Having lived through the .com bubble as a web developer I can see perfect parallels to the Housing/Finance bubble. By 1996, web development was starting to really take off around the country. There were already super-success stories like AOL and Yahoo and people were starting to try and use the concepts behind these successes for a second round of start-ups and internal applications (the birth of the intranet). I think there were quite a few people in this second wave that understood the web and were trying to devise ways to differentiate themselves or innovate in a newly established frontier. The trouble is that its a numbers game. There are just not that many smart people to go around. So as the numbers increased so did the number of “fakers”.
Virtually bottomless demand for web-something-anything allowed anyone and everyone to hang up a sign outside their garage as a web developer and get more business then they could handle. It was not only smart people that were in short supply but people with the experience in the new field. So just about everyone involved was new and flying by the seat of their pants, with a rough idea of where to go based on previous success models they barely understood, other than they made a lot of money.
Finally towards the end, you had a HUGE third wave of just ridiculousness flood the field which eventually broke the back of the market. These people were either actively gaming the system by building paper companies just to sell them to some sucker or people who didn’t care at all about the field and just wanted to get in to make some money before it passed. During this time I worked at a .com incubator and we were doing up to 3 business plans a week! Some of my favorites were: A website for people with broken computers, an intellectual property portal that had to change its name/brand after launch because they infringed on someone’s copyrighted identity, and a guy from New York who at the kick-off meeting summarized his strategy as, “I have got $500,000 and I want to get into this internet thing.” These people were not ready to start a new company, but they felt compelled to do so because that was the model to make 1000x your investment.
I am not a finance guy, but from what I read the MBS market evolution and the the events surrounding its build up and collapse sound identical. I imagine the first MBS was a well designed and innovative investment tool and due to competitive pressure everyone else piled on shortly after with varying degrees of understanding of the original idea. I suspect that near the end in 2007, you had that flood of just ridiculous fakers in everything from the MBS investment world, mortgages and even contractors, realtors and construction supplies. They likely had a very poor understanding of the market they were pretending in and shamelessly didn’t even try to hide it. The endless demand blinded the “customers” and any form of diligence for anything in the market from investment to home purchase went out the window.
I think this phenomena is a function of numbers and time. As more and more people pile on, there is a general sense that this “can’t go on forever” so there is a sense of urgency to “get mine” before the window closes. This urgency puts tremendous pressure on the gatekeepers and diligence experts and eventually they collapse and the system starts going unchecked into “Crazytown”. Maybe it is a natural function of free markets that when 1 guy is successful there are 1000 behind him trying to copy his recipe. You definitely see it everywhere. Just think of movies and TV. But I think the difference is when there is insufficient will or infrastructure to maintain the gatekeepers and diligence in a market place and it turns into a free for all. Free markets are good because they embrace competition and innovation which drives down prices and fuels progress but left unchecked each “super-success” is followed by a “super-bubble” which ultimately is followed by some super suffering. I believe you can have free markets that allow anyone to make a run at the “American Dream” while still maintaining enough regulatory control to prevent the pile of fakers. Keep the barrier to entry high enough to force anyone interested to commit a certain amount of will, time or capital that would scare away anyone looking for a free lunch.
