Boom, Bust and the Echo of History: Author John D. Turner in Conversation

John Turner:

You think of the time lag between the invention of the technology and then the bubble. So with AI, is it going to happen quite quickly? And the thing about a general purpose technology is you don't know it's a general purpose technology until after the event. People at the time didn't realize that the steam engine was going to transform the world or electricity or computerization and the internet. So, we're sitting today trying to guess, well, is this the next big thing? It might be, it might not be.

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Dr Laurence Mussio:

Hello and welcome to the Markets Plus podcast presented by BMO Financial Group. I'm your host, Dr. Lawrence Mussio. I'm a special advisor to the CEO of the bank and chair of the Long Run Institute. I'm also author of Whom Fortune Favors: the Bank of Montreal and the Rise of North American Finance. Today, we're embarking on something a bit unusual, but I think insightful. We'll examine the markets through the lens of long run cycles and patterns. After all, history dissolves mystery, at least when it's done well and properly. In times of contemporary market volatility and global uncertainty, understanding these cycles is more important than ever.

Joining me is my colleague and fellow co-founder of the Long Run Institute, Professor John Turner. John is a professor of finance and financial history at Queen's University Belfast and a former dean of Queen's Business School. He's also the founder and director of the Queen's University Center for Economic History. His award-winning book, Boom and Bust: A Global History of Financial Bubbles, was selected as a Financial Times Economics Book of the year in 2020. He has held distinguished positions at institutions like the Bank of England and Harvard Business School. John, it's a real pleasure to have you on the show.

John Turner:

Thanks, Lawrence. It's great to be here with you.

Dr Laurence Mussio:

John, as co-founders of the Long Run Institute, we've been passionate over the last few years about uncovering how historical patterns can illuminate our understanding of financial markets, but not only for its own sake, but especially for decision makers. So, what we try to do is to connect long run trends and experiences to grand challenges facing today's businesses and governments. And your book, Boom and Bust examines financial bubbles throughout history. And I suppose the theme is eternally relevant, especially in this year of hypersensitive market conditions. So, I guess my first question would be, what inspired you to focus on this subject of financial cycles and bubbles?

John Turner:

Yeah. That's a really good question, Lawrence. As someone who's been interested in the history of finance, I've always been interested in these bubbles that took place in the past. But it was really my lived experience of actually experiencing these bubbles myself that inspire me to write the book. So, if I start, for example, in 1997, I get married, I buy a starter home, and a few years later we're going to trade up, and I see the people coming into our home to try and buy it. And you're always trying to figure out, are these people actually going to follow through? Are they going to get a mortgage? And so eventually I talk to these people and I find out they're ninjas, no income, no job. And so I ask them, "Well, how are you going to get a mortgage?" And they tell me that there are 100% mortgages and 105% mortgages available to buy the house.

So, all of a sudden my alarm bells started going off in my head. And then over the next five years, so I buy a new house, my house quadruples in value. And so here we are today sitting in 2024, my house is 50% less than it was back in 2007. So, I lived through this huge housing boom and bust in Ireland. So, that really was the thing that really inspired me to write the book. Added to that, I was in China, so connecting Ireland to China, I was in China in 2015. I was dean of our business school at Queen's University, and I was visiting alumni, and Shenzhen and Shanghai were in the middle of this huge bubble, particularly of technology stocks. And I was meeting alumni from my university, I was meeting former students and they were all super excited about how well the stock market was performing, and I was going, "Hmm, I've seen this before." And that was really when I decided I need to write a book about bubbles.

Dr Laurence Mussio:

That's amazing. And I think the housing story that you recounted in your opening remarks will very much resonate with a lot of our listeners today, so, this is a very timely conversation. And I think also one of the things that I flippantly said about history dissolving mystery, might applicable to uncovering those cycles within market volatility.

So, we do have this market volatility in housing, perhaps even in tech stocks. It just seems, especially with generative AI. So, it's crucial, I think, to recognize the patterns that have been repeated over time. And I think that can be a very powerful tool in negotiating today's financial landscape. Maybe you can comment on that a little bit on how a better appreciation of financial cycles can help us manage risk and opportunities. Because look, we're also talking about the overconfidence of markets that say, "Well, it's different this time," to coin a phrase of Rogoff and Reinhart's book. And that kind of thinking, as your story suggested, usually precedes a crisis. How can an appreciation of financial cycles help us manage those risks and opportunities?

