Studying the financial bubbles we can see several common characteristics.
During the bubble inflation we see markets taken to an extreme by financial greed, but as Walter Sowell so appropriately metaphored on the housing bubble, “blaming the crash on greed is like blaming an airplane crash on gravity”; it is accurate but not very useful. We have had greed with us since the Garden of Eden. Why does it only seem to rear its head to an extreme only every few years?
We see common sense dissolved in ‘new paradigms’, ‘permanently high plateaus’, ‘irreversible trends’, and ‘progressive thinking.’ Motivated by financial gain we believe whatever will support our belief in the unsupportable.
During the dot.com bubble we accepted billion dollar valuations of companies with no customers, no available products and only promising markets. As 25 year old entrepreneurs became billionaires we believed that they were smart. There is this common aspect of bubbles that equates wealth with intelligence. We want to believe that our new wealth is a reflection of our superior insight rather than mere luck.
When these bubbles burst and reality restores common sense we do not want to accept our own foolishness for buying into the speculative fever, we want to blame someone. The geniuses who adorned the magazine covers as the faces of the bubbles either become villains or fade to obscurity.
In the distant past bubbles were fueled by individual greed buying into bad ideas, or at least good ideas taken to an extreme. But more recently bubbles have been enlarged by government policy. Beyond just misguided monetary policy, the recent housing bubble was fueled by government policy that added to the demand for housing by pushing programs to help people buy homes who could not afford them. By eliminating down payments and guaranteeing otherwise obviously risky loans the Government through Fannie Mae and Freddie Mac created one of the biggest bubbles seen to date.
The cover of Newsweek with the picture of Al Gore as “The Thinking Man’s Thinking Man” strikes me as a sign of a new bubble inflating. The subtitle “Al Gore’s new plan for the planet” is the hubris of bubbles.
We never seem to recognize bubbles when we are in the middle of them. They only seem visible when they burst. Yet the new green industrial complex is growing with massive investments that seem guided more by wishful thinking and paranoia than common sense and reason.
From the administration’s stated belief that green energy will provide the jobs that will lift us out of massive unemployment and recession to the policies that will create the drive to capitalize on the new government direction, we now see massive investment into irrational markets.
Al Gore is the chairman of Generation Investment Management, an investment firm making capital investments in firms with potential to capitalize on the green movement and policies. He is also founder and chairman of the Alliance for Climate Protection, an outfit promoting the green economy. With money from people interested in promoting the public interest of environmentalism, the Alliance for Climate Protection is spending $300 million to promote the lifestyle that will benefit the investments of Al’s firm.
To be sure others besides Al Gore are on Capitol Hill promoting climate bills that will financially benefit their own interests. Members of the Bush administration were chastised for their oil interests and criticized for letting it influence their policy decisions. But we are assured that those now promoting their financial interests in their preferred energy sector are altruistic.
Gore is the face of the green industrial complex, but there are many seeking to profit from their foresight and concern to help save the planet. Gore is a genius for getting public policy firms to advertise heavily to support the market for his investments. The best entrepreneurs from the previous bubbles were never able to get $175,000 to make speeches promoting their industry. Gore may be the first green billionaire.
As in previous bubbles skeptics are marginalized, often demonized. As in so many previous bubbles delusional certainty is hurled at skepticism and reason more like an offensive than a defensive weapon . Gore boldly claims, “The debate is over.”
Believers who do not know which end of the test tube the cork goes into post scientific articles to confirm their belief. Confirmation, not information, is the object of their reading.
As I read about the genius of Al Gore on the cover of Newsweek, I recall the prophetic words of John Kenneth Galbraith in his book , “A Short History of Financial Bubbles,” .
“Genius is before the fall.”