The brave new world of finance-14: The next bubble?


(For previous posts in this series, see here.)

In this final post in this series, I want to look at what might be the next bubble looming on the horizon.

In his article The next bubble: Priming the markets for tomorrow’s big crash (Harper’s Magazine, February 2008) Eric Janszen says that the total value of real estate, if priced according to historical growth rates, should be about twelve trillion dollars. But the real estate boom drove the prices up to about double that, to twenty four trillion. If this is truly a bubble phenomenon and real estate values drop to what they should be historically or even below, suddenly twelve trillion dollars worth of assets would have essentially vanished into thin air.

It may not be that catastrophic. As has been pointed out elsewhere, real estate prices have not dropped that precipitously as yet (and in some areas of the country have not dropped at all) and some are speculating that it won’t. Such people argue that while prices have declined from the peak, that it has now reached a new equilibrium and will not sink further. I think we won’t know for sure which is the case for a couple of years, until all the dust settles from the subprime crisis and all the losses have been tallied. At present, there is considerable guesswork as to the full extent of the losses, both real and potential.

But there is a serious danger that the subprime losses can trigger a recession or even a depression and both the government and the business sectors are trying to find ways to stave it off.

Janszen argues that to make up for the losses generated by the subprime crisis, the financial sector is already gearing up to generate, and thus benefit from, the next bubble sector. What area of business would make a good candidate for the next bubble? Based on recent history, Janszen says that it has to meet certain criteria:

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed not by billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

He looks at various possible candidates for the next bubble, such as the health care, pharmaceutical, and biotechnology industries, and finds each one problematic for various reasons. He thinks that the only sector that meets all the criteria is alternative energy, because it is one of the few sectors big enough to serve the purpose. He thinks that this is already in the process of being “branded” as the next big thing.

Riding the wave of the environmental movement and people’s concern about the future of the globe, he says we are going to see immense investment by the government in alternative energy sources (nuclear, hydrogen, geothermal, solar, hydrogen, ethanol), not because of any deep environmental concerns, but because it will enable the government to subsidize the energy industry by the tens of trillions of dollars necessary to make up for the disappearance of the assets incurred by the collapse of the real estate bubble.

He predicts that we will soon start seeing highly increased hype for various forms of alternative energy and companies that deal in them will start going public, issuing stock and cashing in on the hyped-up interest in this area, just the way internet startups did a few years ago. Janszen also points out that Al Gore has joined the big venture capital firm of Kleiner, Perkins, Caulfied & Byers that was involved in the IPOs of Google and Amazon. Thus despite the initial skepticism Gore received from traditional business and media when he raised the alarm about global warming, he may turn out to be useful to them as the poster boy for the new alternative energy bubble. Joshua Frank also raises questions about the support that the energy industry (including nuclear and coal) are giving Obama and what they might be expecting in return.

I must say that initially I was skeptical about Janszen’s fingering of alternative energy as the next bubble but more recently I have seen disturbing reports that he may be on to something. President Bush, John McCain and Congressional Republicans are now talking enthusiastically about the virtues of alternative energy and green technologies, even while ridiculing the notion of global warming and strongly resisting efforts at conservation. President Bush, for example, now talks up hydrogen-powered cars and solar and wind power as the way of the future, even as he opposes far more direct energy conserving measures such as raising fuel efficiency standards for cars and trucks.

Like many other people, I am very worried about the long-term health of the planet and in favor of reducing our consumption of all resources, including oil. One has the sense that the tide is turning on this issue, that more and more people are beginning to think that we cannot go on consuming resources at the current rate. It is very disturbing to think that the government-industry-Wall Street complex will hijack the general public’s very real concern and cynically use it to siphon yet more vast amounts of public money into the hands of private investors and speculators, the way people’s support for home ownership was used to pump up the profits of those financial institutions involved with real estate.

The next president will play an important role in determining whether we have real conservation efforts or are merely going to create an alternative energy bubble, and we clearly need to watch developments carefully.

POST SCRIPT: Will Tim Russert denounce and reject his ties to Stalin?

Yesterday, I wrote about Tim Russert’s appalling performance as moderator of Tuesday’s debate. General J. C. Christian is worried about what might happen if Tim Russert’s tortured logic in linking Obama to Farrakhan is applied to Russert himself.

Comments

  1. kural says

    Mano,

    A few weeks ago, responding to my observation on your attitude towards thrift, and the basics of good citizenship, you said that you are a traditionalist. William Buckley, the founder editor of the National Review, and ‘conservative’ icon passed away this week. There is much about Buckley that sounds traditionalist rather than conservative. While these words are simply labels, how would you differentiate the two, traditionalist vs. conservative. And to throw in some more to confuse, what in your definition is a liberal?

  2. Rian says

    “Like many other people, I am very worried about the long-term health of the planet…”

    Mano, keep in mind that we cannot (as of yet, and it probably will take a great deal of technological advance to make it possible) destroy the planet. We would have serious difficulty even destroying all life on the planet. However, we have a much greater chance of killing ourselves, which makes conservation and recovery important.

    The only way however that alternative energy would be adoptable on a large scale is exactly the idea of superior profit over existing energy sources. About the only other way to organize the energy sector would be to make it entirely public, which scares me far more as now there would either be coercive force driving conservation or no conservation at all.

    Kural, Buckley was one of the driving forces behind the idea of an interventionist Republican Party after World War Two. In large measure, he destroyed the Robert Taft wing of the party and firmly established the Republican ascendancy as the party of an even more militant foreign policy and staunch anti-Communism. He wasn’t particularly “traditionalist”; he was the intellectual force behind re-defining conservatism into the form it maintained into and through the first Bush presidency.

  3. says

    Kural,

    Your question is intriguing. My statement about being a traditionalist was a kind of throw-away line, like saying I am old-fashioned. But I think I need to think more carefully about what it means. I may write more about it later but for the present, it means that I think in terms of the responsibilities that one has to one’s community and I find appealing the way of life described in Hindu philosophy (which I have written about before) and Confucian philosophy (which can be seen here.)

    The terms liberal and conservative have ceased to have much operational meaning and now serve largely as terms of abuse.

  4. Anonymous says

    Thanks Mano. I look forward to your thoughts on the subject. As for the need for considering actions rather than labels I could not agree more.

  5. says

    Rian, I agree with your statement about superior profit, I am bothered when enviromentalists say how all of america could be run on windmills??? If that were a cheaper energy source, guess what… Nobody would not be able to stop development.

  6. says

    For my money, economists are like meteorologists in that they do a great job of telling you why something happened yesterday, but they don’t have a sign as to what is going to happen tomorrow.

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