In the recent run-up, there was talk of the infallibility of equities. This led to a higher level of variable compensation in the economy through option and share issuance and low pressure to raise fixed wages. This was yet another form of hidden leverage, which hid the unprofitability of enterprises through share dilution.
That was written in 2001, after the flop of the Nasdaq. I have sometimes said that bubbles are financing phenomena. That’s true, but we can phrase it more generally: bubbles occur because of an asset-liability mismatch. People go long a long-duration asset with short-duration funding. The short duration funding can be borrowing, or vendor finance, or it can be a labor commitment in order to get equity or option awards.
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