Boom and Bust: Pop! Go the Bubbles

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POP! WHY BUBBLES ARE GREAT FOR THE ECONOMY
By Daniel Gross
Collins, 232 pages, $22.95

Daniel Gross’ counter-intuitive argument goes something like this: Grand visionaries, or possessed business people (though it’s sometimes hard to distinguish the two), come up with a brilliant idea—be it the telegraph and railroads in the 19th century, or the Internet at the end of the 20th. They persuade the investment community, the government and the citizenry at large that this novelty will make their lives easier and certainly more fun—and that there’s gobs of money to be made with it. In the ensuing stampede, excess capacity is created because of Americans’ peculiar predisposition towards irrational exuberance. And then eventually the bubble bursts ….

Pop! focuses on what happens next. People go broke, retirement accounts are wiped out, the wizards stand trial, and their taste in $6,000 shower curtains is exposed. But that’s O.K., because the infrastructure created to propel this technology—whether telegraph lines, railroad tracks or fiber-optic cable—remains valid and in place. Consolidators—often in the form of large Old Economy corporations—step in to save the day or strip the carcass, depending on one’s point of view, buying it for pennies on the dollar. They find a way to make the new gizmo profitable, and the world becomes a marginally better, more effortless place than when we started. Civilization marches on.

Mr. Gross’ hypothesis seems to make sense, at least if you’re not one of those brave souls working in a pizzeria five years later because your start-up—you know, the one where you were going to create dynastic wealth by selling people greeting cards for their pets or sexual-domination videos online (actually, there’s good money to be made at that)—went belly-up.

He examines several booms and busts—the stock market in the 1920’s, the bursting real-estate bubble today, in addition to the railroads, the telegraph and fiber optics—to show us what they share. In the hands of a less amusing writer, this could make for sober reading. But Mr. Gross attacks his subject with such vigor and so many cultural references (how often do you find “dork-powered,” “tristesse” and “algorithms” in the same paragraph?) that you’d be excused for thinking you were reading about Britney Spears rather than Alan Greenspan. And occasionally, you actually are: A Britney quote­—“Oops! … I did it again”—opens the book.

In any case, so upbeat is the author about the silver lining to economic disaster that it’s hard to resist crossing your fingers and hoping that the next bubble bursts while you’re still around to enjoy it.

He’s particularly fine in explaining the dot-com debacle of the late 90’s, hobbled by dial-up technology, and how it paved the wave for the burgeoning cable/DSL Internet economy whose potential we’re only starting to tap today. He argues that it’s precisely all that unused fiber-optic cable left lying around, more a function of dreamy American aspiration than tough-minded necessity, that paves the way for grand innovation and unlimited growth. That’s why, time and again, we leave Europe in the dust. He believes American exceptionalism will stand us well into the 21st century, even as nations like China—the dictionary definition of excess capacity—“may also adopt the American habit of making the best of our bubbles.”

Less persuasive is his argument that the Great Depression, in the wake of the Jazz Age stock-market bubble, was a good thing because it prompted F.D.R. to create institutions such as the FDIC and the S.E.C., which restored faith in the nation and paved the way for the credit economy under whose sway we live today. It’s hard to see the connection between the Internet revolution, powered by a substantive new technology, and the stock-market bubble, a house of cards that forced the federal government, rather than private enterprise, to step in and put people back to work. That bubble seems to me to have left nothing good behind. Next Page >