From boom/bust to bubble machine

[Joanne98]

When the dot.com bubble burst in 2000, trillions of dollars of value vanished yet the expected severe recession arrived as a minor downturn. We were spared the full effects because the housing bubble followed quickly and re-created the fictitious wealth and debt necessary to refund the system.

The recession that we are just now entering could be an economic disaster unless we float another bubble, create the fictitious value necessary to refund the system and get well along within the next nine months. Then we just might get by again with a short and shallow “soft landing.”

Economists do not pretend to understand financial bubbles. They have treated these periods of irrationality as some kind of oddity specific to some peculiar time and place. Economists like to cite the financial bubble in tulip bulbs in the 17th century and segue into the dot.com firms of the late 20th. That was the way things were.

Now financial bubbles are coming at us one after the other, not decades or even centuries apart. And they are

showing some consistent but disturbing patterns, as though they are now a necessary part of modern capitalism and the business cycle.
In the old days, a business cycle was described as a sequence of boom and bust: businesses over-produced, slowed up production to work off excess inventory, and the economy slowed, bringing on a minor recession. That simple world is in the past.

Now the economy is suffering from a bipolar disorder where each manic bubble is supposed to be followed by a depressionary collapse. Only the last two times, something strange happened: a new bubble arose to provide the finance necessary to keep the economy going.

The Internet-based dot.com bubble was funded by a feedback mechanism inherent in the recurring round of IPOs. The baby-boom demand for housing and its bubble were based on securitization — turning home mortgages into tradable instruments where cities, pension funds and school boards could “safely” park their money.

When a bubble bursts, the funds are no longer in the pipeline to finance a new school building, to pay the necessary amount to the pension fund or to permit the normal funding of business activity. This cessation of spending would have brought on a recession except that each bubble produced a new source of funding.

We are now in the down portion of our bipolar world, and trillions are again being lost. We need a new manic stage of debt and fictitious value, and it could come from any number of sources: alternative energy, the environment, including global climate change, or even infrastructure and education. There is a clear economic agenda of needs.

There is a problem ....
http://origin.ldnews.com/columns/ci_8468751

[PSPS]

1. This author has it wrong

We need a new manic stage of debt and fictitious value, and it could come from any number of sources: alternative energy, the environment, including global climate change, or even infrastructure and education.

The currently popping "housing bubble" was nothing more than a fraudulent ponzi scheme used to prop up the economy that had begun to tank as soon as bush was illegally installed. And people were using their fake "equity" as an ATM machine to finance their lifestyles without regard to the consequences.

But to equate that with spending or investment in "alternative energy, the environment, including global climate change, or even infrastructure and education" is absurd. Such spending and investment would produce actual tangible benefits now and forever. It's nothing like someone using fake equity in an overpriced house to buy a hummer.

[gristy]

2. I think the author is talking about bubble-mania as applied to investments

in things like "alternative energy, the environment, including global climate change, or even infrastructure and education". There was a big article in the Atlantic where a pretty good case was made that the next bubble-like investment frenzy is going to be in alternative energy.

[PSPS]

3. But it's not "bubble-like" at all

The housing bubble was a charade. So was the dot-com bubble.

In the dot-com bubble, naive people who owned, say, a hardware store, were willing to pay anything to get a .COM appended to their store's name. And there were a lot of naive venture capitalists who shoveled money into startup companies who did this "work," complete with buildings full of well paid "employees" who played foos ball or video games all day while their beamer was being detailed in the valet parking lot.

So, in one case, people woke up to the fact that their million-dollar house is really worth $ 350,000 when the demand produced by fake money disappears.

In the other case, people woke up to the fact that people still get out of their chairs when they want to buy something.

Any new-energy investment won't be anything like that at all, unless people will wake up one day and realize that those solar panels are stupid and switch back to oil.

[Warpy]

4. I watched dot com paper profit get plowed into the Dow

in the 90s. I watched that same type of paper profit get plowed into hedge funds and real estate in the early parts of this decade. The Dow is going nowhere and real estate is going south, so now paper profit is getting put into commodities, causing a bubble there.

The only thing you can say for sure about bubbles is that they're going to pop. Every time a bubble pops, a little more of that paper wealth evaporates into thin air. Paper profit is constantly chasing more paper profit without being productive in the meantime.

Until and unless this country regulates the financial stratosphere and makes investment in infrastructure more attractive, we're just going to see bubble after bubble at the top and nothing but decay at the bottom. Such an economy is unsustainable and will eventually crash.