November 26, 2013
The NYT had an interesting piece discussing the bubble in social media type companies; however the article misses a couple of important issues. The bursting of the current bubble will not have the same consequences for the economy because it has not yet grown large enough to move the economy in the same way as the stock bubble of the 1990s or the housing bubble in the last decade. Both of those bubbles led to consumption booms through the wealth effect, in addition to a boom in whacky Internet start-up investment and housing construction. That story could change if the bubble keeps growing, but thus far it is not large enough to move the economy in a big way.
The other issue is that bubbles invariably involve an important component of redistribution as the bubble pushers get rich at the expense of others. In the 1990s, people like Steve Case, a founder of AOL, managed to get incredibly rich by selling out his stake at the peak of the bubble. The big losers were the shareholders of Time-Warner, who were kind enough to give away most of their company for nothing.
In the case of the housing bubble, sellers of homes in the bubble years came out way ahead at the expense of the people who bought into bubble inflated markets. And the Wall Street gang who made a fortune in financing the deals also were big winners.
It would be helpful to know who is losing in the current bubble. Are the buyers of Facebook, Twitter, and other high flyers pension funds and ordinary investors or hedge funds and rich people? In the former case, this bubble would imply some serious upward redistribution as the Mark Zuckerbergs of the world suck money away from the rest of us. In the latter case, it would simply be a question of redistribution among the one percent. Unfortunately this piece gives readers no insight on this topic.
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