Fueling Up the Next Bubble

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The market normally dispatches the grim reaper to punish foolish entrepreneurs and credulous investors on a slay-as-you-go basis, returning talent and salvageable assets to the fertilizer heap. When played right, only the participants in the game lose their shirts. The cautious crowd gets to watch and say “Tsk-tsk, they should have known better.”

Sometimes, just sometimes, a crazy idea works. When it does, the lucky, smart and bold earn rich rewards. This rare dispensation of disproportionate wealth, along with the knowledge that failure is rarely fatal, is what motivates the thoughtful risk taking that propels genuine progress. Welcome to capitalism in its purest form.

When the grim reaper’s hand is staid by the twin forces of mass delusion and public policy, the game of capitalism mutates. It can become rational to bet on the irrational if you believe your timing is good enough to leave the greater fool holding the bag. Crazy ideas that have a chance of working get lost in a flood of crazier ideas chasing rewards whether the ideas work or not.

Quick buck artists crowd out fundamentals players as slick positioning trumps due diligence. Early stage investors who cash out not by resolving risk, but by hiring fat-fee investment bankers to package and sell off their risk attract ever more capital when they trumpet their “returns.” Political entrepreneurs outnumber market entrepreneurs as landing government subsidies proves more lucrative than landing customers. With the exception of loathed shorts that are punished mercilessly if their timing is bad, and investigated by authorities if their timing is good, everyone is motivated to keep the delusion alive.

Sooner or later reality rears its ugly head and the grim reaper breaks loose. Except now he doesn’t come for just the foolish and imprudent. With pent up fury he spreads devastation far and wide, breathing down the necks of even the cautious crowd as they flee for safety. Thanks to the unlimited powers of a democracy stripped of constitutional limits run by populist princes on the payroll of this perverted version of capitalism, the hapless taxpayer is usually called on to clean up the mess.

Under normal circumstances, giving a $700,000 no-money down mortgage to a $14,000 a year strawberry picker is crazy enough to attract the grim reaper in a matter of months. It takes congressionally backed Government Sponsored Entities (GSEs) pursuing “enlightened” public policies, aided and abetted by Wall Street sharpies and their short-term bonused minions, to scale such an absurdity into a global colossus of crazy.

Run and hide, the grim reaper is among us and we don’t know who’s next!

As our elected officials reach into our pockets to bail out those favored few grown too big to fail, cultural and political forces are lining up to sew the seeds of our next bubble. The tales they are spinning may sound sensible today, just as “increasing homeownership” had few detractors yesterday. But next time we are forced to run and hide we will surely be asking, “What were we thinking?”

You can color the next bubble green

A Nobel Prize winning PowerPoint presenter wants to end our reliance on fossil fuels in ten years. More power to him if he chooses to bet his own money to make it happen – may he become the wealthiest man on earth if his crazy ideas prove right. But are we really going to gamble 20% of the GDP of the entire human race?

Great banks came tumbling down because they believed computer models could predict housing prices five years out. Are we really going to bet our collective industrial infrastructure on computer models that predict the weather fifty years from now?

A car company that has proven it can only make a profit selling pickup trucks to Joe Six-pack is going to get a public rescue. Do we really think they can be made successful by forcing them to switch over to making compact cars for a handful of affluent environmental zealots with short commutes?

Oil is good if it comes out of the ground over here but is wicked if it comes out of the ground over there. Yet we have to refine it over there because we can’t build new refineries over here. Is it really worth impoverishing ourselves in search of “Energy Independence”?

Windmills may be the wave of the future. So how come we’re not allowed to build them when those waves lap the shoreline of a powerful Senator who supports environmentalism only if it’s in someone else’s back yard? Why does deciding whether generating energy from a particular biomass is good or bad depend on whether that mass votes in a quadrennial political media event in some flyover state?

We didn’t have enough fun constructing a pyramid scheme of complex derivatives based on making houses. Now we are going to spin up an even bigger shell game based on credits earned for not making an invisible gas?

Experienced real estate appraisers proved incapable of honestly assessing the value of a house. But an army of green jobs is going to be created for freshly minted specialists to estimate carbon footprints?

Trillions are going to be spent on bridges and highways by the same people who are browbeating us to drive less?

The world’s most powerful energy source generates no greenhouse gasses. Yet it can’t get a foot in the door because it’s held shut by gale force winds emanating from an army of bloviating lawyers?

As a bipartisan consensus emerges to promulgate a centralized Industrial and Economic Policy on a scale this country has never seen, be afraid as realty takes a holiday and we throw in with hope and change. When today’s grim reaper finishes his grisly task cleaning up the real estate market, he will unceremoniously be stuffed back into the cellar and the door will be weighted shut with a mountain of fiat currency whose ink has yet to dry. We can then celebrate a return to normalcy as Keynesian pundits claim, "see it worked!"

But the grim reaper will bide his time. After all the freshly printed money has been frittered away on well-intentioned clean energy projects that happen to have negative financial returns, the reaper will be back with a vengeance, just about the time we baby boomers are ready to crack open the empty Social Security lock box. In comparison, the popping of this real estate bubble will feel like a gentle breeze.

Bill Frezza is a fellow at the Competitive Enterprise Institute, and a Boston-based venture capitalist. You can find all of his columns, TV, and radio interviews here.  If you would like to have his weekly columns delivered to you by e-mail, click here or follow him on Twitter @BillFrezza.

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