Is Sub-prime the New Dot-com?

I recently came across an article that I wrote in 2001, right after the dot-com bubble had burst in the San Francisco area, and I was struck by how similar the themes were to articles that are being written now in the wake of the mortgage meltdown. In fact, replace “dot-com” with “sub-prime” and I could nearly publish the article as is. But I would never be so lazy with Thoughtbasket, so instead I’m going to point out some parallels between then and now. I would like to do this in table format, but my friends at WordPress haven’t added that technology yet, so I’m going to use paragraphs (very Gutenberg, I know (no, not Guttenberg)) instead.

The first, and most obvious, parallel is that of income and spending. During the dot-com boom folks in the Bay Area were making tons of money, and spending it freely. Salaries were high, and nobody bothered saving because their options were all going to be worth zillions. Every fancy restaurant in SF was packed, and there were waiting lists at the BMW and Mercedes dealerships. Audi too, but that’s an SF thing. This is remarkably similar to the mortgage and hedge fund frenzy of the past few years, including my paradigmatic example of the Cristal-swilling mortgage-writing meathead.

A second, and much less obvious, parallel is that both bubbles had specious intellectual theories trying to justify what were obviously market failures. The dot-com’s sham theory was the “new economy,” in which economic cycles were banished, cast into the dustbin of history by the ever-increasing productivity that computer technology would drive forevermore. As the recession of 2002 clearly demonstrated, the new economy was a fairy tale. The mortgage meltdown was fueled by the theory that financial firms could, using mathematical models, split up and quantify the risks in a basket of securities and then sell off the pieces to parties who had corresponding risk appetites, as calculated by their own mathematical models. As the recession of now is clearly demonstrating, the efficient market for risk is a fairy tale. Sound familiar?

The last parallel is the aftermath of the bubbles, the hangovers resulting from what were really drunken bacchanalia of faux-mastery of the universe, with the lucky few guzzling goblets of their own press and in their dizzy haze thinking themselves geniuses. Ex post partyo, of course, there is a period of regret and soul-searching (“I’m never going to drink again”), as people are humbled and their bank accounts flushed, and they try to make sense of their sudden fall from grace. In the case of the dot-com, this period lasted a few years. For a while, VCs lived by their stumbling home mantra (“I’ll never again invest in a company without a business model”), until they saw Twitter. Wall Street remains chastened, still debating whether it should stay in bed or go out for a greasy breakfast, but how long will that last? Wall Street spinmeisters are already pumping out stories about how they have to pay fat bonuses to retain good people. My prediction: by the fall of this year, we’ll see Wall Street reaching again for their beloved goblet.