Why the housing credit bubble is much worse han the "dot.com" bubble of the 90s

As the stock market joins the dollar on its hang-gliding trajectory back down to lower ground, many journalists and bloggers have been comparing this market collapse to the dot.com bubble of the 90s. True, you can reasonably compare the discounted risk assessments investors had for the new tech firms of the 90s with the easy credit given to sub-prime borrowers. Certainly, the market fall for tech stocks and speculative real estate securities looks the same, just like gravity will bring a falling boulder or apple to earth at an impartial rate of speed. However, the current market collapse being triggered by the easy credit, “housing bubble” is a much more dangerous phenomenon than was the dot.com implosion of 2000-01.

One big reason is that the dot.com bubble, which we’ll more accurately refer to here as the high tech bubble, yielded a productivity boom that was felt throughout the economy. As microprocessors became faster and software efficiency improved, business and personal investment in that equipment was easily justified. The money supply largely expanded with those boosts in productivity. Bets on high tech stocks were bets on which firms and competing technologies were going to win. Yahoo was a winner. Infoseek paid off when acquired by Disney. Redback was acquired by Ericcson. Exodus died. Juniper lived. Webvan failed, but Amazon succeeded. Excite At Home perished, but broadband internet flourished anyway. No matter who won, the best technologies themselves survived and became interwoven into the world we live and work in.

Housing construction and loan origination, on the other hand, do nothing to increase productivity throughout the economy. An individual home builder or mortgage broker might get better at their job over time, but this boom did not revitalize the business models of other industries, the same way computer networking and software have done.

Another reason the high tech and housing driven collapses are very different is that the high tech boom didn’t account for most of the employment generated during 90s. Growth in the economy, spurred by high tech, occurred across all sectors. Job growth during the housing boom has almost entirely been within the housing sector, so that as those companies fail or fast for survival, the impact on unemployment will be much more severe. Unlike the many high skilled workers that flourished during the high tech boom and could easily take their programming and engineering skills to other industries, housing employment has been primarily unskilled. It doesn’t take a professional degree from an accredited university to be a real estate agent or loan originator, and as these people find themselves out of work, they won’t be able to easily transition into another career. Competition for the remaining jobs will become intense. A very abrupt structural change in the nation’s employment is taking place.

Furthermore, the high tech stocks always were speculative and tended to be isolated from more traditional investments. “Value” mutual funds that most people put their 401K and IRA savings into didn’t include big stakes in JDS Uniphase or Silicon Graphics. By contrast, the collateralized debt securities in which today’s challenged mortgages are bundled are held by many of the world’s biggest banks. Take a closer look at your Oppenheimer or Fidelity “value,” “balanced,” or “long-term” funds. Don’t be the least bit surprised to see Countrywide Mortgage or Citibank or Washington Mutual as one of the bigger assets in there. In the high tech bubble, getting into “aggressive” and “tech” funds was a choice. The hangovers hurt, but investors knew what they were drinking. In the mortgage/housing market collapse, investment bankers and fund managers have spiked punch and millions of people don’t realize what they are in for.