boilingspot: Why I'm Rooting for 3 Big Economic Bubbles

Let's see, I've lived and worked through how many bubbles and bubble pops?

By Stephen Pizzo, News for Real, December 26, 2008

My first bubble must have been the real estate bubble that developed during the Carter Presidency. Housing prices in my Northern California region were popping up 2% a month. Everyone and their uncle suddenly wanted to buy a "fixer upper" and cash in.

That bubble burst sometime late in 1979, if I recall properly, which I should since I owned a real estate company at the time. I knew the end was near for that bubble when suddenly the investors showing up in my office weren't grizzled old pros, but average Joes. "Hi, my neighbor and I scrapped together five grand and we want to invest it in a fixer upper," they'd tell me.

I took that as a sure sign that the jig was up. I sold my office and went looking for another line of work. That turned out being the newspaper business, which is a story for another day.

After that I avoided bubbles until 1996, when I suddenly found myself in wallet deep in a San Francisco Internet startup, Quokka Sports. Eeeeeeeeeeeeeeeeeha! What ride that was. We burnt through $164 million in venture capital money in less than 40 months. And when the dust settled in 2001 all that was left were 438 over-priced Herman Miller desk chairs, a ping pong table and a couple of tons of empty Cheeto bags.

Of course, we were just one of hundreds of dot com companies that flared like new-born stars, burnt brightly for a short time, then went super nova, leaving nothing behind but a big ass echo and lot of dust. (The dust would be all that dot.com stock ordinary folks bought like lemmings at the top of the curve…. as they always do - just like those two neighbors I mentioned above who were gonna get rich buying fixer uppers..)

That's the way of bubbles. They are fueled by hope, greed and -- most of all -- other people's money. And the money is easy to get. Hell the bubblemisters don't even have go get the stuff. Other people bring it to them by the truckload and beg them to take the stuff.

When the bubble bursts the bubblemisters shrug and mumble things like, "Oh well, nothing ventured, nothing gained," and "Hey, don't blame me, you're the one who begged us to let you in on the action." (My favorite rationalization during the dot.com bubble came when a reporter asked a venture capitalist why they continue funding CEOs who ran failed dot.com companies. "Because you can't encourage risk-taking by punishing failure," he replied. Easy for him to say, since he was investing what? - Other people's money.)

But the real problem with most bubbles is not that people lose money. The real problem with bubbles is that the amount of money lavished on bubble-stuff rarely creates anything near the amount of useful tangibles that could have invented/produced with the commensurate amount of money.

Nobel Prize winning economist and columnist, Paul Krugman recently wrote;

"…once the economy has perked up a bit, there will be a lot of pressure on the new administration to pull back, to throw away the economy's crutches….The point is that it may take a lot longer than many people think before the U.S. economy is ready to live without bubbles.."

Now, while I agree with that in principle, I am rooting for three more bubbles;

An infrastructure building boom bubble
A universal healthcare bubble
A green technologies bubble.

Because that's the only way we're going to deal with the challenges that face us.

Thanks to Global Warming deniers in both government and industry, we are at least 25-years behind the curve on addressing human contributions to global climate change. And there's simply no way normal market forces are going to spend what it will take to catch up. In fact many industries, like coal and oil, have taken a page right out of the old Big Tobacco playbook, pumping out junk science and junkier scientists to counter such efforts.

The only way to catch up is to ignite the same animal passion that fuels every bubble - greed. "Make some green by investing green," needs to become one of America's investment mantras. "A healthy American is a consuming American" is another good one.

There are some early signs that just that kind of thing may be beginning to happen. With Democrats back in power, and the billions of fresh dollars rolling off the presses in DC, investors smell new opportunities in new places - the kind of places Democrats and the incoming Obama administration say they favor - healthcare, infrastructure and all things green.

Need capital? Green start-ups may fare best in tough '09

December 17, 2008 -- Start-up companies in green industries stand the best chance of getting venture capital funding in 2009 -- in what will otherwise be a dismal year for entrepreneurs looking for money, a new venture industry survey suggests.

