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Winter Park / Maitland Observer Thursday, Feb. 11, 2010 10 years ago

Big dip

by: Abraham Aboraya

So what exactly is an echo bubble?

An echo bubble is a term economists use to describe what happens after a bubble bursts. Typically, frantic investors pull out of bad stocks on their way down, triggering the burst of the first bubble.

But then, the stock market will rally — and usually fall prey to the exact same problems that caused the first bubble. According to an October Newsweek article on echo bubbles, commodities are rising again like they did in 1999, with a barrel of crude oil costing $70.21, compared to $48.33 a year ago.

Even the banking industry — at the root cause of the first bubble — are recording record profits. Robert Shiller, the Yale professor who successfully predicted the current economic downturn, told Newsweek that prices on Wall Street are up because, "We've just gotten very speculative in our behavior, and it's a change that will likely last. I'm inclined to say that we're seeing a new bubble," Shiller said.

So, assuming that another echo bubble is about to burst on Wall Street, what does that mean for Winter Park and Maitland? To understand the local impact, you have to understand how an echo bubble could hurt the economy on a national level.

Sean Snaith, the director of the UCF Institute for Economic Competitiveness, said there could be some truth to the echo bubble.

"After the collapse of a bubble, there's this scrambling and shuffling of portfolios that's taking place," Snaith said. "As investors reassemble or get their wits about them, some of that money starts coming back into the market. That may be the genesis of these echo bubbles."

Snaith said that when bubbles form, they form around irrational behavior and thoughts — like the idea that housing prices will continue to rise forever. When they burst, investors, like a manic depressive, go into an irrational depression, fixated that the world is coming to an end.

That may mean that the market dipped to an unnatural low, and many of the gains investors have seen — the stock market breaking 10,000 but getting stuck there — could be a result of that. But if there's another bubble about to burst, that could hurt.

In short, we're not out of the woods and on the way to stable economic ground yet.

"If we continue to see stock markets retrench, that's going to feed back into the economy with weak spending from the consumer," Snaith said. "We don't need anything that will further weaken consumer spending or further hamper recovery."

The current bubble that burst and nearly sent the U.S. economy into a second Great Depression started with the real estate market. As home prices continued to boom, banks bundled securities backed by mortgages.

But, as more and more homeowners began to default on their payments, the balance sheets of banks began to rise to unacceptable levels. Many of those banks were bailed out by the government because it was decided that, if they failed, it would be a systemic failure that would wreak global havoc.

The bottom line is the real estate market was at the heart of the trouble. Steve Moreira, the president of the Orlando Regional Realtors Association, said that even if a second bubble happens, he doesn't think it'll hurt the local market.

"Do we think if the stock market takes a dip, we'll see a second real estate crash? I don't know where it would really go," Moreira said. "It's as low as it can go. We're below replacement value right now. You can't build it for what you can buy it for."

Moreira said that, at this point, the real estate market is operating independently of the stock market. He said it would work both ways.

"I think it stays steady no matter what the stock market does," Moreira said. "And even if the stock market goes to the moon, you're not going to have the over-exuberance in this market for a long time."

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