This recent article in the Wall Street Journal about stock market “bubbles” caught my eye. Bubbles are generally viewed as great negative events because of their impact on investors and the general economy when they “burst” at the end of their cycle. I have a more mixed perspective on bubbles.
It seems to me that bubbles often trigger a deluge of new product and business method ideas that were not happening before the bubble. This is most certainly true of the “dot-com bubble” of the mid-to-late 1990s, and it also appears to be true of the 1920s bubble that preceded the Great Depression. Both of those bubbles were times of great technological progress and promise. It seems that the “irrational exuberance” of bubbles often give entrepreneurs the courage to conceive and try out new ideas. Indeed, we are living in a world today in which the implementation of the concepts developed during the dot-com bubble still dominate our world.
In other words, the long-term benefit of bubbles often seems to greatly surpass the immediate damage that occurs when bubbles burst. The reality is that we do not (and should not) live in a flat and predictable world. Peaks and valleys in the market are needed to stir up the imaginations and energies of entrepreneurs and business people. The misguided regulatory actions by the federal gvernment to flatten the world harms everyone in the long run.
In many ways, the Enron prosecutions were caused by an over-reaction of the Feds to a natural business cycle that was triggered, in part, by the bursting of the dot-com bubble in 2001. The great market prosperity of the 1990s, driven by the technology sector, bought a horde of ordinary (and inexperienced) investors into the stock market. I cannot tell you how many times I had people tell me how wealthy they had become based on a point-in-time valuation of some stock they owned; when I pointed out to these people that stock prices can fall as well as rise, they laughed as if the concept of stock market risk was an old-school notion.
When the dot-com bubble burst and the stock market experienced a general decline, many investors cried foul, as if it was their right to never experience a stock price decline. These investors put great pressure on the federal government to “do something”. When Enron went bankrupt, the Feds had the perfect scapegoat to appear as if they were “doing something”. The Feds went after Enron, implying that bankruptcies were un-natural events that can only occur when business executives are engaged in criminal activity. This was obviously false, of course, but in the paranoia that existed in the shadows of the dot-com bubble collapse and the 9/11 terrorist attacks, the press and the public remained non-skeptical — indeed, the press and the public appeared gleeful to have a witch to burn in public.
Ironically, Enron’s bankruptcy preceded the Great Recession that came to the USA at the time of Obama’s election. During this broad economic downturn, we have seen businesses, many weaker and more poorly managed than Enron, bailed out by the federal government (at taxpayers expense, of course). One of the tragedies of Enron is that, had its problems occurred a few years later, it would have been a sterling candidate for a government bailout instead of the target of a government witch hunt.