The Difference Between a Tech Bubble and a Housing Bubble

Embedded in an interesting post on creating the illusion of prosperity over at Zero Hedge is this snippet noting the difference between a tech bubble and a housing bubble:

The bubble of 2000 reflected the dramatic expansion of technology companies. A complete saturation even if many of these companies did indeed play a pivotal role in enhancing the nation’s capital stock. But corporate balance sheets expanded dramatically to a point where the gap between tech-heavy capital spending budgets and internally generated funds surged to unprecedented levels. The bears of 1998 and 1999 weren’t exactly wrong as much as being early.

The bubble of 2007 reflected the rapid expansion of the housing stock (not a productive asset) and the speculative leverage that ignited the boom. This was about a radical expansion in two balance sheets at the same time ? household balance sheets and banking sector balance sheets. The extent of the excess leverage made the previous debt-induced dot-com bubble look like a mild affair in comparison.

I think that this distinction may go some distance in explaining the difference in the employment situation between the recessions that followed each of the bubbles. The tech bubble enhanced capital stock; the housing bubble expanded housing stock. Enhanced capital stock set the stage for at least some further expansion which prevented employment from collapsing to its pre-bubble levels. The housing bubble did no such thing.

7 comments… add one
  • And this makes sense when you consider Edward Leamer’s point that housing/real estate has been a significant factor in many of our past recessions. In other words this is looking more and more like the “L-shaped” recession than a “V or U”, or at best a very wide “U”. I don’t think the idea of government spending will work because it is an attempt to move the economy back to a point that was unsustainable. And to be clear, I’m not implying we will have 10% unemployment forever, but that government spending is not going to be a quick fix or even necessarily hasten the recovery. Part of the problem is that directing spending to projects that are politically favored are not inclined to produce a better economy. Or to put it differently, a major player in why we are in this mess is the government. Clearly the ability to make good medium to long term decisions by various government officials, at all levels, is dubious. Turning to them makes about as much sense as turning to the Wall Street looters who were the other major player. Especially when you consider the revolving door between DC and Wall Street.

  • john personna Link

    I really thought I got grief for the “productive asset” argument at OTB a year or two ago. Though … maybe that was my evil twin.

    FWIW, the tech bubble was also “fast” and much of the losses were both “paper” and “new.”

    I “lost” more in the tech bubble than I ever thought I’d have at risk in the stock market, but I still came out of it ok.

  • steve Link

    I think that the tech bubble also illustrates how our wealthy investing class changed. They used to invest in companies. When they switched to innovative financial products, the result was good for them, but bad for the economy.

    Steve

  • Drew Link

    Sometimes I just don’t know where steve gets his weird notions. Private equity (venture, buyouts, real, oil and gas) is where new money comes from to “invest in companies.” Anyone in the business knows that the capital raise for the past 15 years (ending in about 2009) was huge. As the following link shows (click on the graph) steves point is the thing that lightweight reporters put in sensational articles……but holds no truth. To be sure, TRADING, in existing (not IPO’s) public equities or financial instruments occurs. But that’s no fresh money, that’s just money flitting about among asset classes.

    http://newsblaze.com/story/2010070105370200001.pr/topstory.html

  • sam Link

    It’s not often, I think, that one gets to see a bubble deflate from the inside, but I did. I was hired by a computer manufacturer at the very forefront of that tech wave. When I work for them, they were just transitioning out of the small group of buildings they had been leasing for years into this big, shiny new campus. Brand spanking new. When we moved into our new digs, I remember being struck by the crowds of people you’d see in the hallways going to and fro, the bustle, the optimism, the almost electric feeling of energy that seemed to run through everything. I worked for the company for seven years before I retired, and after that initial burst of hum and bustle, the crowds in the hallways got smaller and smaller, the buildings got progressively emptier and emptier, and the optimism was gradually replaced by dread that the HR angels of death would visit your group next. The company was finally bought by another company, and that lovely campus was sold to another company. My former employer, now a part of something else but still in the business, limping, leases one of those campus buildings from the new owners.

    I know I’m being overly sentimental about this, but that arc saddened me then and still does.

  • john personna Link

    While we’re doing charts, here’s another one:

    Americans Just Added More Money To Emerging Markets Than From 1995 – 2005

    It was kind of daunting hearing in the investment forums over the last few years about everybody increasing their emerging markets allocation. So much for funding US business.

    FWIW, I stayed in US market indices. In part because I believe John Bogle that this already gives me sufficient emerging market exposure … but also because it did seem wrong to bail.

  • sam Link

    Solar Panel Maker Moves Work to China

    Aided by at least $43 million in assistance from the government of Massachusetts and an innovative solar energy technology, Evergreen Solar emerged in the last three years as the third-largest maker of solar panels in the United States.

    But now the company is closing its main American factory, laying off the 800 workers by the end of March and shifting production to a joint venture with a Chinese company in central China. Evergreen cited the much higher government support available in China.

    In a telephone interview in August, Mr. El-Hillow [CEO of Evergreen] said that he was desperate to avoid layoffs at the Devens factory. [The Devens, MA plant closed, laying off 800 workers.] But he said Chinese state-owned banks and municipal governments were offering unbeatable assistance to Chinese solar panel companies.

    Factory labor is cheap in China, where monthly wages average less than $300. That compares to a statewide average of more than $5,400 a month for Massachusetts factory workers. But labor is a tiny share of the cost of running a high-tech solar panel factory, Mr. El-Hillow said. China’s real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.

    Evergreen, with help from its partners — the Wuhan municipal government and the Hubei provincial government — borrowed two-thirds of the cost of its Wuhan factory from two Chinese banks, at an interest rate that under certain conditions could go as low as 4.8 percent, Mr. El-Hillow said in August. Best of all, no principal payments or interest payments will be due until the end of the loan in 2015.

    By contrast, a $21 million grant from Massachusetts covered 5 percent of the cost of the Devens factory, and the company had to borrow the rest from banks, Mr. El-Hillow said.

    Banks in the United States were reluctant to provide the rest of the money even at double-digit interest rates, partly because of the financial crisis. “Therein lies the hidden advantage of being in China,” Mr. El-Hillow said.

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