No Comment — January 27, 2008, 5:36 pm

The Bubble Bursts

Eric Janszen, “The Next Bubble: Priming the Markets for Tomorrow’s Big Crash,” Harper’s, February 2008.

“Our economy is in serious trouble,” writes Eric Janszen in the cover story for the February Harper’s. “Both the production-consumption sector and the FIRE [finance, insurance and real estate] sector know that a debt-inflation Armageddon is nigh, and both are praying for a timely miracle, a new bubble to keep the economy from slipping into a depression.” A well-known venture capitalist, Janszen is the founder and owner of iTulip.com. His is hardly the only voice on the markets today invoking apocalyptic notes. In the December issue of Vanity Fair (“The Economic Consequences of Mr. Bush”), my Columbia colleague Joseph Stiglitz makes equally dire forecasts. George W. Bush, he says, will soon outstrip Herbert Hoover for the unwanted designation of worst presidential economic steward in modern American history. Whereas the Stiglitz piece focuses on the major macroeconomic indicators, however, Janszen pulls in for a close-up view of the bubble cycle which, he argued, has come to mark the American economy.

What’s a Bubble?

semper_augustus_tulip_17th_century
We all know about this phenomenon from high school history. In the beginning, of course, was “Tulip mania,” the obsession the Dutch had with the tulip trade in the first four decades of the seventeenth century. Since the Netherlands in this era was pioneering the introduction of pre-capitalist high finance, it only stands to reason that they would also have first experienced the bubble phenomenon. Owning and propagating tulips was of course a matter for the leisure class, and the matter was developed into an industry that moved on ridiculous paths, but also providing the footprint for an emerging commodities market (futures contracts, for instance, were developed in conjunction with the tulip trade). At one point the varietal “Semper Augustus” drew a bid of 6,000 florins for a bulb (at a time when a middle class burgher subsisted on 150 florins a year). The prices were delusional, out of proportion to a realistic long-term market. A crash was inevitable. It came in 1637.

And other bubbles came and went. The South Sea bubble of 1720, for instance, which led Britain to start the process of regulating the financial services industry. The Crédit Mobilier scandal of 1872.

A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences.

But the word “bubble” itself is something of a misnomer. “It confuses cause with effect. A better, if ungainly, descriptor would be ‘asset-price hyperinflation’—the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.” Exactly, just keep that magnificent “Semper Augustus” tulip in mind. A British sailor happened by the warehouse in which it was stored and mistook it for an onion, so he peeled and ate it.

Of course, in recent times, the pace of “bubbles” has picked up considerably.

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being.

They are essential to the rhythm of American business, Janszen argues:

There will and must be many more such booms, for without them the economy of the United States can no longer function. The bubble cycle has replaced the business cycle.

Inside the Bubble Machine
There is a familiar cycle to this process in the United States, and Janszen calls it part of our new faith-based financial world. It always starts with an idea. Indeed, a good idea. But it quickly gets hyped into sometime far beyond its short-term potential. It captured the imagination of the masses. Think of the dot-com bubble.

Deregulation had built the church, and seed money was needed to grow the flock. The mechanics of financing vary with each bubble, but what matters is that the system be able to support astronomical flows of funds and generate trillions of dollars’ worth of new securities.

And of course, the regulators might have held the excesses in check. And the media might also have proven an effective break—exposing the rising financial soufflé to a little bit of skepticism. But America’s media? Our Congress? Think again.

The media stood by cheering, carrying breathless profiles of Wunderkinder in their early twenties who had just made their first hundred million dollars; business publications grew thick with advertisements. The media barely questioned the fine points of the new theology. Skeptics were occasionally interviewed by journalists, but in general the public was exposed to constant reiterations of the one true faith. Government stood back—after all, there was little incentive for lawmakers to intervene.

So every bubble machine knows its end. “In a bubble, fictitious value goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed.”

The Subprime Crisis
The latest bubble to pop, with potentially calamitous results, is the subprime mortgage market.

The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. Risks are embedded in price and lurk as defaults. Even after the faith that supported a bubble recedes, false beliefs continue to obscure cause and effect as the crisis unfolds. . .

