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The test of Rational exuberance

Posted by: Michael Mandel on March 14

In 2004 I wrote a book called Rational Exuberance. The main premise of the book was that the boom-bust pattern of the U.S. economy was actually an advantage. Back then I wrote:

During boom times, the U.S. is able to fund innovative and growing new businesses with financial instruments…that barely exist anywhere else. And then when the inevitable bust comes, the U.S. financial system is highly liquid and far more diversified than elsewhere, able to cope with sharp plunges without freezing up.

For the U.S., the ability to direct resources to innovative new businesses sucks in new ideas and smart people from all over the world. That accelerates innovation, produces new jobs, and creates a competitive advantage that other countries cannot match, no matter how low their wages are.

Well, it looks like the U.S. is about to test my 2004 assertion. Bets, anyone?

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Reader Comments


March 14, 2008 04:58 PM

I can't believe that you have the intellectual honesty to post this question! Hats off, Sir.

Mike Mandel

March 14, 2008 05:01 PM

Honesty or stupidity, I haven't decided which.


March 14, 2008 06:20 PM


The tagline of your 2004 book was 'Why the Future is Better than You Think'.

Since that time, you have decided that productivity estimates are overstated, and future projections will be revised downwards.

Do you still think the future is going to be as bright as you thought in 2004?

Mike Mandel

March 14, 2008 06:35 PM


When I look back, my mistake is clear: The period from 1998-2007 was really about globalization, rather than innovation. That is, big companies discovered that taking advantage of globalization and outsourcing was a quicker and more certain way to profits than R&D and innovation.

That was good news for the global economy, and less good news for the U.S. (It was also good news for Tom Friedman, who got it right). The consequence was that this business cycle (2000-2007) was fundamentally weak, on some levels.

Now, for a return to my natural optimism. I think that the next stretch will be about and healthcare, probably, but also in media. So maybe I will republish my book again.


March 15, 2008 11:21 AM

Mr. Mandel, parsing that quote completely, all I get from you is that the US financial system is so strong that it can handle the stupidity of booms and busts. Yet somehow, you turn that around and claim the stupidity of booms and busts AS the advantage, not the financial system that cleans up after the mess. Why is it that you think the boom and bust themselves are positive?

I see some form of boom and bust as being natural occurrences, caused by investor uncertainty and herding behavior. However, it certainly was not a positive that the 90s tech boom had a whole bunch of useless tech companies valued in millions or billions, only to go bust with many investors losing their shirt. It is not a positive that the recent real estate boom bid up housing prices to wacko levels, only to lead to problems today. The way I see it, the advanced financial system in this country makes up for the idiocy of booms and busts by cleaning up the mess afterwards and more individuals should be thinking about ways to make that financial system stronger, rather than encouraging these constant roller coasters. btw, can we get a preview button for commenters?


March 15, 2008 10:23 PM

This is a matter of too much money in the hands of too few. The final transfer of wealth from the commoner to the wealthy via a Ponzi scheme based in escalating home values may result in the redistribution of wealth in a return to normality.

Mike Reardon

March 17, 2008 12:21 AM

We still have an open creative financial market willing to continue transfer of wealth in exchange for investment.

I think the Fed will stroke a new bubble like a coal furnace, going forward major investment banks will handle corporate consolidations and acquisitions and that will draw even larger foreign investment. Corporate consolidations and foreign acquisitions will continue the inward flow of inflated foreign money into our economy.

As market sectors are under duress over the next year we will see mid-range corporations put into this new financial furnace with full Fed support. That Fed or foreign money will go to stock investors who can either resolve their own pressing problems or reinvest into potential new corporate acquisition targets. I think it will be a real force over the next few years.

American corporate value even in failing sectors still has greater value for future foreign investment. It is real wealth transfer that has driven foreign investment and reinvestment into our economy and our financial markets can now create one more level of greater profit by consolidating our top tier corporate ownership.