John Turner:

So, in Boom and Bust, we look at three centuries of financial bubbles and we identify a pattern. All bubbles have what we call the bubble triangle. So, there's three sides to this bubble triangle-

Dr Laurence Mussio:

I think I've been to the bubble triangle.

John Turner:

Yeah. People have got lost in the bubble triangle. So, the bubble triangle is where we have low interest rates or easy credit conditions. That's one side of the bubble triangle. That's like the fuel.

Dr Laurence Mussio:

Yes.

John Turner:

Okay. Then we have the oxygen of the bubble triangle, which is the marketability. So, this is the ease with which we can buy and sell financial assets, houses. And of course there's regulatory changes that drive that. And there are technological changes that drive that. And usually during bubbles, marketability goes up. And then the third side of the bubble triangle, if you like, the heat of the bubble triangle is the speculation. During bubbles, you get a lot of amateurs coming into the market and professionals usually can work against that. But during bubbles, it's really difficult to go short the market. So, there are, what are called, short-tail constraints in markets. That's a bubble triangle. And then all bubbles, all fires, need a spark to set them of, that sets the speculators off. And we identify two sparks. One is politics, so politicians do something that sparks a bubble. The other is some radical new technology that gets speculators excited and boom, we have a bubble. So, that's the pattern that we recognize in the book. And it's called the bubble triangle.

Dr Laurence Mussio:

Yes. I think our listeners will be able to apply that bubble triangle to, at least, three or four discrete areas of contemporary economic life right now. We're talking about housing, we're talking about perhaps even artificial intelligence, which we'll get to in a moment. And it's fascinating to see how economic history is not just about economics. It's about regulation. It is about a political economy as well. And just thinking of technology, we have trust and antitrust, thinking about the housing that we were just talking about, that it's maybe immigration policy or let's say mortgage rules that are liberalized or restricted. And then most interestingly, what you're saying is that overconfidence and risk-taking, because you had the average punter who's trying to get into the game to make a quick buck. So, maybe talk about that a little bit more, that overconfidence and risk-taking and how it escapes the professional manager's area of competence because everybody's crowding in, so they can't control the market.

John Turner:

So, fear of missing out.

Dr Laurence Mussio:

Yes.

John Turner:

So, a lot of these amateur investors, whether it's buying shares, cryptocurrencies, houses, whatever it might be, there's a fear of missing out. And they see an easy buck to be made, and their friends are making money investing in these stocks, these cryptocurrencies, these houses, so they're going to do it. You also get wider social pushes that are going to result in people moving into these markets. So, famously, the housing bubble that took place in the United States, UK, Ireland, Spain in the 2000s, a lot of this is driven by the press. So, the business model of the press, the printed press especially, has changed so that they now have incentives to carry advertisements, advertising houses for sale. They have incentives to actually puff the bubble, if you like. And then you've got TV shows. Flip My House or amateurs who are buying and selling houses and making money out of it. And it looks simple, it looks straightforward. And of course, banks are willing to throw money at these amateur speculators. And that's when trouble really starts.

Dr Laurence Mussio:

Interesting. Yes. Our listeners and others can really focus on, that is so applicable, especially to tech stocks. Tech stocks seems, we can maybe zoom in on that a little bit. What is your view of this massive tech investment in generative AI? Does it have the characteristics of a bubble? The promoters like Nvidia who are saying, "Look, this is Moore's Law squared." Moore's Law squared, in terms of the progress of artificial intelligence. It could be true, but my heavens, if that is true, then maybe it will be different this time or is it?

John Turner:

So, this is the million-dollar question that everyone's asking at the minute. But if we take a step back to 2020, all of a sudden during the pandemic, several months into the pandemic, we begin to see bubbles in particular asset classes. We have it in green technology stocks, we have it in the, so called, FANG stocks. So, the Facebooks, the Googles, the Apples of this world. We have it also in Tesla stocks and electric vehicle stocks. So, there's a lot of excitement during the pandemic. And why is that the case? Well, first of all, interest rates have been dropped to near zero. There's lots of money floating around. We have actually made it easy for people to buy and sell stocks because we've gamified buying and selling of stocks and cryptocurrency. So, think of Robinhood and other apps that you can access through your phone, that you can buy parts of stocks. You don't even have to buy the whole Tesla stock, you can just get a 100th of the Tesla stock.