The housing bubble has left us in dire shape, worse than after the technology-stock bubble, when the Federal Reserve Funds Rate was 6 percent, the dollar was at a multi-decade peak, the federal government was running a surplus, and tax rates were relatively high, making reflation—interest-rate cuts, dollar depreciation, increased government spending, and tax cuts—relatively painless. Now the Funds Rate is only 4.5 percent, the dollar is at multi-decade lows, the federal budget is in deficit, and tax cuts are still in effect. The chronic trade deficit, the sudden depreciation of our currency, and the lack of foreign buyers willing to purchase its debt will require the United States government to print new money simply to fund its own operations and pay its 22 million employees.

So the prognosis is clear. What’s the fix? Seriously, who would think there’s an easy one. There isn’t. But the market and its genies are so predictable, says Janszen. They know of only one possible fix: the next bubble.

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded.

No this is not investment advice. Rather the opposite. Let’s call it a cautionary tale unlikely to be heeded. George W. Bush has long been tagged the “Bubble Boy” president because of the lengths employed by his handlers to keep the public at a safe distance. Now, of course, the label may take on a different meaning.

Which brings us back to those Dutch tulip vendors. Can it be any coincidence that the first bubble in our historical cycle started on that powerful market that did so much to put Europe on the path to capitalism, tolerance and prosperity? There was punishment for excesses, but then the worldly wise managed always to stay ahead of the popular crazes, exploiting them, building wealth off of them, but avoiding financial ruin. Perhaps deep in the folds of those Calvinist brains was some residual contempt for the vanity of it all, a recognition, as Calvin wrote, of the necessity that thorns would be found among those roses. The stumble and failure of markets is inevitable and provides no reason for shame. The good entrepreneur knows to pick himself up and plow ahead. But he also knows to learn from his adverse experiences. And that’s the point on which America in the age of Bush is proving lamentably dense.

Share
Single Page

More from Scott Horton:

Conversation August 5, 2016, 12:08 pm

Lincoln’s Party

Sidney Blumenthal on the origins of the Republican Party, the fallout from Clinton’s emails, and his new biography of Abraham Lincoln

Conversation March 30, 2016, 3:44 pm

Burn Pits

Joseph Hickman discusses his new book, The Burn Pits, which tells the story of thousands of U.S. soldiers who, after returning from Iraq and Afghanistan, have developed rare cancers and respiratory diseases.

Context, No Comment August 28, 2015, 12:16 pm

Beltway Secrecy

In five easy lessons

Get access to 167 years of
Harper’s for only $45.99

United States Canada

CATEGORIES

THE CURRENT ISSUE

February 2018

Notes to Self

= Subscribers only.
Sign in here.
Subscribe here.

Within Reach

= Subscribers only.
Sign in here.
Subscribe here.

The Bodies in The Forest

= Subscribers only.
Sign in here.
Subscribe here.

The Minds of Others

= Subscribers only.
Sign in here.
Subscribe here.

Modern Despots

= Subscribers only.
Sign in here.
Subscribe here.

Before the Deluge

= Subscribers only.
Sign in here.
Subscribe here.

view Table Content

FEATURED ON HARPERS.ORG

Article
The Minds of Others·

= Subscribers only.
Sign in here.
Subscribe here.

Progress is impossible without change,” George Bernard Shaw wrote in 1944, “and those who cannot change their minds cannot change anything.” But progress through persuasion has never seemed harder to achieve. Political segregation has made many Americans inaccessible, even unimaginable, to those on the other side of the partisan divide. On the rare occasions when we do come face-to-face, it is not clear what we could say to change each other’s minds or reach a worthwhile compromise. Psychological research has shown that humans often fail to process facts that conflict with our preexisting worldviews. The stakes are simply too high: our self-worth and identity are entangled with our beliefs — and with those who share them. The weakness of logic as a tool of persuasion, combined with the urgency of the political moment, can be paralyzing.

Yet we know that people do change their minds. We are constantly molded by our environment and our culture, by the events of the world, by the gossip we hear and the books we read. In the essays that follow, seven writers explore the ways that persuasion operates in our lives, from the intimate to the far-reaching. Some consider the ethics and mechanics of persuasion itself — in religion, politics, and foreign policy — and others turn their attention to the channels through which it acts, such as music, protest, and technology. How, they ask, can we persuade others to join our cause or see things the way we do? And when it comes to our own openness to change, how do we decide when to compromise and when to resist?

