The Next Big Bubble

I remember being really confused by the meteoric rise of all the new businesses that were suddenly coming out of the woodwork. With many of the commercial aspects of the internet still unexpolored, new businesses that utilized its seemingly limitless potential were making money hand over fist and rushing to increase their piece of the pie by tapping the latest gold rush to hit Wall Street, the I.P.O (Initial Public stock Offering). But despite the seemingly can’t-miss moneymaking opportunity, I decided to pass. I just couldn’t understand how a company that was made up entirely of three guys with a laptop could be estimated to be worth millions. But thousands, if not millions, of investors who did believe that financial success did not require a dime's worth of infrastructure flooded into the market, only to have the illusionary stability collapse and the “dot-com” bubble burst.

I also remember watching the mortgage industry explode with activity as legislators pressured the banks and lenders to make home ownership a reality for millions of people previously unable to get a loan. People flocked to any company that promised an affordable slice of the new American dream. This led to a shortage in the immediate supply of housing, which led to a boom in home construction and skyrocketing property values. But then the bills came due, and thousands of new borrowers discovered the harsh reality of caveat emptor and that many of those lenders did not exactly have their best financial interests in mind. Another boom, another bubble, another bust.

But with unemployment stagnating at 10-20% (depending on which government report you read) and with talk ranging from slow recovery to double dip recession to even the possibility of depression setting in, people everywhere are quickly becoming desperate enough to enable what I think is the next big bubble: government.

With the study of economics being more art than science and the results of those studies being far from settled upon, the experts seem to be aligning themselves in one of two major camps: “free market” economists and “Keynesian” economists. A detailed discussion of those terms would take volumes, and any conclusion would remain purely speculative, so to save time, let me just say that I think both have some merit and many areas of concern. However, while it’s easy enough to see some of the hazards of a laissez-faire market, my bigger fear is the long-term questions that still surround the theories of John Maynard Keynes.

The basic principle of the Keynesian plan is actually pretty simple: in the event of a downturn in the economy, shortages in the demand for goods can be filled in by government expenditures, which should bridge the gap in productivity and end the downward spiral into recession. It looks good on paper and it makes sense, at least in the short term. Picking up the buying power slackened by private industry helps keep people employed and should eventually restore confidence in the market.

However, with what research I’ve done and education I’ve had on the topic, I don’t recall ever seeing a comprehensive description on how the process ever reverses itself. I’m not doubting that the government CAN fill a temporary void, but the next question that begs for answers is how temporary that relief would be. After all, when’s the last time a politician successfully legislated the cutback of any government program? Jobs may be saved in the short term by an increase in government funding, subsidized work projects and extended contracts, but the only way an economy regains strength is by demonstrating collective stability.

That being the case, the government's own Congressional Budget Office calls the current rate of spending unsustainable. The trouble is that too many people have become way too accustomed to levels of support that, while comforting, are not conducive to recovery. The growing dependence on government intervention has created its own market bubble, and God help us all if we keep inflating it until it pops.

While on vacation last month in Canada, I happened across an opinion piece written by the former Chief Medical Health Officer for Vancouver, John Blatherwick (Vancouver Sun, June 17, 2010). In the face of the rising costs of their government-sponsored health care system, Blatherwick riles against proposed cutbacks in certain areas in spending, instead calling for promoting what he calls “healthy public policies”. His argument: the only way to save money is to spend more. In the article, he suggests  “comprehensive poverty reduction legislation”, since “poverty is one of the most powerful determinants of health.”

Adequate income support for the non-employed, improved earnings for low-wage workers, affordable housing, and universal publicly funded child care were all suggested as potential solutions. As if by merely mandating prosperity with a law, all of a sudden the market would capitulate. But no matter how much we would all like to live in that Star Trek society, where disease was a thing of the past and poverty and starvation were completely eradicated, you cannot inherit what hasn’t been earned. And the government cannot give someone what it first doesn’t take from someone else.

So if you have to manage the housing market to maintain healthcare, then what else will you need to do from there? The problem with Keynes’ solution is that the path seems to only lead to bigger and bigger government, with more and more spending, which requires greater taxation, and increasing control. A bubble is created when the intrinsic value of a product or service is perceived to be much greater than its actual worth, and I question whether this type of short term remedy is worth even the remote possibility of what can happen if this type of a bubble might burst.

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Volume 6, Issue 14, Posted 8:37 AM, 07.14.2010