The Economic Dreamtime

FROM THE 1980S THROUGH THE ’90s and into the 2000s, the financial and economic fantasies that got such traction were happy happy happy. In addition to our uniquely entrepreneurial approach to religion, America also developed an unusually religious approach to entrepreneurialism, especially since the 1960s. At Amway, Mary Kay, Walmart, Chick-fil-A, Apple, the Oprah Winfrey empire, Martha Stewart in her heyday, Whole Foods, and Amazon—among employees as well as customers—those businesses cultivated a cultish, evangelical vibe. And maybe most of all at Apple, one of my own brand faiths, where the acid-tripping megalomaniac Steve Jobs famously radiated a “reality distortion field” that made people believe whatever he wanted them to believe. “In his presence,” said the Apple underling who borrowed the idea and phrase from a Star Trekepisode, “reality is malleable.” Another employee explained her boss to Jobs’s biographer in terms of the Bay Area religious entrepreneur Jim Jones, who became famous when Apple was also a Bay Area start-up: “It didn’t matter if he was serving purple Kool-Aid. You drank it.”

Entrepreneurialism that produces useful, innovative new products and processes is one thing. Bravo to Jobs and these entrepreneurs. But the free-market fundamentalism that became our governing paradigm starting in the 1980s had unfortunate consequences when it extended into wholesale wishfulness and denial of reality. Near the end of a speech he delivered at a conservative think tank around Christmastime in 1996, during the long boom, our libertarian chairman of the Federal Reserve, Alan Greenspan, wondered, “How do we know when irrational exuberance has unduly escalated asset values?” Irrational exuberance: in other words, were we in danger of slipping off the reality tether, becoming so financially delirious we were heedless of our delirium?

Yes, as it turned out.

The bubbles in technology stocks and real estate were classic American phenomena. We’d been there before—with the Virginia gold hunters in the 1600s, overbuilt railroads in the 1800s, rocketing Florida real estate prices in the early 1920s, and the value of U.S. stocks tripling in four years in the late 1920s. As the prime interest rate fell from 20 percent in 1981 to 4 percent in 2004, however, credit had never been so easy for so many Americans. The irrational exuberance, the national fantasy of good times rolling forever, had never lasted longer or been shared more widely. The Great Depression had chastened people in the 1930s, but that was then—by the 2000s, everyone who’d lived through it was elderly or dead. We were ready and hungry to believe in financial and economic fantasies again.

In less than a decade around 2000, the value of the average home almost doubled. Many, many middle-class Americans suddenly felt rich. The country seemed to be on some incredible Vegas winning streak or at a multigenerational rave that went on and on. (Actual raves, no coincidence, also emerged in the 1980s and ’90s.) We decided that Mardi Gras and Christmas are so much fun, we should make them year-round ways of life. Maybe some people knew deep down it couldn’t last forever, just as some people found the incredible performances of Barry Bonds and Roger Clemens…incredible. But no one wanted to be a buzzkill. The fantasies were more fun, and in the financial domain self-fulfilling.

To the technology and real estate and financial businesses, the years on either side of 2000 were like what the years on either side of 1970 were to the rest of American life: the prudent old rules no longer applied, anything seemed possible.

In Silicon Valley, a few clever and lucky people occasionally found a pot of gold, which encouraged everyone else to keep believing and wishing. The odds of any individual entrepreneur becoming a megawinner are vanishingly small, as they are for buyers of lottery tickets, and the jackpots in tech are capricious. The first generation of digital entrepreneurs to get amazingly rich, in the 1980s and ’90s—Gates, Jobs, Bezos—became billionaires in early middle age. In this century, before and after burst bubbles and meltdowns, it happened to younger, digital billionaires at thirty (Larry Page of Google) or twenty-five (Evan Spiegel of Snapchat) or twenty-three (Mark Zuckerberg). Which serves only to make the dream all the dreamier. What’s the new term of art for the most financially successful tech start-ups? Unicorns, after the magical creatures in which only children believe.

It’s correct to say that the financial meltdown of 2008 resulted from too much deregulation, too many arcane Wall Street innovations, and some fraud. But that’s just one way of explaining it, the one that comfortingly focuses all blame on government and a small class of the rich and powerful and deceitful. The deeper causes were more widespread and unconscious, the fantastical wishfulness affecting at least a large minority of Americans, maybe a majority.

In the late 1990s, the smart people decided the old rules didn’t apply because digital technology had created a New Economy. Companies with no revenues were worth billions of dollars, and paying 175 times earnings for a share of the average tech stock didn’t seem mad. Why not buy bigger and bigger houses, why save money, why not go deeper into debt? The price of the average house was bound to just keep doubling every ten years. To keep Tinker Bell alive, Peter Pan sent out a magical alert to everyone in the world “who might be dreaming of the Neverland….‘Do you believe?’ he cried….‘If you believe,’ he shouted to them, clap your hands.’ ” For two decades we clapped our hands and believed in fairies.

One undeniable virtue of markets is that eventually they reflect hard facts. The financial world isn’t prone to permanent fantasy. During the 1990s and the early 2000s, however, Wall Street “honed the art of creating and selling financial products with an increasingly tenuous connection to reality,” Nick Paumgarten wrote in The New Yorker right after the 2008 crash. “It was more like what anthropologists and psychologists call magical thinking—the tendency to believe that wishing it so makes it so.” Americans

clung to the conviction that you can have outsize returns with little risk, leverage without recoil. This is what the clever financiers claimed that their inventions could do. Their colleagues and clients wanted to believe them. They all wanted to believe that their credit-default swaps could continue to insure against debt defaults….

Magical thinking enables you to see good where there may be only bad.

The financiers were a mixture of Cynics and Believers. When their faith in the financialized magic ended in 2008, they promptly chucked those wishful beliefs, of course, and defaulted to pure, reality-based Cynicism.

What ended that period of extreme financial make-believe? It wasn’t grown-ups in charge stepping up and announcing it was crazy and doomed, that enough was enough. Rather, we finally ran through the supply of greater fools willing to pay a premium for the houses and other things the last group of fools had just bought. When America and the rest of the world were spanked by reality’s invisible hand, we got the meltdown and crash and Great Recession, the inevitable results of Fantasyland economics.

In 2009, I sincerely argued that our national near-death experience, in which we glimpsed the economic abyss, could sober us up and put us back on the reality-based straighter and narrower—a national reset! It was pretty to think so. Our voracious national craving for fantasy, however, when denied in one area, quickly finds other places to satisfy itself.

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