"We will likely see a marked slowdown of new investments as venture capitalists turn their attention to supporting existing companies," said Mark Heesen, NVCA president. Despite the overall slowdown expected in venture funding, 48% of venture capitalists predicted increased investment in clean technology businesses, ranking that sector at the top of list of industries likely to get more funding. The life sciences industry, including biotech, ranked second." (Full)

The pressure on the incoming Obama administration to change the direction of the Bush bailouts will be overwhelming. Ordinary Americans have no sympathy for Wall Street companies and bankers who took it up the assets when the housing market collapsed. Nor do Americans have much of appetite for saving the Big Three auto companies, which wasted the last decade rock stupid products like Hummers and other four-wheeled dinosaurs.

So between now and eight years from now over a trillion dollars will be lavished on our long-neglected national infrastructure, expanding and modernizing our healthcare systems and on R&D/deployment of clean, renewable energy sources and technolgies.

Sure, all three areas will become investment bubbles. Duh. America is now and will always be a capitalist nation. It's in our DNA. Everyone wants a piece of whatever is happening now. Don't you? (Don't try that holier than thou crap with me…. you would too.)

And so, "The Greater Fool Theory" will again kick in. New companies will form, new ideas will not only be funded, but over-funded, by venture capitalists eager to grow these new infrastructure, healthcare or green companies fast as they can so they can take them them public, (IPO) and start over again…for as long as the bubble lasts.

Once again, the general public will serve as the greatest fools. As they hear about the millions being made in these three new bubbles they will begin pestering their broker to get them in on these hot IPOs. Day traders will stay up all night online, prowling amatuer investor chat rooms where the sharks play "pump and dump," with the newbies drop who stumble in drooling for an opportunity to snap up the "hottest" new green or healthcare company IPO.

Then, at some point, each of these three bubbles will burst, as all bubbles must. A small number of healthcare and green start ups will actually survive in some form. The lucky ones will be acquired by biggies, like Johnson & Johnson, Exxon, Kaiser Permanente, etc.

But, like the dot.com companies of yore, most will not make it, and they will disappear, along with billions of investor dollars.

But this time, at least, the stuff left behind by the healthcare, infrastructure and green bubbles, will endure long after their creators and funders are long gone. And they will form a modernized foundation upon which a resurgent American economy can not only stand, but grow.

That's what happened after FDR lavished federal funds on dams, roads and bridges, most of which are still in use today. And it happend again when, after WWII, Ike lavished more federal money, knitting the nation together with a new national highway system. Imagine how the America of the 1960 on could have been anything near what it became without all that infrastructure.

And so it will be with the federal money that will spark the healthcare, infrastructure and green bubble of 2009-2017. After that bubblemisters of the future will have new bridges, highways and high-speed trains on which to deliver their goods and services. All Americans will have cleaner water, cleaner air and safer food. Air travelers will enjoy less delays due to new airports and modernized air traffic control systems. Universal healthcare will extend lives and the quality of those lives.

(Of course, conservatives out there will shake their heads at all this. "The government can dump all the money they want into those three areas and the private sector is still not going to invest in something they could lose money on," they'd claim. Not so. Not so. And don't force me to list all money-losing schemes the private sector dumped trillions into over the past couple of decades. The private sector always follows the money… be it other people's money or Uncle Sam's money. Just lay out in the warm sunlight and they'll show up like flies attracted to camel dung. And the very people who claim they won't be attracted to it will be among the first banging on the door to get in once those trains start leaving the station. You can bet the farm on it. History tells us so.)

Ah, but I digress.

The biggest bang for the buck will be generated by all the green technologies nourished and grown by the combination of government and speculative money. Those investments will pay dividends for a century -no, for centuries to come. The return on those investments will be incalculable. Not because we can't do the math, but because all the human wealth on earth would be drop in the bucket by comparison.

Finally we'd enjoy investment bubbles that leave more behind than they consume -- bridges to somewhere..bridges to the future. Imagine if we had a green technology bubble, for example, as large as the recent housing bubble. Imagine that, and what it would leave behind for the future generations.

Bubble on, dudes.