Peter Thiel's four theories on the bubble and bust economy
Peter Thiel is an American entrepreneur, hedge fund manager and venture capitalist. He is Clarium’s President and the Chairman of the firm’s investment committee, which oversees the firm’s research, investment, and trading strategies. Before starting Clarium, Peter served as Chairman and CEO of PayPal, an Internet company he co-founded in December 1998 and was acquired by eBay for $1.5 billion in October 2002.
Prior to founding PayPal, Peter ran Thiel Capital Management , the predecessor to Clarium, which started with $1 million under management in 1996. Peter began his financial career as a derivatives trader at CS Financial Products, after practicing securities law at Sullivan & Cromwell.
In addition to managing Clarium, Peter is active in a variety of philanthropic and educational pursuits; he sits on the Board of Directors of the Pacific Research Institute, the Board of Visitors of Stanford Law School, and is an adviser to the Singularity Institute for Artificial Intelligence. Peter received a BA in Philosophy from Stanford University and a JD from Stanford Law School. He is self-described libertarian and a minority investor in Big Think.
Peter Thiel: Let me outline four different possible explanations one can give, and I will just leave it to the audience to reflect on these four possible explanations for why we’ve had this extraordinary run of bubbles and busts over the last number of decades.
The first one which, when Mike described as sort of the left-wing or Liberal answer, is that it has, it has basically been driven by reckless lending, lack of regulation and greed and that, in effect, the entire boom since the early [Ronald] Reagan years in 1982 was basically driven by this escalating leverage that in effect was more fake than real, and that it has basically come to an end. It worked well as it did but it was basically the fault of the lenders and all kinds of agency problems associated with them.
There is a second type of political answer, which is the right-wing or conservative answer, which is that it basically was the fault of the borrowers, that they were recklessly borrowing all these money. It was people who were too greedy in buying houses and going on credit. It was the product of a narcissistic and selfish generation that was not, was shortsighted and not thinking about the future. Under that narrative, you might trace things back to, say, 1968 and say that was the year that everything went downhill in the US and the hippies took over, or something along those lines.
It is of course the case these two explanations are not inconsistent, and it is possible that there were problems with both the lenders and the borrowers and that, in some sense, there was something deeper about the whole political system which failed to proactively deal with these things.
Just speaking on my own context, it was obvious that there was an insane housing bubble three years ago, and you could talk about it, you could scream about it, you could go on CNBC and tell people there was a housing bubble, they should now buy houses, and it was like shouting into a hurricane. Nobody was willing to listen.
There is something about the nature of these things that is extraordinarily pro-cyclical in a bad way in terms of our political system where when there is. When everything’s going well, the regulations get loosened. When things are going badly, they get tightened, so that, in effect, the political process had the effect not of dampening these bubbles and booms but actually exacerbating them tremendously. I think that is going to be one of the real serious challenges we face in the years ahead.
In the technology context, for example, in the late ‘90s, there were obviously tremendous abuses. We dealt with the abuses with Sarbanes-Oxley and there have been basically virtually no tech IPOs in six years. So we had an excessive boom, the regulators did nothing, and then we had an excess of bust and we had an overreaction.
Again, you can blame it on special interest groups that are serving the lenders. You can blame it on the desire of the borrowers to keep the easy money going. But when basically both of them end, you have to wonder how this can better be handled.
One of the challenges that is happening on a global scale is that the inability of our political system to proactively deal with these bubbles is calling into question the very concept of democratic capitalism. One of the challenges in the next four to five years is that a more authoritarian version of capitalism of the sort that one sees in China will get a lot more appeal because the argument will be that it is able to resist the appeal of people in special interest groups and act on behalf of the whole society.
The challenge for the next president is going to be to somehow rehabilitate the good name of democratic capitalism and it will be quite a big challenge. I certainly hope that whoever becomes president will succeed at that.
Let me however outline a fourth possible explanation for why so many of these bubbles have turned into busts. This is probably my own personal hobbyhorse in this. Which is that there’s not been enough real growth in the economy. In some sense, the reason so many of these booms didn’t work was that the whole economy was not growing.
This is not a question about finance or politics or regulations, at least not centrally about those, but about science and technology and the rate at which science and technology are progressing. While this incredible hype surrounding tech companies and scientific innovation, the reality has simply not lived up to the hype for a very long time.
The anecdote I would cite is if we were sitting in this room in 1968 and talking about what was the future of the US going to look like in 40 years, we would have predicted vacation trips to the moon, spaceships on Mars, massive increases in productivity.
Servan-Schreiber, a European writer who wrote “The American Challenge” in 1967 said that by the year 2000, the average person in the US will be working 7 hours a day, 4 days a week and have 13 weeks a year of paid vacation time, which was a reflection of the incredible growth in productivity that was set to take place by accelerating technology and science. And everything’s gone the other way. There’s not been enough progress.
The long term challenge that I would submit is that we somehow need to get that restarted. It’s not easy. It’s broken down for a lot of very complicated reasons. But I think that in some sense that’s the kind of thing that needs to be very much restarted.
If one had to look at the whole series of bubbles, the one that I think was the central one, perhaps not just in time but also in importance, was the tech bubble of the late ‘90s. In some sense, when that one turned out to go wrong, it meant that none of them would work. If there was not going to be exponential progress in technology, nothing else made sense.
You could leverage up in housing but eventually housing prices would go down if there was not real growth in the society taking place. The same I think is true of finance and, to a lesser extent, of the emerging market story.
I would encourage us to very seriously rethink why there’s been so little progress and how that can be accelerated, and this is certainly one of the great things that Big Think is an impetus for doing.
Recorded: October 23, 2008
Peter Thiel articulates the divergent perspectives on what brought the U.S. economy to the brink.
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