Bubbles, Part II: Green Power, George Carlin and Housing L.A.’s Poor
by David Deutsch
In my previous article, “Dutch Tulips, The Boston Massacre and Housing LA’s Poor,” I used the examples of the Dutch Tulip Bubble in the 16th century and the reaction following the Boston Massacre to illustrate that we, as a society, tend to overreact to events, economic and otherwise. Given this, I wanted to see if we could use these overreactions to address L.A.’s housing issue. I received some very interesting feedback from a couple of readers and I would like to address them as a follow-up to my previous piece.
One respondent (let’s call him Peter, to protect the innocent) suggested that I look at old clips of the late, great George Carlin for an answer. Peter noted that Carlin frequently spoke of a cabal of ultra-rich people at the top of the economic heap who have been controlling the global economy for who knows how long. I am not a conspiracy buff, and I do not think the ultra-rich in our world could even decide on what to eat for lunch, much less collectively conspire to manipulate the world economy. But it is not at all hyperbole to suggest that the top 1% of American citizens hold about 40% of the wealth. And, it is not far-fetched to assume that those who control this wealth have a strong incentive on an individual level to maintain their wealth in perpetuity. That’s why firms like AllianceBernstein exist: to maintain wealth for the wealthy. While hardly conclusive, one might reasonably assume that these same powerful interests might have a stake in creating a bubble to make more money for themselves and perpetuate their personal fortunes.
Piggy-backing on Carlin’s observations, Peter remarked that bubbles and other overreactions originate from this group of powerful people, who deliberately exploit the public’s tendency to gravitate toward get-rich-quick schemes (such as the recent housing bubble) or get people to cower in fear behind them (as was done following the Boston Massacre and other national tragedies.) Why do they do this? Frankly, so they can make a lot of money or acquire power quickly. According to Peter, by pulling the emotional levers of society at large, these power brokers are able to capitalize on the overreactions of lay investors and pocket the wealth for themselves.
To illustrate: During the dot-com craze, obscene amounts of money were paid to buy every kind of website. For instance, www.bluemountain.com, a website with the very lucrative business model of giving away e-cards, sold for $780 million in 1999. Not long after that purchase, the company that bought Blue Mountain went under; Blue Mountain was later bought by another company for $35 million. The remaining $745 million went somewhere, and clearly someone made money off of this; after all, $745 million didn’t just evaporate, now did it? I suspect some of it went to those who had caused the mass hysteria in the first place. My point is that, one major component to creating a bubble-like overreaction seems to be an immediate massive payout for those in power. The trick, of course, is getting the rest of society to play along and put their hard-earned money into such speculation.
On another somewhat related topic, reader Judi (another pseudonym) voiced concern about a bubble in the green technology sector, followed by a burst. In my last article, I identified what I believe are the four steps associated with bubbles:
I once worried about a green tech bubble as well, but the more I thought about it the more I assumed that there would likely never be one. In fact, this sector has seen a reverse bubble—an elbbub if you will. Given the myriad threats global warming poses to humanity, there should have been an overreaction and a massive overinvestment in green technologies, including photovoltaic (PV) solar cells, wind power, and the like. It would be easy to blame well-funded global-warming-denying gasbags like Senator James Inhofe and the Competitive Enterprise Institute to explain our national yawn toward developing green technologies. But it seems to me the reason is far simpler than that: there does not appear to be an immediate economic incentive for us to do anything. If someone invests in green technology (or housing for L.A.’s poor, for that matter) their money won’t quintuple overnight like it did for some lucky Blue Mountain speculators. Much like the green technology sector, housing for the poor in L.A. also seems to be experiencing an elbbub, an underreaction to a real crisis that has a direct impact on the rest of the community, even if the effects aren’t entirely visible.
Thanks to the fantastic insights of two Fourstory readers, it seems we have some clues on how to solve the housing crisis for the poor in L.A.. While we see the long-term effects of the housing crisis (dilapidated communities, disinvestment by businesses, hope and despair, poverty, crime, drugs, etc.) and the long-term benefits of solving the crisis, we don’t necessarily see the causal relationship between housing for the poor and Boston Massacre-style executions, and thus we have no catalyst for change. Additionally, we do not see an immediate economic incentive to make people aware of the myriad challenges facing us. So it seems to me we have two tasks: First, we have to identify the causal relationship between the housing for L.A.’s poor and the degradation of our city, and communicate this causal relationship to those in power. Second, we need to identify, articulate and communicate the economic benefits of solving this problem to the wealthy and powerful, and somehow convince them to start generating some real hysteria; that is to say, we need to reverse the elbbub.
Given all of this, I will now pose another question to the Fourstory community: Any thoughts on how to do this? Again, please e-mail me, or comment below, and I will write another follow-up article about this.