Sunday, November 11, 2007

Book Review: Pop! : why bubbles are great for the economy

I have recently read the book Pop! : why bubbles are great for the economy, by Daniel Gross. The book can be borrowed from NLB (332.6 GRO). Overall, the book is short and interesting as it presents the positive aspect of bubbles, instead of the negative sides (ie the losses sufferred by investors etc).

Some learning points are:
1) Economic bubbles are good in the sense that they provide positive externalities to the other sectors/people. For example, bubbles can help to hasten the construction of the neccesary infrastructure for businesses and the general public. The US railroad building bubble has lead to lower cost and faster transport of goods and people in a shorter timeframe compared to the Eurporean countries where railroad building bubble does not exist.

2) For investors, during bubble period, avoid the acquisitors. Instead, aim for those who are supplying the raw materials. After the bubble period, aim for the acquisitors who are on the brink of bankruptcy and they are holding valuable assets. Also, aim for those business who get to enjoy the positive externalities.

3) In reading the book, I tend to get the idea that government somehow, indirectly or directly, is involved in the creation of the bubble. For example, the recent housing boom can be linked to partly to the low Fed rate (in 2002 onwards) and US pro-housing policies.

While the book gives me an impression of how bubble may be formed (ie a great revolutionary idea, prominent event) or can be recognized, I would think that the book, The Tipping Point, would provide a better understanding on how bubbles are created.

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