[untog]

And why do you suppose that Silicon Valley will not crash the economy? It's not implausible, with the arrival of increased automation, self-driving cars, etc. that the economy will at least take a major hit as a result of Silicon Valley innovation. And I'll wager a lot of the Valley will get very rich off it, too - just like Wall Street.

[mcguire]

Hey, it happened on 2000. The only difference was that the dotcom crash didn't have a load of consumer debt behind it.

[thinkmilitant]

I'm sure you were just speaking casually, but this was far from the only difference. Biggest difference that comes to my mind is the lack of bailouts.

[mcguire]

The bailouts were a follow-on action.

Back in 2000, we had an asset bubble, primarily in tech stocks but also in stocks generally. But the bubble was not primarily debt-fuelled (Thank you, post-great-depression limits on margin loans!); when in burst, it had no direct, lasting consequences. Sure, a lot of people felt less wealthy, which caused a bit of a general slowdown, but the economy recovered fairly quickly.

In 2007, we had an asset bubble in the housing market, fuelled primarily by consumer debt. When the bubble started bursting, consumers stopped being able to get big loans, meaning they couldn't buy at those prices and couldn't refinance their existing huge loans. Housing prices dropped, meaning even fewer loans, more foreclosures, more houses on the market and lower prices. Because consumer debt was also financing the rest of the economy, the collapse of that and the ensuing pessimism put the binders on the whole economy, hard.

In the midst of this, the institutions that had been making the loans discovered that the paper they had been shuffling around was actually worthless, leaving them with many debts and few assets. The bailouts were intended to do two things:

1. Improve the balance sheets of the financial institutions, preventing them from going bankrupt and falling over like a sack of doorknobs. (IMO, this was ultimately both good and bad. Uncontrolled collapse would have been bad, but a restructuring and breakup of those firms is still necessary or it's going to happen again.)

2. Increase the money supply, through the banks-make-loans-loans-go-into-accounts-banks-make-loans cycle. This was necessary to avoid deflation and support the overall economy. (Want to shoot an economy in the head? Think inflation is bad? Check out deflation.) Unfortunately, banks weren't making loans, so that didn't happen. Modern economic theory at its finest, ladies and gentlemen. Oopsie.

I maintain that the big, primary difference is the amount of leverage applied on the downside.