June 17, 2008

The housing bubble has burst, long live the next bubble.

Once dreaded, now financial markets search the horizon for
signs of the next bubble. Without it, things look bleak for
the U.S. economy and by extension, Canada's.

A financial bubble is a "market aberration manufactured by
government, finance, and industry, a shared speculative
hallucination and then a crash, followed by depression,"
says Eric Jansen, venture capitalist and entrepreneur
(Harper's Magazine, February, 2008).

The housing bubble arrived just in time to rescue the
economy from the collapse of the dot-com bubble which
vaporized billions of dollars in 2000. Now collapse of the
housing bubble has left the economy in tatters.

The tsunami created by the collapsing U.S housing market
swept over Canada's shores wreaking havoc with B.C.'s
forestry sector and devastating Ontario's manufacturing
economy. Not that Canada's Finance Minister, Jim Flaherty,
seems to care. He berates Ontario for not having lower
taxes and ignores B.C.'s woes. Flaherty remains confident
that Western Canada's natural resources will sustain our
economy.

Flaherty's optimism is based on the hope that there will
always be a market for Alberta's oil sands. Who needs
forestry and manufacturing, he imagines, when the world is
clamoring for your oil? Look at the U.S. economy; it hasn't
depended on manufacturing since 1975.

It's tempting to think that Canada can survive without
manufacturing. Americans have crafted an economy without
the messy need of producing any goods of value to sell the
global market. They do it with FIRE - - finance, insurance,
and real estate.

"FIRE is a credit-financed, asset-price-inflation machine
organized around one tenet: that the value of one's assets,
which used to fluctuate in response to the business cycle
and the financial markets, now goes only in one direction,
up," says Jansen. FIRE can achieve the equivalent of
Superman leaping tall buildings with a single bound.

Governments in the 1940s took careful measures to prevent
the kind of speculative bubbles that brought about the Great
Depression of the dirty thirties. Now governments seem to
have forgotten the devastation that deregulation can bring
as free-wheeling finance tries to organize the next big
thing.

"The only thing worse than a new bubble would be its
absence," worries Jansen. It's worth exploring the knack of
divining a new bubble.

Like any bubble, the dot-com bubble of the 1990s started
with a good idea; the internet. But FIRE inflated
expectations beyond realistic goals with a self-sustaining
financial loop. Profits from IPO investments poured back
into new venture funds which, in turn, fueled new startups,
which funded new IPOs and so on.

The high priests of FIRE provided the liturgy and media sang
its glories. Stories were told of fortunes to be made by
geeky teenaged geniuses. But fiction couldn't sustain the
dot-com bubble and when it collapsed, the fictitious value
of stocks disappeared. Fictitious value is defined as the
difference between the overvalued stocks and their real
value based on historical trends.

The housing bubble was another good idea taken to bizarre
limits. The fall of housing prices to historical values has
sent billions of dollars to money heaven. That amount of
money can't be removed from the economy without dire
consequence. Where will that money come from? "Our economy
is in serious trouble," says Jansen. The FIRE sector is
hoping for a miracle.

Canada's economy can't be sustained without the wellbeing of
our largest trading partner. We need a new bubble as much
as the U.S. does.

Jensen suggests a likely candidate is alternative energy.
Each U.S. presidential candidate promises "energy
independence." The new liturgy of clean energy and
innovative technology is being written.

According to Jensen's calculations, investments in
hydroelectric power, geothermal energy, nuclear energy, wind
farms, solar power and hydrogen fuel cells will generate
about $3 trillion, including necessary infrastructure.
Trillions of more will be created as the bubble
hyper-inflates fictitious value, and away we go again.

Finance Minister Flaherty is living in a fool's paradise if
he thinks dirty oil from Alberta's tar sands will fit into
the new plan. Its days are numbered as the new bubble of
alternative energy inflates.

When the prophets of profit gather the flock and build
temples in the air, and when the media chorus sings hymns of
the dawning green clean world, no outsiders with dirty oil
on their hands will be welcome.
 

David Charbonneau is the owner of Trio Technical.
He can be reached at dcharbonneau13@shaw.ca

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