Summary: There is an exception to a previous post, which explained that a stock market crash would have only minor economic effects on America. Just as an oil crash hurts oil producing regions (e.g., Texas), a stock market crash hurts areas that produce stock certificates. Printing this “paper” is the most profitable part of the San Francisco Bay economy, putting it in the cross-hairs for the inevitable crash. We do not know when it will arrive, just that it will. (This is a slightly revised post from 2015.)
Sector crashes often harshly affect industries and regions even when the national impact is minor or even beneficial. An oil bust hurts not just oil exploration and production companies, but also regions focused on that industry (e.g., Texas) – while helping everybody else. Similarly a stock market crash will hurt companies that trade stocks (brokerage firms) and those that print stock certificates (e.g., Tesla Motors) – and areas that manufacture stock certificates. Most especially the San Francisco Bay Area.
Silicon Valley and the entire Bay area form a 21st century version of a gold rush. Money floods in and fortunes are made — but instead of exporting pretty rocks it exports papers promising future riches. This should be obvious by now. I walk through the details in these posts…
- The advertising glut dooms the social media industry.
- The key things to know about the great American bubble machine.
These industries will not disappear, any more than finance did after the 1970s crashes, or the oil industry did after the 1980s bust. But the people in these industries and the areas in which they cluster will suffer from the fall to Earth (except those people at the top, and those who got in early).
What will happen after the crash?
The venture capital industry will evaporate, except for its long-experienced super-competent core. The bursting bubble will thin the herds of biotechs, social media companies, and other bubble industries. Bankruptcies for the unprofitable while the survivors reorganize to produce cash flow and profits instead of glitzy investor presentations and clickbait headlines. That means layoffs, and wage freezes for the rest – which slowly ratchet prices and wages back towards the national averages.
The crash will force evolution of the cultures at some corporations. The New York Time’s exposé about Amazon reveals how the management squeezes its white collar workers (it doesn’t mention the sweatshop working conditions in its warehouses). Only its insanely hot stock price makes that possible, as workers toil for the chance to profit from investors’ greed – more so than their wages.
When a regional economy breaks, its real estate prices usually crash soon afterwards. San Francisco has been one of two great beneficiaries of the debt supercycle since 1982. The result of its field of dreams burning will not be pretty. For its history see this March 2018report by Paragon Real Estate Group (click to enlarge graph). Imagine the effect when the prices revert, something unimaginable to many in the region.
A real estate crash in a hot property market begins a second wave of economic decline for the affected region. People with no-recourse mortgages walk away from their loans (“jingle mail” for the banks) and seek new opportunities elsewhere. Prices will drop far. Not down to the levels of Buffalo or Iowa City, but to those of a premium urban center. San Francisco will be much like Oz, the Emerald City, after its people take off their green glasses.
Conclusion
Crashes are part of the business cycle, not the apocalypse. Boom-bust cycles are an inherent aspect of free market systems. They occurred in 19th century Britain, with its gold-based currency and no fractional reserve banking.
Sometimes government policy restrains the formation and development of bubbles. Sometimes – like now – it magnifies them.
The important policy action after the crash is helping affected people (minimizing the pain), not making the downturn worse (e.g., the Fed should stop raising interest rates). For long-term benefit we need to better manage these cycles. Investors being less gullible is a good first step. Only fools allow insiders to blow two bubbles in 20 years.