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links for 2007-05-14

A Review of Daniel Gross's Book "Pop"

By Gillian Tett: / Arts & weekend / Books - A heresy wise investors might embrace: Almost nothing makes financial journalists salivate as much as the world “bubble”. After all, in recent years it has been considered self evident that bubbles are a bad thing for society, particularly when they burst.... But could it be that the cassandras have it all wrong and that bubbles are actually a blessing, not a curse? This is the heretical idea advanced in a provocative book, Pop! Why Bubbles are Great for the Economy, which sketches out a history of the bubbles that have swept through America over the past 150 years. The author, Daniel Gross, is a columnist who has written for a range of publications, including most recently Slate, the internet magazine which itself emerged from the 1990s dotcom bubble. It is a pedigree which gives Gross a good perspective on the follies of the 1990s.

However, he advances his thesis by also exploring episodes which may be less familiar to modern investors, such as the telegraph investment bubble of the 1840s and 1850s and the railway frenzy of the 1880s and 1890s. He also covers the housing bubble that is bursting right now in the US – and a sector he considers the next candidate for investment excess, the alternative energy world.... Gross believes that America is prone to investment bubbles partly because its government tends to have a laisser faire attitude to innovation, preferring to let private investors fund new technologies, rather than the state. Thus “in every generation, people arise to proclaim that a new technology or set of economic assumptions and financial tools promises untold riches,” Gross writes....

[T]he interesting thing, Gross argues, is what happens after the bubble bursts.. a second round of entrepreneurs usually arrives who can create something valuable out of this excess infrastructure.... Today’s ruined infrastructure, in other words, can be the building blocks of tomorrow’s innovation. This infrastructure should not be viewed purely in physical terms. What is perhaps most beneficial about a bubble, Gross argues, is that mass mania changes the way society views the world: mad fashions or wild enthusiasms can be creative. Just look at how society has become internet-savvy in less than a decade. Or how quickly the world is now converting to the alternative energy cause as investors jump on to this bandwagon. While this investment trend will probably also end in tears, it could also produce a cleaner world – even after the “green” bubble bursts.

All this is scant comfort for anybody who lost money on internet stocks – let alone those facing foreclosure on a subprime mortgage. Gross does have the grace to acknowledge how callous his argument sounds, given that burst bubbles can unleash great suffering...