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Economic Bubbles — A Look at Past, Present, and Future

Tuesday, March 6, 2012 1:47pm
Economic Bubbles
Think about a traditional, common bubble. The image in our minds is made of soap or perhaps gum. Before a bubble is created it’s nothing more than flattened material, but after a rush of air that material rapidly expands and forms an inflated pocket trapped by the previously flattened casing. If somebody tries to blow too much air into their bubble, it suffers a quick pop, and within the blink of an eye it’s gone.

Such a description is quite obvious, but it’s hard to comprehend such a cycle when it comes to our economy.

And that begs the question: what exactly is an economic bubble?

The best way to define an economic bubble is to look at the end result. When soap bubbles pop, they’re met with disappointment. When bubblegum bubbles pop, they’re met with frustration. When economic bubbles pop, they’re met with devastated lives.

That’s not new information though—we already know that as we’re all experiencing and witnessing the aftermath of a ruptured economic bubble caused by the failed mortgage loan market. Rather, the information we should be seeking is how to prevent future bubbles.

The Great Depression

An economic bubble isn’t made from soap or chewable sugar, but rather from some sort of financial medium that grows increasingly more unstable as time progresses. Whether that material be made from deflation, home loans, or money for college degrees, a bubble can be formed from virtually any sort of economic volatility that spirals out of control.

The most famous economic bubble to hit this earth was the Great Depression of the 1930’s. The Great Depression was formed from a perfect storm of financial failures, but its primary encasing material was that of deflation—exactly opposite of what caused the recent home loan crisis.

Arguably started after the Hawley-Smoot Tariff was signed into law in 1930, the Great Depression was the closest thing to an economic apocalypse our nation has ever seen. The Harley-Smoot Tariff raised taxes on thousands upon thousands of goods imported into the United States. But a few months before its signing, massive trades were seen in nearly every financial market in an attempt to maximize profits before the 20,000-some-odd new taxes would go into effect.

This quick liquidation of assets served as the rushing of air that picked the encasing of deflation up off the floor and launched it into a growing—but frighteningly thin—bubble.

Then on October 24, 1929, the stock market opened at a loss 11 percent. The deflation bubble grew larger.

Wall Street rushed to meeting rooms behind closed doors and poured over each other’s opinions, trying desperately to come up with a fix to this economic brushfire. They collectively backed a representative and he tried to persuade investors that everything was alright by dumping his money into an overpriced stock for U.S. Steel. Wall Street’s feeble attempts were ignored and investors continued to sell their stocks.

As the weekend passed, economists could almost hear the economic bubble tearing.

On October 29th, 1929, what famously became known as Black Tuesday, 16 million shares were traded, and, when the catastrophic day ended, it was reported that the stock market lost over $30 billion over the course of just two days.

Using the Bureau of Labor Statistics CPI Inflation Calculator, the $30 billion lost in that one day in 1929 is today’s equivalent of $397,657,894,740.

When the economic bubble of deflation tore open at the end of the roaring 20’s, Americans experienced a financial decimation unlike anything that had ever been seen—and unlike anything that’s ever been seen since.

As Richard M. Salsman, the objectivist American economist, ominously recounted, “Anyone who bought stocks in mid-1929 and held on to them saw most of his adult life pass by before getting back to even.”

The Home Loan Bubble of the New Millennium

The most famous bubble in history seems almost too ancient to really comprehend, but for us seeking to understand what it might have been like, we’re in luck. The bubble caused by subprime home loans and irresponsible Wall Street lenders ripped through the United States with such force that today, 5 years later, we are still trying to catch our breath.

Like its 1930’s big brother, the mortgage loan bubble and the housing collapse of 2007 devastated the everyday citizen and people in every state from coast-to-coast felt the very real vibrations of the rupture.

Millions upon millions lost their homes due to the quick flood of negative equity that struck our home loans. Those with money in the stock market saw it dissipate into virtually nothing before they were able to withdraw it. Others, many of whom put their 20 to 30 years of labor into our work force already, found themselves without retirement and without employ.

This home mortgage loan bubble, now referred to as The Great Recession, has proven to be the worst economic catastrophe to hit this nation since it underwent the event this new bubble’s name pays homage to.

The material that The Great Recession was made of was poor lending standards and overpriced home loans. While very different from that of the Depression, we’re starting to see another bubble formed of a very similar type of material.

The Future Bubble?

Student loans have ramped up and have turned into a mutated growth themselves—one very closely resembling the beginnings of the home loan catastrophe we saw but a decade ago.

Lenders are granting thousands of dollars to virtually anybody with a college acceptance letter, and students across the nation are financing their degrees—despite the amount of existing graduates who are unable to currently find work to pay back their existing loans.

We have experienced past bubbles, and despite the fact that experts are weary of this volatile sector of the market, little is being done to thwart it. Even as new studies show the student loan default rate is over 25 percent, we seem content with sitting by and simply watching this enormous beast grow before our very eyes.

Sure a student loan bubble may not be the next Depression, but it could very well be comparable to—or even exceed—the damage caused by the home loan bubble. Regardless of its potential, the United States ought to be learning from the past, and working hard to stop put an end to the result of “devastated lives.” At the very least, the United States should try to stop parading around as the physical manifestation of the phrase, “History Repeats Itself.”