10 March 2009

  Why are we always so surprised when bubbles burst?  Because we don’t realize they are expanding bubbles?  Ah, that’s the reason; how are we to know?  How indeed?  Consider our current crisis; how could we have possibly known?

Housing costs were rising so fast that in California, Florida and other places the only way to buy was with an interest only loan – no equity, betting on the price continuing to rise.  Is that not the definition of a bubble?  Here is a comment from Thomas Sowell to chew on: “The same politicians who have been talking about a need for ‘affordable housing’ for years are now suddenly alarmed that home prices are falling. How can housing become more affordable unless prices fall?”  Hmmmmmm.

How about government debt and spending, including balance of payments?  How long had those been growing?  But who could have known about that?

Or personal debt, particularly credit card debt?  One wag was quoted as saying debt is a way of life with which one must just learn to live, and his was going to the grave with him.  Uh huh.

How about the incredible rise in the stock market?  Well, we deserved that, through our cleverness.  That was no bubble, but reasonable, expectable sustained growth.  Oh, and don’t’ forget the unbelievable salaries and bonuses paid to the artists that created it.  Surely not a bubble.  Surely not.

The consumer had long been the “stimulus” (bad word) that continued to maintain GDP – more spending, more debt.  But a bubble?  How could that possibly have been a bubble?

Would it be a stretch to see drug usage as a bubble?  Perhaps in a conventional sense it would, but the growth of cartels, as well as growing usage, and cost of trying to contain both acted very much like a bubble.

Another stretch – trial lawyer activities and law suits.  This one has been growing for a long, long time in our country, but lately the growth has been remarkable.  Who pays for law suits, especially class action law suits?  Everyone.  Was that growth not akin to a bubble?

Energy use?   There is a bubble of a different sort, since it has always been known that oil cannot last forever.  But we used it as if it would – resisting any kind of conservation that might have reduced it, but caused inconvenience.

The real bubble has been mindless expectation – the belief that everything would continue to be as we wished it to be, bigger and better, because we wished it.  Almost like a fairy tale, Hollywood.  One can see similar in professional sports, growing larger than life, growing, growing, growing, along with expectations of thousands of young dreamers, and millions of voyeurs.   Thinking that we will all live happily forever and ever is a bubble that has been pricked for the moment.  But it will begin to inflate again – fortunately, actually, because the anticipation of a better life is what motivates us all.  But a little perspective would be helpful, though not very realistic.  We like bubbles – until they burst.