bubbles

Brayden

Business journalist, Daniel Gross, has just published a new book in which he argues that market bubbles are good for society. Financial Times reviews the book here. Looks to be fascinating and certainly controversial.

[C]ould it be that the cassandras have it all wrong and that bubbles are actually a blessing, not a curse? This is the heretical idea advanced in a provocative book, Pop! Why Bubbles are Great for the Economy, which sketches out a history of the bubbles that have swept through America over the past 150 years. The author, Daniel Gross, is a columnist who has written for a range of publications, including most recently Slate, the internet magazine which itself emerged from the 1990s dotcom bubble. It is a pedigree which gives Gross a good perspective on the follies of the 1990s.

However, he advances his thesis by also exploring episodes which may be less familiar to modern investors, such as the telegraph investment bubble of the 1840s and 1850s and the railway frenzy of the 1880s and 1890s. He also covers the housing bubble that is bursting right now in the US – and a sector he considers the next candidate for investment excess, the alternative energy world. . .

But what sets the work apart from the usual bubble-literature is its central thesis. Gross believes that America is prone to investment bubbles partly because its government tends to have a laisser faire attitude to innovation, preferring to let private investors fund new technologies, rather than the state.

Thus “in every generation, people arise to proclaim that a new technology or set of economic assumptions and financial tools promises untold riches,” Gross writes. This prompts investors to flood into the “big new idea”, which creates over-investment and pushes up asset prices – which is then followed by a crash as the market realises the implications of all this excess capacity.

So far, so depressing. But the interesting thing, Gross argues, is what happens after the bubble bursts. While the pundits are wringing their hands in horror at the “waste” of the bubble, a second round of entrepreneurs usually arrives who can create something valuable out of this excess infrastructure.

Thus when the railway bubble burst in the 19th century, entrepreneurs swooped in to buy the track cheaply – which eventually produced America’s first integrated network. Similarly, when the dotcom mania ended earlier this decade, it left an internet infrastructure in its wake which later produced YouTube.