The Hindu Business Line : ‘Bubbles are good for the economy’

This world’s a bubble, says Saint Aurelius Augustine. And in almost a similar vein, George Santayana sees the soul as “but the last bubble of a long fermentation in the world.” Truth is tough, it will not break, like a bubble, at the touch, nay, you may kick it about all day like a football, and it will be round and full at evening, reminds Oliver Wendell Holmes, Jr.

Well, the depressing truth of the times is that financial pundits lose no opportunity in frightening us of one bubble or the other, more so in the wake of the sub-prime crisis. So, it should be refreshingly reassuring to read that bubbles are great for the economy, as Daniel Gross writes in ‘Pop!’ ( www.landmarkonthenet.com ).

“During bubbles, a great deal of money and energy is spent building up the mental infrastructure surrounding a new technology — convincing people to invest, to use new media, to make Internet phone calls … to buy stocks and investment trusts instead of leaving cash under the mattress,” explains Gross. Competition created by excess capacity — be it in e-tailing or telegraph, roads or condos — chases customers with price cuts, and soon thereafter comes the end stage, with plans going sour and managers panicking.

“Joseph Schumpeter, the economist who promulgated the notion of creative destruction, compared the upper strata of an entrepreneurial economy to a hotel, always full but with guests always checking in and checking out,” narrates the author. “When bubbles start to deflate, the guests at the Schumpeter Hyatt pick one another’s pockets, clobber one another senseless, and then leave without paying the bill. Finally, when economic reality catches up to dreams and hype, the bubble bursts. Pop!”

Don’t despair, however. Bubbles are good, they are right, and they work, says Gross, especially with regard to bubbles that leave behind a new commercial and consumer infrastructure. “The stuff built during infrastructure bubbles — housing and telegraph wire, fibre-optic cable and railroads — don’t get ploughed under when its owners go bankrupt,” he reasons. “It gets reused — and quickly — by entrepreneurs with new business plans, lower cost bases, and better capital structures.”

Examples that the book gives are of Sears, the Associated Press, Western Union, Fidelity Investments and Google. “They certainly would not have developed as they did without the Pop! dynamic.”

In a chapter on real estate, the author chronicles the home mortgage crisis in the US, and wishes that “a new and beneficial spreading of risk could take root from the wreckage of the housing bubble.”

A page-turner.

Home run

To know what happened in the US housing market, read the chapter titled ‘Nemesis’ in Peter Hartcher’s ‘Bubble Man’ ( www.wwnorton.com ). It traces how the national housing stock was around 60-70 per cent of GDP (gross domestic product) in the early post-World War II years, and how it touched 100 per cent in 1981. “During the course of the 1990s, the market value of the nation’s housing stayed in a steady ratio of 102-110 per cent. Even as the stock market slipped its traces and raced beyond all historical proportion to the US economy in the late 1990s, the value of the residential real estate market remained in a stable relationship with the size of the economy.”

A rapid run-up began from 2001, aided by Alan Greenspan’s interest rate cuts. The ratio climbed to 121 per cent; by 2004, it was at 140 per cent. “Americans were borrowing at a remarkable pace. Every day of the year 2004, they were signing on for a net extra of about $2.1 billion in new mortgage debt, or some $800 billion a year… For scale, that’s around the size of the total annual economic production of Canada or Spain.”

Meanwhile, increase in home prices since 1995 was found to be more than the overall inflation rate by more than 40 percentage points. “This is without precedent; from 1951 to 1995, housing prices rose at the same rate as other prices. There is no way of explaining this phenomenon other than as a bubble,” reads a quote of Mark Weisbrot of the Centre for Economic and Policy Research, cited in the book.

Apt read, in the context of the just-released memoir by the 81-year-old Greenspan: The Age of Turbulence: Adventures in a New World.

How bubbles collide and fall

All is not lost when the pop happens. You can protect your portfolio using alternative investments, say John David Wiedemer, Robert A. Wiedemer and Cindy S. Spitzer in America’s Bubble Economy ( www.wiley.com ).

First, what is a bubble? “There is no formal definition within the field of economics that provides a precise way of identifying a bubble. For our purposes, we say a bubble exists whenever an asset’s perceived or psychological value exceeds its real economic value.” Economic value, the authors define, is a value based on logical economic parameters, such as population growth, rising company earnings, increased personal income, or some other fundamental economic parameter that is directly tied to the asset’s rise in value.

The book graphically describes ‘bubblequake’, the scenario of how bubbles will ‘collide and fall’. Fear and greed will accelerate the fall, caution the authors. “The fear of loss and the desire for gain will push or pull investors to unload their US investments.” And it will be a two-stage collapse: ‘at first very slowly and then very, very fast.’

A book you can’t afford to slow-read.

Not truth, but peace

A central task of government is to work out and enforce a framework whereby we can live together, says John Gray in Black Mass ( www.penguin.com ). He does not foresee a role for a homogenised world or a morally homogeneous society. “No one type of government or economy will be accepted everywhere, nor will any single version of civilisation be embraced by all of humanity.”

Religion, a primary human need, should not be suppressed or relegated to a netherworld of private life, demands Gray. “It ought to be fully integrated into the public realm,” while at the same time harbouring a diversity of world-views. “Goal is not truth but peace,” he declares. “It is time the diversity of religions was accepted and the attempt to build a secular monolith abandoned.”

Offering hope amidst what seems apocalyptical.

Oil vulnerabilities

In See No Evil, Robert Baer, a former CIA operative had written about how terrorism works. Now, his Sleeping With The Devil ( www.crownpublishing.com ), a book dedicated to Danny Pearl, is about Saudi crude. The author describes how Saudi oil fields have the same vulnerability as Pearl Harbour had in 1941, when ‘even if a Japanese bomb missed its target, it was likely to find something worth blowing up’. It seems, according to one scenario, “if terrorists were to simultaneously hit only five of the many sensitive points in Saudi Arabia’s downstream oil system, they could put the Saudis out of the oil-producing business for about two years…”

A book that can make you sleepless!

Where the sick are abundant

Fleeing from the empty test clinics of the West, drugmakers have come in search of better places where the sick are abundant, and costs low, writes Sonia Shah in The Body Hunters ( www.pearsoned.co.in ). Destinations, as you can well imagine, are the developing countries.

“In the US investigators reject proposals that require their subjects undergo painful, invasive procedures.” Not so in the new venues of trial. The book cites a doctor as saying he was approached to conduct a trial that required him to “surgically insert telescopic devices into women’s abdomens that were ten times bigger than he and other doctors had been using for years.”

Companies are happy that “in contrast to the agonisingly slow pace of enrolment in trials at home, recruitment abroad is rapid. “And unlike American patients, who hemmed and hawed and often simply dropped out of studies, in India, boasted Vijai Kumar, head of a New Delhi-based industry trial centre, ‘we have retained 99.5 per cent of the subjects enrolled.’”

Disturbing.

D. MURALI

http://BookPeek.blogspot.com

More Stories on : Books | E-Dimension | Economy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
The power to unlock

Role of public representative director in corporate governance

DRDO: Nourishing and protecting the Armed Forces

Consumer welfare and development are inseparable

‘Bubbles are good for the economy’

Bankers on guard