The author tries to make a case in this book that bubbles are not entirely bad. The author makes a case that overinvestment in certain sectors during bubbles sets the stage for subsequent innovations in the economy. Let us make no mistake – a lot of investors lose their money when the bubble ends. It is good reading for those who want to profit after the bursting of a bubble.
The author looks at the bubbles in America spanning three different centuries. First he starts with the telegraph and railroad bubbles of the 19th century. Then he moves to the stock market bubble of the 1920s and the internet/telecommunications bubble of the 1990s. Finally he looks at the real estate and alternative energy bubbles of the 21st century. He examines the causes of each bubble, identifies the main events during the bubble and looks at the aftermath of each bubble. You get the feeling that the economic history of America is one of bubbles.
The most interesting fact about the railroad bubble is the involvement of the federal and state governments. They encourage private companies to overbuild their rail networks. The railroad companies behave in a manner similar to their counterparts in the dot com era. They cook the books like Worldcom and Enron. They spend money on projects that made little economic sense. The real economic impact of the Railroads was felt after the investment bubble in railroads ended. They lead to establishment of large retailers – Montgomery Ward and Sears. It made to easy for them to transfer physical goods in a cheap efficient manner.
The author chronicles the price wars in the telegraph business that drives down prices and increases the demand for telegraph services. The telegraph system leads to innovations - money transfer and transfer of business information. Companies that used horse drawn couriers to send messages start using the telegraph to transmit business information. Western Union and Associated Press are two companies that owe their beginnings to the establishment of the telegraph system.
The telecommunications bubble traces its beginnings of the breakup of AT&T in 1984 and the Telecommunications Act of 1996. The telecommunication bubble led to installation of high speed fiber optic networks and fast broadband connections for the last mile. This cheap bandwidth is being exploited by the likes of You Tube. Of course it helps that America has an installed base of 150 million internet users and Google has smart engineers who design applications to make use of the bandwidth.
The contemporary bubble that most of us would be interested in is the real estate bubble. The author contends that the real estate bubble has improved the housing stock in the United States of America. It could lead to the development of financial instruments that can be used to hedge against the value of homes. My personal view is that price wars in housing do no good to existing homeowners who are counting on high home prices for home equity loans, retirement etc. It does not benefit financial institutions that have to mark down the values of the assets behind the mortgage backed securities. It will be interesting to see how the real estate bubble ends.
The book is organized into chapters – each chapter dealing with a different bubble. So you can skip chapters and read the book anyway you desire. In all this book makes for easy and interesting reading.
The book is available at Amazon
http://www.amazon.com/gp/product/0061151548?ie=UTF8&tag=journefrommid-20&link_code=as3&camp=211189&creative=373489&creativeASIN=0061151548
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