How Is a Real Estate Bubble Great for the Economy?

by: Tim Iacono

A new book by Daniel Gross will be out next week. With an eye-catching 60's era cover and an intriguing title, Pop! Why Bubbles Are Great For The Economy, the real suspense lies in what the Slate columnist has to say about what some call the biggest one of them all - the world-wide housing bubble.

The premise appears to be that, despite the mania associated with rapid economic change, where businessmen, investors, and much of the populace lose their collective heads bidding up share prices for railroad companies or dot coms, technological innovation proceeds at a rapid pace and after the inevitable popping, something good is left behind.

While it is clear that better transportation and low-cost broadband for all have had a beneficial impact after all the gains and losses had been tallied and the last teary eye had been dried, the lasting good after speculative manias in tulip bulbs and, more recently, housing is less certain.

Bubbles—from hot stocks in the 1920s to hot stocks in the 1990s—are much-lamented features of contemporary economic life. Time and again, American investors, seduced by the lures of quick money, new technologies, and excessive optimism, have shown a tendency to get carried away. Time and again, they have appeared foolish when the bubble burst. The history of finance is filled with tragic tales of shattered dreams, bankruptcies, and bitter recriminations.

But what if the I-told-you-so lectures about bubbles tell only half the story? What if bubbles accomplish something that can only be seen in retrospect? What if the frenzy of irrational economic enthusiasm lays the groundwork for sober-minded opportunities, growth, and innovation? Could it be that bubbles wind up being a competitive advantage for the bubble-prone U.S. economy?

In this entertaining and fast-paced book—you'll laugh as much as you cry—Daniel Gross convincingly argues that every bubble has a golden lining. From the 19th-century mania for the telegraph to the current craze in alternative energy, from railroads to real estate, Gross takes us on a whirlwind tour of reckless investors and pie-in-the-sky promoters, detailing the mania they created—but also the lasting good they left behind.

In one of the great ironies of history, Gross shows how the bubbles once generally seen as disastrous have actually helped build the commercial infrastructures that have jump-started American growth. If there is a secret to the perennial resilience and exuberance of the American economy, Gross may just have found it in our peculiar capacity to blow financial bubbles—and successfully clean up the mess.

Well, that was a fine choice of words - millions of us wondering how the mess that Greenspan made is going to be successfully cleaned up. Many observers are willing to give the former Fed chairman a pass on the whole late-1990s technology boom because of all the fiber optic cable that was left laying around is now being put to good use.

Despite all the hand-wringing, something good was left behind.

But what good can be expected to linger after all the bad real estate loans are called in and activity in the homebuilding industry reverts back to levels where ordinary people buy ordinary houses just one at a time?

When the history is written, it is more likely that the housing bubble will be seen as just an easy-money fling for the stock-averse majority of the population who just sat, watched, and wondered about Amazon.com and their ilk in the late 1990s.

The Financial Times provided this review:

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. . . . an entertaining primer on market madness. . . thoroughly accessible to a broad audience. . . But brutal or not, Gross’s thesis is a thought-provoking one for modern investors, particularly given that the bubble phenomenon shows no sign of disappearing.
The suspense is just killing me.

Aside from being an after-effect of some other event, such as late 19th century land booms when the next leg of the railroad was announced and towns sprung up out of nowhere, how is a real estate bubble great for an economy?

Does it have something to do with granite countertops?