Are bubbles good?

Dubai, in all its glory...

It goes without saying that, after every bubble bursts, someone justifies bubbles and claims that they are good for society. Daniel Gross who wrote the book Pop!: Why Bubbles Are Great For The Economy--I haven't read it--wrote an article for Slate justifying the benefits of bubbles last year. I don't have a strong opinion on this topic. I need to think a lot more about it. My gut feeling right now is that bubbles are bad because they are inefficient. However, I also know that certain activities would have never occurred without the mania inherent in bubbles. For instance, the present state of the Internet, which relies on very cheap communications, would have, instead, taken decades without the dot-com bubble. Without the various railroad and canal bubbles, America would not have expanded to the western states. Thus, the question, in my mind, comes down to whether the inefficient allocation of capital is worth it, in order to realize a larger-than-life accomplishment.

Well, now we have The Economist tackling the topic. It's an interesting article, well worth reading on your free time. It goes over the current real estate bubble in Dubai and points out how the Florida real estate bubble in the 1920's led to the establishment of Florida, and Miami, as a tourist destination. Here's a sample:

The fireworks could be seen from space (allegedly), putting China’s Olympic displays to shame. Hollywood celebrities studded a guest-list of 2,500 people. Kylie Minogue, a diminutive Australian singer, cavorted in a gold and black corset designed by Jean-Paul Gaultier. Guests consumed an estimated 1.7 tonnes of lobster.

The launch party for the Atlantis hotel in Dubai on November 20th was a perfect, noisy finale to the world’s latest age of excess. But its loudest echoes—the man-made islands, the iconic hotels, the overheated property market, the celebrities and the sun—are from another, more distant time: south Florida in the 1920s.

The summer of 1925 was mania time in Miami. Speculators descended on the city, hungry to buy land in the hottest property market in America. Salesmen swarmed to meet them. “Bird dogs” (youngsters looking to make their way in the industry) scanned the new arrivals at Miami’s train station and steered the most promising prospects to their bosses’ offices.

The heart of the boom was Flagler Street, clogged with traffic and tourists. Would-be buyers were put in the hands of “binder boys”, named for the binders in which sales were recorded. Transactions were swift and shoddy. Buyers had to put down only 10% of the purchase price for the lot they were buying to close a deal; further instalments were payable when the sale was legally recorded. Many new owners had no intention of waiting that long. In another echo of modern-day Dubai, they wanted simply to flip their property, which often had yet to be dredged from the ocean, on to the next man. Some bits of land were sold and resold several times during a single day.