Booms and busts are just great!


An old piece by Brad DeLong reminds us that booms and busts can be just great for those of us whho don't get too caught up in them. He's talking about the internet stock boom here:

The same thing will happen with the froth that the bubble put on our 1990s boom. Investors lost their money. We now get to use all their stuff. What got built wasn't profitable, but a large chunk of it will be very useful.

As other examples he gives us the US railroads: lost money for just about everyone who tried to finance their building and then made vast profits for those who used them. As indeed with many of our own canals and railways. The US airline industry has, in total over its lifetime, lost money but the value of its existence to the rest of us is huge. Yes, the internet boom saw $600 billion go missing somewhere in the vanities of and the rest. But has Google brought more than that value to the rest of us in the decade since?

The busts that follow the booms aren't all that fun, this is true. But the booms happen because there's something new in hte world, a new technology which no one really knows how to harness. So we experiment in this free market capitalist style manner. Keep throwing money at ideas until we find those that work. The animal spirits get a bit excited, this is true, but there doesn't seem to be any way of exploring the possible uses other than harnessing the ingenutiy and inventiveness of the rest of us shaved apes in playing with it.

In fact, history will look back and see gain and gain. That's because profits are not the same thing as social value.

Which of course brings us to the current bust following the most recent boom. Of course, I don't know what the benefit we'll get in the future from it is for if I did I'd be doing it not writing about it. But I'm willing to hazard a guess.

I think we'll end up looking back and seeing that securitisation is an extremely useful tool. Sure, first time we started playing with it it all got a bit out of hand. But it did exactly what it advertised upon the tin: it allowed risk to be dispersed (German banks going bust because of falling US house prices is indeed risk dispersal) and in doing so it allowed huge amounts of capital to be mobilised. Yes, of course there was froth involved: but those out there screaming that trillions need to be spent on investing to beat climate change. Where are you going to get that money if you cannot mobilise the savings of the world through securitisation?