Thursday, February 28, 2019

econlife - How a Sock Puppet Created a Bubble by Elaine Schwartz

Several years ago we asked why markets and bubbles always seem to find each other. Then we looked at tulip bulbs, Beanie Babies, and bowling. Today let’s add the sock puppet and a 1920s Florida housing boom.

Where are we going? To what they all have in common.

The Bubble

Let’s start with a sock puppet who was the “spokesdog.”

In 1998, an online pet store was a new idea. But they got millions in venture capital funding (even from Amazon) and called themselves With their cute and clever sock puppet, Super Bowl ads, and a Macy’s Thanksgiving Day Parade float, they created buzz and spent a lot of money. Its former CEO explains that it was tough to do internet business then. Imagine no plug and play and no cloud computing. You needed to do it all yourself. Then, to attract customers and offset high shipping costs, they had to discount below cost.

The firm went public in February 2000. By November it was in “doggy heaven.” Through their initial public offering (selling stock to you and me) and venture capital they raised hundreds of millions of dollars. At the end the stock was selling for 22 cents, down from its IPO high of $11.

At the same time, other e-tailers were experiencing a similar demise. Few of us remember,, You can see the downdraft after the March 3, 2000 high. Dominated by sick tech, the Nasdaq composite more than halved:

A Florida Bubble

Like selling pet supplies online, a Florida vacation was once a new idea. Before 1920, Miami Beach, Coral Gables and Tampa—indeed, most of the Florida we know today—did not even exist. But then the auto created unheard of mobility and a swarm of developers transformed one huge expanse of swampland into a vacation wonderland … or what was supposed to become one.

In 1925, two thousand Miami real estate agents were reputedly selling acreage. Entire communities were planned and sold long before the first bulldozers appeared. Across the state people were moving tons of sand, paving streets, and building houses and hotels. Without even counting vacationers, Miami’s population jumped from 30,000 in 1920 to 75,000 five years later.

The rise and fall took close to five years.

The Florida boom collapsed in 1926. At first people began to default on payments for land on which they had left a binder. It was said that one gentleman who had sold some property for $12 an acre experienced regret because the land was resold repeatedly, at first for $17, then $30, and finally $60 an acre. The gentleman had cause for further regret. Because no one in the sequence of transactions had paid what was due, once Florida’s economic decline began, the property moved backward from hand to hand. The story ends with him repossessing his land.

Compounding the economic contraction in Florida were the other calamities that followed. Two hurricanes struck. A September 18, 1926, storm targeted Miami. It left hundreds dead and roofs, autos, yachts, and other assorted debris strewn haphazardly in its wake. The next step was for the banks to fail. With everyone needing more money and few having it, the number of Florida’s bank collapses steadily climbed. From 31 in 1928 to 57 in 1929, the number was destined to rise even further. The final blow was struck when the Mediterranean fruit fly destroyed the 1929 citrus crop. Because of the nationwide decline, there was no one to pick up the pieces in Florida.

Our Bottom Line: Speculative Manias

Like and Florida real estate, all bubbles start with something new that captivates the market. As euphoria builds, so too do demand driven price increases. Then, with speculative purchases escalating, prices move even higher. But always, the euphoria switches to panic, sellers multiply, and the market crashes. On the way up, participants like to say “This time it’s different.” They have relatively easy access to money. They enjoy irrational exuberance and believe puffed up growth stories. Inject all of that with a dose of moral hazard that obscures your risk and you get your bubble.

My sources and more: This WSJ quiz and this week’s stock market plunge started me thinking about market manias. WSJ was also ideal for the story. As for Florida, I’ve copied an excerpt from my Econ 101 1/2.

Several sentences from this post’s Bottom Line were in a previous econlife.

Ideal for the classroom, reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.