Bursting bubbles: after tech stocks and housing, what's next?

• Author: Cote, Mike
• Position: ECONOMY - Society of American Business and Economic Writers - Conference news

A few things are certain in life: death, taxes and financial bubbles, be they tech stocks or subprime mortgages.

A panel that convened in Denver in April as part of the annual convention of the Society of American Business Writers and Editors pondered how to look for the next financial bubble and whom to blame for the one that fueled the biggest financial meltdown since World War II.

Up until the 1990s, housing prices roughly kept pace with inflation for a hundred years. So it shouldn't have been difficult to determine that something was amiss when they radically diverged from that trend, said Dean Baker, co-director of the Center for Economic Policy and Research.

"That should really have raised some alarm bells," said Baker, who noted that apartment owners facing high vacancy rates converted them to condos, which were selling briskly, another sign that there was a problem with the fundamentals.

Baker blamed the media for failing to adequately warn investors, and also said former Federal Reserve Chairman Alan Greenspan should have seen it coming.

Not that anyone would have paid much attention. Panelists noted that those who warned about potential disaster from subprime mortgages and derivatives faced ridicule.

"Within any bubble there are always a few wise sages who warn that the bubbles exist," but they are always drowned out, said Kevin Blakely, president and CEO of Risk Management Association.

"True bubbles are driven by the herd. It takes the momentum of the group to sustain them," Blakely said. "Bubbles are very similar to Ponzi schemes. The only difference is one is legal and one is not."

Like Baker, Blakely said the fundamentals should have been clear: "Most everything usually reverts back to the norm. If something's value extends far beyond its norm, you should be worried about it."

There's no way to prevent bubbles from happening, Blakely said, but there are ways to mitigate them, saying financial institutions and regulators need to pay better attention.

He alluded to the green energy...