Jason Calacanis wrote a valuable post on how start-up companies can cope with the “collapsing” economy. A few months ago, Marc Andressen called it the “oncoming nuclear winter” – and that was before the collapse of AIG, Lehman, WaMu and so on. I have shared that pessimism for a while myself; I sold my house in 2004, and chose to rent for the past 4 years, which tells you my view of the housing bubble. While I was too early, prices are well on their way to 2004 levels and lower. This kind of pessimism is not uncommon among tech geek circles. What is going on here? Why are we so pessimistic?
Many tech geeks tend towards libertarian economics or the so-called Austrian School economics – the best way to get into it is at http://mises.org. No, don’t confuse libertarian economics with the “free market capitalism” claptrap coming out of the Wall Street financial complex; when Wall Street gunslingers touted the miracles of “capitalism”, what they really meant was their government-conferred right to borrow easy money from the Federal Reserve, leverage themselves up 20 to 1, even 40 to 1 while speculating with that easy money, paying themselves tens of billions collectively in bonuses, finally inflicting hundreds of billions, soon to reach trillions, of losses on the taxpayer when those speculations predictably failed . The Wall Street version of financial capitalism has about as much to do with real savings and investment led capitalist wealth creation as alchemy has to do with with chemistry. The alchemy analogy is particularly appropriate: much of the Wall Street “business model” was really transmuting pools of highly risky, toxic mortgages into nearly risk-free “golden” securities.
A lot of geeks like myself got a real education on this in the last NASDAQ bubble, where the alchemy of the time was transmuting stock in unprofitable private companies into strong “currency” to be used for rewarding employees and to “pay for” acquisitions – the very words “currency” to “pay for” acquisitions, common at that time, connote the realization of the alchemist’s dream. That bubble was also aided and abetted by the Federal Reserve’s easy credit policy, as all such bubbles are. It was that bubble that led me and many other geeks to discover the Austrian School.
The predictable solution the Federal Reserve came up with to fight that bubble’s aftermath was to unleash even more easy credit, this time directed to housing and Wall Street. Even as early as 2004, it was obvious there was a bubble forming in housing, as documented by sites such as The Mess That Greeenspan Made or Prudent Bear which I have been reading for several years now. To give credit where it is due, there is one politician who has taken a strong, consistent stand against the bubble blowing policies of the Fed, warning of the dangers ahead, for several years: Congressman Ron Paul. Just as price to earnings ratios reached the stratosphere in the NASDAQ bubble, price to income, price to rent and mortgage to rent ratios reached historically unseen levels during the housing bubble. To anyone who witnessed the NASDAQ bubble and its collapse, it was a strong sense of deja vu, yet policy makers like Greenspan and Bernanke simply saw nothing wrong. Bernanke, in particular, came up with absurd excuses such as the “global savings glut” to explain the housing/Wall Street bubble, absolving the Fed of any responsibility. It is instructive to keep that track record in mind, because the same policy makers who got us in this mess are still in charge, still making decisions for all of us. No wonder there is such pervasive pessimism in tech geek circles.
Finally, Japan. Anyone in technology industry realizes quickly how important Japan is in the global tech industry. At Zoho, our first big corporate customer is from Japan. That is part of a pattern: in 1996, our first big OEM customer for our network management was Japanese. In fact, it was our Japan connection that first taught me about destructive bubbles, because Japan had its own mother-of-all-bubbles in the late 80s. The Japanese have paid for that financial bubble for nearly a generation. Cocky American economists like Paul Krugman, now a leading NY Times commentator, but at that time only a leading economist, gave the Japanese useful advise like “PRINT LOTSA MONEY” (sic), to get out of their doldrums. Krugman merely reflected the common view among American economists at that time – the Japanese were economic rubes, and if only they listened to the smart American economists their economic problems would be solved. Keep in mind that while Krugman has his issues with the Bush administration, he was cheering Greenspan on in 2003-4 to keep interest rates low and credit flowing freely, which enabled carry-trades of various kinds to run amok, worsening inequality dramatically by shifting wealth to those financially well-connected; Krugman now fully supports the Bernanke Fed and its endless series of bail-outs, while shedding progressive tears for the inequality that the easy credit policies engendered. This misbegotten government policy also has the effect of zombifying companies, freezing bad investments in place, something Japan experienced.
Well, let’s just say God must have a delicious sense of irony. We are all Japanese now.