A second lower credit worthy market with housing and consumer credit now added, that is now below market values in the Global equation, will need to be fixed by Congressional decrees of debt that maintains that domestic balance. It’s the Fed covering balance sheets for the next year then our tax system may get this piece of this equation, I could see a two-tier response to the economy from here out.


March 18, 2008 02:38 PM


So are we on the brink of a boom once this recession passes? Or have you permanently lowered your expectations on productivity growth, despite the next cycle being about innovation?

I think one big letdown has been nanotechnology. In 2004, many people (including you) were optimistic on what Nanotech would deliver by 2008. Businessweek did a big cover story on Nanotech in 2004. It clearly has not happened, and people don't even talk about it anymore. The expected advances will happen far later than people expect.


March 18, 2008 04:02 PM

The seeds for the big technology and software push of the 80's and 90's were sown decades before with the huge R&D investments in electronics and basic materials (and largely financed by the US government for military purposes)...this allowed the "cheap revoution", as someone call it, to flourish later on.
Unfortunately building nanomaterials is WAY more difficult and costly than writing "innovative" software code...the amount of R&D spending required is staggering and I think government serious help is needed.

I hope I'm dead wrong, but I think we are not going to see a nano boom anytime soon....

Mike Mandel

March 18, 2008 04:38 PM


Booms--free and easy access to capital--can encourage a lot more experimentation and innovation. Of course, we've just had a bad boom.

Mike Mandel

March 18, 2008 04:40 PM


My view is that full commercial exploitation of a technology, on a macro-economically important scale, comes 25 years after its initial entry into the market place. So nano is years off, but it's about time for an energy/ biotech boom.


March 18, 2008 06:23 PM


I might agree with the 25 years, except :

1) That period continues to compress, as the public becomes more savvy and open-minded about the adoption of new technologies. See this :

2) How do we decide when the 'initial entry into the market place' is? Was the initial entry of the Internet in 1988, 1991, or 1995? Was the initial entry of the PC in 1971, 1976, or 1984?


March 18, 2008 11:37 PM

What we have right now is not a liquidity crisis but a measurement crisis. No one has any idea of the actual levels or risk. Interest rates have been pegged so low for so long that we are miles from having reasonable returns on risk. When rates are finally raised, most likely by the Republican Federal Reserve as soon as a Democrat gets into office, we'll see the economy come back to life as it did in the 1980s. If a Republican is elected, the Fed will keep rates low and the economy will limp into a weakly stable state that misleading statisticians can turn into a recovery. Watch for rising prices with flat inflation and a shrinking work force with a constant unemployment rate.


March 19, 2008 03:46 PM

Mike, I realize that is the standard excuse given by pro-innovationists like you who want to see a lot of money thrown at new ideas. I argue that most of the money during the last two booms was thrown at useless ventures. I would much rather see a rational seed and venture process that operates during all financial climates, rather than a whole bunch of idiots running into a field like tech during a boom, throwing around money like crazy as though they're destined to be rich, and then losing everything in the bust. A more rational financial system that is made up of capital markets with smarter investors and early-stage investors who actually know something about the field they invest in- rather than aged financial jocks looking for a couple of quick scores- is what I was talking about earlier when I mentioned strengthening the financial system.

Gerard MacDonell

March 24, 2008 10:57 AM

I bet you bail on it.

Mike Reardon

April 8, 2008 08:53 PM

As I said above we may have two separate level of market accountability as the ultimate solution. Alan Greenspan today came forward with support for a new (RTC) Resolution Trust Corporation to help resolve housing debt held by banks.

One other supporting comment on corporate acquisitions. Microsoft’s bid for Yahoo is a perfect example of a bid above the original market value that has pushed up the asking price of the target company. A still rich acquirer can gain financial support from both the market and investment banks for this new debt.

It will give a monetary return to present investors getting the deal done with new debt instruments that can be resold into a still willing foreign market.

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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