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The Next Bubble?

One text that helped shape my outlook on the U.S. economy was America’s Bubble Economy: Profit When It Pops, by Eric Janszen, Cindy Spitzer, David Wiedemer, and Robert Wiedemer. In the book, the authors argued that not one, but several financial bubbles exist simultaneously in the United States. These bubbles interacted with each other and temporarily boosted our economy. However, now they pose a significant threat not only to us but the global economy as well. Back on January 15, Eric Janszen, who is also an entrepreneur, investor, and has his own website, iTulip, was the subject of a post in the Wall Street Journal’s “The Informed Reader” blog. Apparently, Janszen wrote in Harper’s Magazine that a new bubble may be emerging. According to the Journal:

Where will the next bubble turn up? In Mr. Janszen’s view, the alternative-energy industry’s expansion is showing some of the same patterns that allowed values to swell far beyond their true worth during the dot-com and housing booms. For starters, green energy is popular with the media and with politicians. Energy security has become a catchphrase for both Democrats and Republicans. It has received favorable legislation involving loan guarantees and subsidies, just as the Internet got a sales-tax amnesty in the 1990s and deregulation allowed banks to offer more credit to potential homeowners.

Finally, the industry is flush with fresh capital. The Internet bubble was inflated by irrationally exuberant venture capitalists and IPO investors. The housing boom exploded thanks to the packaging of securitized debt. In the case of alternative energy, venture capitalists seem once again willing to supply the new capital.

Ironically, the Wall Street Journal announced earlier today that a new blog, “Environmental Capital,” is being rolled out on its website. According to the very first post:

Welcome to Environmental Capital, The Wall Street Journal’s new daily blog about the business of the environment. It’s not just about melting ice sheets. It’s about the flow of money…

There’s no end of hyperbole in the hubbub about saving the planet. Carbon offsets, renewable energy, hybrid cars- all are sensible ideas drawing massive amounts of investment. How much they do for the planet will depend on the details of how they’re rolled out. We’ll drill into those details.

With today’s announcement by the Fed of additional interest rate cuts, the fastest easing of monetary policy in the United States since 1990 further increases the likelihood of a bubble in “green” energy. In a Bloomberg piece from yesterday entitled, “Fed May Cut Rate Below Inflation, Risking Bubbles,” Craig Torres and Simon Kennedy wrote about the possibility (now reality) of Ben Bernanke and the Fed cutting interest rates below the pace of inflation this year to avert the first simultaneous decline in U.S. household wealth and income since 1974. According to Torres and Kennedy:

So-called negative real interest rates represent an emergency strategy by Chairman Ben S. Bernanke and are fraught with risks. The central bank would be skewing incentives toward spending, away from saving, typically leading to asset booms and busts that have to be dealt with later.

Marvin Goodfriend, a former senior policy adviser to the Richmond Fed bank, told Bloomberg that negative real rates are “a substantial danger zone to be in.” He said:

The Fed’s mistakes have been erring too much on the side of ease, creating circumstances where you had either excessive inflation, or a situation where there is an excessive boom that goes on too long.

And what if circumstances don’t allow for a bubble in alternative energy to take place, or any other bubble, for that matter? According to the Journal piece from January 15:

Mr. Janszen says the financial sector would probably collapse under the weight of the losses it incurred under the previous bubble. The only thing worse than a new bubble, he says, would be its absence.