How the Federal Reserve’s Economic Recovery Plan Fueled the Tech Bubble

The $3.6 trillion the federal government has pumped into the U.S. economy since the 2008 financial crisis fueled a tech bubble that led to start-up valuations that far exceed that of successful established companies in traditional industries.

The hospitality tech company AirBnB, for example, is valued at $24 billion, which exceeds the stock value of the company Marriott, which runs over 4,000 hotels. The transportation company Uber is valued at $15 billion, while SnapChat, an enabler of ephemeral picture-sharing, is valued at $16 billion, despite having produced no profits.

Economics journalist Doug Henwood writes at The Nation:

While all this pumping has probably had some good effect on the real economy (though opinions differ), even proponents concede that it was fairly modest. But it looks to have been immensely stimulative to the financial markets. Stocks are up about 175 percent from their post-Lehman low. (They’ve come a few percentage points off their highs, thanks to jitters about the Chinese economy, but the gains remain largely intact.) Long-term interest rates fell from 4.3 percent in June 2008 to a low of 1.4 percent in July 2012; they’ve since come up but not by much—to 2.2 percent. When interest rates fall like that, bondholders enjoy huge capital gains (older, higher-yielding bonds become more valuable as rates fall), which they need to redeploy. And as interest rates fell to minimal levels—that July 2012 interest rate on 10-year Treasury bonds was the lowest since the Federal Reserve’s historical series began in 1953 — it became cheaper to borrow funds to speculate with. Investors, bored with sub-2 percent rates, were happier to “reach for yield” — invest in risky ventures in hope of earning higher returns. …

There’s something sad about this echo-bubble, with its constricted ambitions and minimal use of utopian rhetoric. We’re accustomed to hearing that there’s just “no money available” for all manner of excellent pursuits — though clearly we have plenty of money available to fund serial bubbles and busts, and few unreconstructed social critics ever denounce that with a “Remember last time?” I’m only partly thinking of social benefits like child care and libraries; those are day-to-day expenditures, not big-ticket items financed out of long-term money, like transit and green energy research.

Congressional Republicans’ eagerness to slash Amtrak funding by $242 million got some headlines, but the railroad’s $1.3 billion current level of federal funding was none too generous to start with. But Uber has had no problem raising almost $7 billion so far, and rival Lyft another $1 billion. This is a staggering misallocation of capital. Nor do we have the imagination or funding to follow up on the suggestion by Mike Konczal and others to “socialize Uber,” by turning the thing into a driver-owned cooperative. There really are some more urgent tasks than devising a better way to hail a cab — or buy a mattress — and it would be nice to steer some money towards them instead of towards capitalist phantasms.

Read more here.

—Posted by Alexander Reed Kelly.

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