What’s Different About This Time

One benefit of bubbles: they usually leave something useful behind.  Despite the grief and anxiety wrapped with the downturn, bubbles fuel innovation at a breakneck pace and finance the infrastructure that vaults the economy forward.

Daniel Gross elaborated on this thesis in his book Pop: Why Bubbles Are Great For the Economy, citing irrational exuberance as the main factor for new commercial developments.  During the post Civil War booms, for example, companies laid out competing and often redundant rail networks.  Fifteen years later, a quarter of the companies landed in bankruptcy.  The same pattern repeated during the ’90s: each major telecommunications company strung enough wire to service the entire nation.  Collectively, they dropped over ninety percent by 2002.

But these busts were like phoenixes: new life arose from the ashes.  The Internet pop directly led to Web 2.0 (Google, Skype, Wikipedia), technologies that gained critical mass after the bubble burst.   Each directly benefited from the cheap excess capacity built during the ’90s.

This time around, the bubbles didn’t produce anything tangible which we can latch onto as consolation.  A rise in house prices reflects paper growth, lost amidst the downturn, and reshuffling CDOs doesn’t provide the country with any lasting contribution.

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