Two Speculative Bubbles in a 10-Year Period

Paul Krugman was on To the Best of Our Knowledge this week talking about economics and the current troubles with the economy. He expressed concern that we have had two speculative bubbles within a short period.


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After the dot.com bubble burst, you would have thought that people would be quite alert to the signs of irrational exuberance out there. What happened instead was this housing bubble inflated. And it was quite clear from the numbers that something very strange was going on. How did people fall for that? It's one thing to believe that a radical new technology might create some new paradigm where old ways of measuring value didn't matter, but houses have been around for around 6000 years or so. Why would you think suddenly that old valuation models for houses were no longer relevant? And yet people bought into it. -- Paul Krugman

To some extent I bought into the dot.com idea. I really wanted to believe that my area of expertise, technology, would change everything. It did change most everything, but it didn't change business valuation models. I can understand how people in finance and real estate might have experienced a similar psychology. What I don't understand is how they rationalized it. They didn't even have a plausible story behind it. No revolutionary development happened. Just all of a sudden they thought we were running out of places to live.

If the dot.com bubble was foolish, the real estate bubble was foolish on steroids.