Illustration (detail) by Lincoln Agnew
Article
Within Reach·

= Subscribers only.
Sign in here.
Subscribe here.

On a balmy day last spring, Connor Chase sat on a red couch in the waiting room of a medical clinic in Columbus, Ohio, and watched the traffic on the street. His bleached-blond hair fell into his eyes as he scrolled through his phone to distract himself. Waiting to see Mimi Rivard, a nurse practitioner, was making Chase nervous: it would be the first time he would tell a medical professional that he was transgender.

By the time he arrived at the Equitas Health clinic, Chase was eighteen, and had long since come to dread doctors and hospitals. As a child, he’d had asthma, migraines, two surgeries for a tumor that had caused deafness in one ear, and gangrene from an infected bug bite. Doctors had always assumed he was a girl. After puberty, Chase said, he avoided looking in the mirror because his chest and hips “didn’t feel like my body.” He liked it when strangers saw him as male, but his voice was high-pitched, so he rarely spoke in public. Then, when Chase was fourteen, he watched a video on YouTube in which a twentysomething trans man described taking testosterone to lower his voice and appear more masculine. Suddenly, Chase had an explanation for how he felt — and what he wanted.

Illustration by Taylor Callery
Article
Before the Deluge·

= Subscribers only.
Sign in here.
Subscribe here.

In the summer of 2016, when Congress installed a financial control board to address Puerto Rico’s crippling debt, I traveled to San Juan, the capital. The island owed some $120 billion, and Wall Street was demanding action. On the news, President Obama announced his appointments to the Junta de Supervisión y Administración Financiera. “The task ahead for Puerto Rico is not an easy one,” he said. “But I am confident Puerto Rico is up to the challenge of stabilizing the fiscal situation, restoring growth, and building a better future for all Puerto Ricans.” Among locals, however, the control board was widely viewed as a transparent effort to satisfy mainland creditors — just the latest tool of colonialist plundering that went back generations.

Photograph from Puerto Rico by Christopher Gregory
Article
Monumental Error·

= Subscribers only.
Sign in here.
Subscribe here.

In 1899, the art critic Layton Crippen complained in the New York Times that private donors and committees had been permitted to run amok, erecting all across the city a large number of “painfully ugly monuments.” The very worst statues had been dumped in Central Park. “The sculptures go as far toward spoiling the Park as it is possible to spoil it,” he wrote. Even worse, he lamented, no organization had “power of removal” to correct the damage that was being done.

Illustration by Steve Brodner
Post
CamperForce·

= Subscribers only.
Sign in here.
Subscribe here.

After losing their savings in the stock market crash of 2008, seniors Barb and Chuck find seasonal employment at Amazon fulfillment centers.

Chance that a Silicon Valley technology company started since 1995 was founded by Indian or Chinese immigrants:

1 in 3

A gay penguin couple in China’s Polar Land zoo were ostracized by other penguins and then placed in a separate enclosure after they made repeated attempts to steal the eggs of straight penguin couples and replace them with stones.

Trump’s former chief strategist, whom Trump said had “lost his mind,” issued a statement saying that Trump’s son did not commit treason; the US ambassador to the United Nations announced that “no one questions” Trump’s mental stability; and the director of the CIA said that Trump, who requested “killer graphics” in his intelligence briefings, is able to read.

Subscribe to the Weekly Review newsletter. Don’t worry, we won’t sell your email address!

HARPER’S FINEST

Report — From the June 2013 issue

How to Make Your Own AR-15

= Subscribers only.
Sign in here.
Subscribe here.

By

"Gun owners have long been the hypochondriacs of American politics. Over the past twenty years, the gun-rights movement has won just about every battle it has fought; states have passed at least a hundred laws loosening gun restrictions since President Obama took office. Yet the National Rifle Association has continued to insist that government confiscation of privately owned firearms is nigh. The NRA’s alarmism helped maintain an active membership, but the strategy was risky: sooner or later, gun guys might have realized that they’d been had. Then came the shootings at a movie theater in Aurora, Colorado, and at Sandy Hook Elementary School in Newtown, Connecticut, followed swiftly by the nightmare the NRA had been promising for decades: a dedicated push at every level of government for new gun laws. The gun-rights movement was now that most insufferable of species: a hypochondriac taken suddenly, seriously ill."

Subscribe Today