I’ve posted my second Google Knol. This one is called The Bull Market Caused the Economic Crisis.
Juicy Excerpt: There is a simple and compelling explanation for our troubles that is rarely discussed. The bull market of the late 1990s pushed stock prices to three times fair value. That translates into $12 trillion of funny money. Presuming that stock prices were always fated to revert to the mean (Vanguard Founder John Bogle describes Reversion to the Mean as an “Iron Law” of stock investing), we set ourselves up for the loss of $12 trillion in spending power once the bull market came to an end. It’s not hard to understand why that would bring on an economic crisis. So why not pay heed to Occam’s Razor and accept the obvious explanation as the most likely one?
A strong case gets stronger when you take into account the message of the historical stock-return data. Yale Professor Robert Shiller reports in his book Irrational Exuberance that there have been four times in the history of the U.S. market when stocks reached insanely dangerous price levels: (1) the early 1900s; (2) the late 1920s; (3) the mid-1960s; and (4) the late 1990s. On each of those occasions, we experienced a stock crash. We have never experienced a stock crash of lasting significance starting from a time when stock prices had not gone to insanely dangerous levels. And on each of those occasions (and not on any other occasion) we also experienced an economic crisis. The correlation is perfect.