A Consultant's View
Prairie Trail Software, Inc. ............................................................. May 2006
High Tech has had some interesting times over the last few years. We have gone through the "Dot Corn" boom and the "Dot Bomb" bust, the telecom boom and the telecom implosion. What's up next? There is talk of a housing bubble.
One thing to note: a "bust" seems to take about as long as its related "boom."
Why is that?
Exuberance creates booms and reactions create busts. Booms and busts are not just about money, they are about expectations. The longer the boom, the more people expect boom times to continue and then they build that expectation into contracts, laws, and societal expectations. But they (we) rarely want to accept that the boom is over.
The first studied boom and bust was the Dutch Tulip bubble of 1634 to 1637. That bubble took a while to clear up. While financial professionals worked out a way to get out of the contracts they had signed, a number of the regular people did not.
The professionals got the government (in May 1638) to declare that all the contracts were options and did not require payment (or could be fulfilled by a payment of only 3.5% of the original price); However, individuals still demanded payment. Jan van Goyen, the Dutch landscape painter, spent the latter part of his life painting just to pay off his debts from that bust. Solid Dutch business people wanted the payments specified in the contract.
In the 1980's, there was a construction boom in Texas. It was fueled by Savings and Loan companies that wanted higher returns than they had been getting from regular house mortgages. Today, when we look around Texas, there were two types of buildings obviously built with all that money: fancy office buildings, and condominiums.
Building after building along the North Dallas Tollway was built at that time. East of town, row after row of condominiums stood empty waiting for buyers who never came. That boom lasted 10 years. It took about that long before another office building was built along that road. It also took about that long before people started converting old downtown buildings into condominiums. The cost of the bust included shutting down nearly every major S&L and independent bank in Texas. To this day, some people still claim that they were cheated.
Mississippi, which is one of the poorest states in the Union was the wealthiest prior to the Civil War (or if you prefer, "The war between the States"). Cotton was extremely profitable. Yes, there was a severe bust because of the war but it lasted much longer than the recovery from the war. Reconstruction was over in 11 years, but the bust lasted much longer. After the Reconstruction, many people insisted that they try to recreate the society they had prior to the war and implemented many restrictions in laws and constitutional amendments.
Restrictive laws and discrimination are simply bad economics. The effect of such laws is that the society loses new ideas and new ways of making money. Thus, the South stayed static while the rest of the country moved on. The South did not rise again until a generation grew up that had not known the society prior to the war and changed those laws.
General Motors has had their own bubble. For many years, it stood at the peak of global automotive manufacturing; however, neither management nor unions understood that they were in a bubble. Attitudes and expectations are written into stone-and into contracts. So, as the company's situation changed, the union contracts, the way of negotiating, and management structures all stood in the way of facing reality. General Motors is still going down in the bust part of that cycle.
Contrast the GM bubble with the Internet bubble. The Internet bubble generated a lot of economic activity for computer companies. It lasted about five years and burst in 2000. But, because it was a shorter bubble, it didn't get into as many contracts- or into people's expectations. It has taken about five years to work off that bubble.
Other long bubbles and long busts have occurred in Spain (with all the gold from the Americas), Egypt (3,000 years of dominating their neighbors) and elsewhere. Again, in most cases, the bust lasts as long as the bubble.
If we are in a housing bubble today, how long has it lasted? We can expect to see a similar time to go through the bust.
Just like a teenager can never be the "baddest" person around, nobody can have the worst ethics in business. Once you let go of ethics, there will always be someone with worse ethics who will take advantage of you.
.
Dave Randolph,
President, Prairie Trail Software