Not only are credit crises different from other cycles, they also differ from other bubbles.
As Dan Gross explained in “Pop! Why Bubbles Are Great for the Economy,” the typical investing bubble leaves behind something of value. Whether it was thousands of miles of railroad tracks in the 19th century or thousands of miles of fiber-optic cables in the 1990s, usable infrastructure survives the bubble. Assets get scooped up out of bankruptcy for pennies on the dollar. Eventually, all of this overinvestment in the bubble du jour becomes a productive part of the economy. All that cable laid by Global Crossing and Metromedia Fiber and other bankrupt firms? Today, it is the bandwidth infrastructure that supports Google Maps, Netflix streaming video and Twitter.
Or so says Barry Ritholtz over at the Washington Post.
I have to admit that as someone in the financial services industry, this is one of those little bits of economic theory that goes completely and utterly ignored. Of course it makes perfect sense: “bubble and bust” is standard enough economic reality, but this last bubble was different. The example placed of laying infrastructure during the dot.com bubble of the 90’s led to the current internet-cable framework that we all take advantage of every day. Sure we saw the decline and devastation of the thousands of small and large firms in the tech industry during that period, but we also saw a nation that, fairly quickly, laid the groundwork (literally) for the current access-routs to the internet that we have now. We saw a boom in internet advertising and marketing which has sustained itself on the shoulders of the investment that occurred during the 90’s.
It all seems to make too much sense. Our current recession (and yes, we’re still in a recession) has very little in the way of positives when we look at what was created and what sustains. The product that bubbled wasn’t exactly “housing”, although it tends to get the blame due to being the physical thing we can point at, but was about credit. And that’s the mess. Credit, itself, creates nothing when it blows up. In the dot.com bust we saw innovation and physical benefit; here we’re left with debt as the “product” that killed us. And, well, there isn’t much to debt besides, well, debt.
And here we have ourselves: over-invested in investment itself. It really doesn’t get much more postmodern than that. The winners are, of course, those who control investment. When you’re laying cables or developing products and services for use, others can come in when you go bust to purchase your ideas and physical investments. When it’s credit, there isn’t much you can do other than discharge and get on with everything.
And that’s where one of the real problems hides. Dot.com going bankrupt? sell off your assets and declare your bankruptcy. Going bust on your mortgage? Well, there isn’t anything created that can be sold.
It all circles back to the same problem: When we start, in earnest, doing nothing more than making a big pile of money into a bigger pile of money we’re bound to pay a huge price. Not only are we cutting support and assistance to the very people who need it most, our financial institutions have also ensured that there isn’t anything that we’ve actually created aside from money. Who needs a product when you can spin gold?