reserve Chairman Ben Bernanke used in 2004 to describe the lengthy expansions, mild and infrequent recessions, and low inflation that we’ve benefited from over the last couple of decades.

Financial bubbles occur when prices of assets rise far above their intrinsic value. We’ve seen that happen twice now, on very large scales, since 1995: First came the dot-com bubble, and now the housing-credit bubble.

Beyond Pop!, Gross writes the “Money Culture” column as a senior editor at Newsweek. Since 1998, he’s been the editor of Stern Business, an economics and management magazine published by New York University’s Stern School of Business. His three earl-
ier books include the best-selling Forbes Greatest Business Stories of All Time. He advocates looking beyond the immediate crisis to what historically follows.

Gross argues that while bubbles seem to do little good when they pop, they charge up the U.S. economy over the long haul, providing a vitality that’s missing in the more restrictive regulatory climates of Western Europe. Bubbles help build vast infrastructures that provide the groundwork for widespread innovation down the road.

For example, the dot-com bubble financed vast fiber optics networks here in the United States. For several years after, they were underused. But today, they provide the plumbing that has enabled many companies to grow and prosper. In Gross’s research, he found similar outcomes in the wake of three other U.S. bubbles: the
manias over the telegraph and railroad businesses in the 19th century, and the recent frenzy about housing.

No Fizz, Please
Janszen disses this idea, noting that punctured bubbles helped push the country into downturns in 2001 and again this year. Janszen is president and founder of iTulip.com, a Web site that issued dire warnings in the months before the dot-com bubble burst. At the time, he was the CEO of venture-backed tech companies Bluesocket and AutoCell. His site donned its bubble-watchdog hat again in 2006, warning about euphoria in the housing market. That year, he and three co-authors wrote the book America’s Bubble Economy: Profit When It Pops.

Janszen declares that the business cycle has become the bubble cycle. He fingers the economy’s giant FIRE sector—finance, insurance, and real estate—for encouraging bubbles. This sector, which accounted for only 10 percent of the nation’s gross domestic product in 1947, claims 20 percent today.

Janszen argues that the FIRE sector needed to recreate the gargantuan wealth lost when the dot-com bubble vanished. Thus it drummed up and fed a mad rush to inflate housing prices, abetted by financial institutions addicted to ever-larger debt loads. Now that this euphoria has evaporated, he argues, FIRE’s brigades need another mega-boom. Where are they looking now? To the alternative energy and “infrastructure” industries such as water treatment and road building.