Monday, November 5, 2007

Can we learn to love a bubble?

David Goss, the author of a witty short book called Pop! Why Bubbles are great for the Economy provides an alternative to all of the negative comments on bubbles. Unfortunately, there is no good way to spin the bad news from a bubble. He argues that there has been a significant amount of good which has resulted from bubbles. The capital invested has not been completely wasted but has provided powerful long-lasting effects. An interesting argument, but there is no documentation of the huge toll associated with the wild swings in asset prices and the bust when the markets fall.

He reviews the following bubbles and always found a silver-lining:

The telegraph – the country got wired (19th century version).

The railroads – the country got connected.

The financial services – the country got regulated.

The internet – the country got wired (2oth century version).

Real estate – the country got housed.

Alternative energy – the country will get fueled.

In all of these cases, the capital stock did not go away, but this growth could have been more efficient. Is there good that could come from the housing crisis? Building will not be destroyed but households have been. If the capital was placed in other areas, the pay-off would have been stronger. The down-side price of the combined housing and credit bubbles has still not been determined. We do know that it has started to help clean house of executives not minding their risks. So something may be positive from all of this.

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