We Keep Bursting Bubbles

As we’ve been learning in class, one of the primary causes of the Great Depression was a lack of diversification in the American economy, where the automobile and construction industries were bubbles, oversaturated industries, that popped and caused a chain reaction in the economy.

There are several other instances of bubbles that seem relevant and are important to study: the first is the housing bubble that popped in 2008 and was a catalyst for the Great Recession, the second is the tech bubble today which experts warn will burst soon.

Housing:

From 2007 to 2009, the value of real estate in the U.S. fell by around 6 trillion dollars and led to the Great Recession. For the eight years prior to the bursting of the bubble, housing prices had been increasing at double digit rates, and investors had been significantly speculating with the belief that the housing industry could only expand.

According to the Washington Post, in 2006 subprime mortgages (mortgages for consumers with bad credit histories) became 20% of the market. Because some banks prioritized these types of mortgages, they collapsed when they started to see late payments and defaults on their mortgages in early 2008, and with their collapse, they brought down insurance companies like AIG that had insured the mortgages. In attempts to save themselves, banks foreclose 3 million homes in 2009, which spiked unemployment to over 10%. Similar to the banks in the Great Depression, the banks that collapsed had held people’s money, so with their collapse, that money also went “poof.”

In efforts to prevent future banks from pulling down the entire economy and bring the country into a recession, the Obama administration passed the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The act is detailed in over 2,300 pages, and creates a few government agencies intended to create more oversight on various aspects of the banking system, like predatory subprime mortgaging.

Tech:

For the past few years, tech unicorns, startups with a perceived large market potential, have been abundant with the rise of companies like Uber, Airbnb, and Snapchat. Yet the money supply for startups seems to be dwindling, and there’s a consensus among many, like Bloomberg and Wall Street Journal, that the tech bubble will inevitably burst soon. Entrepreneurs have fewer opportunities as the older startups, like Uber, Airbnb, and Snapchat, dominate their fields with almost unlimited funds that had been provided by venture capitalists before.

According to capital research firm CB Insights, there are 163 unicorns. Empirically, there’s no way there can be this many unicorns, which means some of them will have to pop. While a few unicorns have been disappearing slowly, at a rate of about one a quarter, some, like venture capitalist Bill Gurley, fear that this slow-motion bust could just be hinting at something more catastrophic.

Since this is a history class and the bubble hasn’t popped yet, there’s no way to write about the tech bubble bursting. So it’ll suffice to say that Global Equities Research analyst Trip Chowdhry predicts it’ll burst next March or April because the public will bail out of investing in the private market, and the too-high valuations will inevitably crash. All we can do is anxiously wait and see.