I’ve been reading Eric Janszen’s interesting piece in last month’s Harper’s, “The next Bubble: Priming the Markets for Tomorrow's Big Crash.” He compares the dot.com and housing bubbles as part of a general theory of why the US economy is so bubble-prone. Reading it is like sitting next to a caustically witty financial analyst at a bar; he’s had one too many and is shredding his life’s work, and for you it’s prime entertainment.
So what’s his theory? In a nutshell, he says that the US is now in the hands of its FIRE brigade — finance, insurance and real estate. They own the politicians and control economic policy. Bubbles are their stock in trade. These guys get rich and leave the rest of us with the tab. To save our economy from certain ruin in the wake of one bubble, we have to pump up the next one. This is how the housing bubble inflated after tech bubble popped. And where do we turn after housing goes bust? Janszen predicts alternative energy (including nuclear) as the new new new thing.
I like anyone who builds a worldview around bubblesome finance. Nevertheless, putting on my skeptical academic hat, I think he has slipped into the dangerous waters of functionalism, believing that social or economic events happen because they are needed to happen. There is a longstanding critique of such reasoning, but I’ll spare you. The point is that functionalist explanations don’t really explain. For instance, Janszen’s article doesn’t explain why some economies are more bubble-prone than others, nor does it offer a reason why efforts of insiders to inflate a new sector will necessarily succeed.
As my loyal legions know, I think there is a structural factor behind US asset price inflations during the last 15 years or so, capital account recycling. I’m hoping to get a few hours in the coming weeks to put this into its proper algebraic form. This is how we become convincing in my business. As Groucho almost said, “Who are you going to believe, my model or your own eyes?”
Speaking of quotes, I like this one by Janszen: “Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions.” Amen brother.