And then during the pandemic, of course, you have lots of sporting events are closed, and so people can't gamble anymore. So, what do they do? They've got a lot of extra money because they're not out spending it at restaurants, going on holidays. They're putting it into the stock market. And that's still there to some extent. And the interest now has moved on from electric vehicle stocks. It's back into cryptocurrency, interestingly, but it's also then into AI stocks or AI adjacent stocks because a lot of the AI today, of course, is in private markets. It's not actually being traded on capital markets.

The interesting thing is the hype. So, during the Chinese bubble in 2015, if you wanted to raise capital in the market, you describe yourself as a technology company, even if you were producing wooden floors. That's what some of these companies were doing. And so you will see a lot of hype about AI. So, if I was wanting to raise capital today, AI would be the top thing I'd be telling potential investors. We're not really a company doing this, we're really an AI company. So, I would be concerned that there is a lot of hype. We don't really know if AI is going to be this radical breakthrough new technology that everyone says it's going to be.

Dr Laurence Mussio:

Yes.

John Turner:

It has potential, but we don't yet know.

Dr Laurence Mussio:

But John, wouldn't we also have recourse to the pattern recognition of predecessor technologies. And so technological transformations happen along a fairly predictable pattern. And so obviously there are known and unknowns. And when we talk about pattern recognition, we also have to understand where the pattern breaks. And that is exactly what you're saying is the million-dollar question, will it break? Is for example, AI, an invention of a method of invention, like the Industrial Revolution, and is it going to become a general purpose technology? But even still, there'd be dragons there as well because it's a matter of timing, is it not? So, in terms of electricity and in terms of steam power, all of those things say, "Look, you get into the market early, then you might lose your shirt." Now, what remarks might you have on those connections?

John Turner:

So, through history, we've had three general purpose technologies. So, the first one was the steam engine, so invented in 1765. It's not really widely adopted or used until the railroads are developed in the UK. And when the railroads are being developed in the 1840s, we get this huge bubble, probably the largest bubble there ever has been in history. We get hundreds of railway companies setting up and their stock prices zooming way up. And then we get this brilliant railroad network built. We get all of these railway engines. That's fantastic. But a lot of people losing money.

Dr Laurence Mussio:

Exactly.

John Turner:

We have the same with electricity. So, electricity is roughly invented about the 1870s, but it's not until the 1920s that we see electricity popping up in stock markets. So, everyone knows about the Wall Street crash of 1929, but the run-up in the 1920s in the US, what was that driven by? It was driven by the electrification of factories. All of a sudden, this electricity is now being put into factories and it's really driving the productivity of US firms, but it's also driving the stock prices of these firms.

The next general purpose technology, computerization. So, 1960s. We don't get a bubble in the 1960s, but with the internet and with information communication technologies in the 1990s, we get this huge bubble in terms of, it happens in the US, it happens in Asia, it's in Germany, it's in the UK, tax stocks going through the roof and then collapsing. A lot of people, of course, lose a lot of money through this. We get an amazing sort of ICT setup across many countries that experience these bubbles. So, then the question for us today is, well, is AI going to go the same way?

And you think of the time lag between the invention of the technology and then the bubble. That's getting shorter and shorter with each of those new general purpose technologies. So, with AI, is it going to happen quite quickly? And the thing about a general purpose technology is you don't know it's a general purpose technology until after the event. People at the time didn't realize that the steam engine was going to transform the world or electricity or computerization and the internet. So, we're sitting today trying to guess, well, is this the next big thing? It might be, it might not be.

Dr Laurence Mussio:

Precisely. And I think that caveat to say is it a GPT or not is very important because we're not quite there yet. Because it's already been declared as a GPT by even some very senior economists. They're saying, "Okay. This really does look like that." But history will maybe teach us to be a little bit more circumspect about declaring the next coming. The second coming. I suppose I've got one last question and that is, regulation or government policy. Where does that fit in? Because every single example that you've used has a public policy component or a regulatory component that might've worsened things or stabilized things. So, what is the role of government in this?

John Turner:

So, let's go back to the bubble triangle again. Of course, it's taken from the fire triangle in chemistry. Fires can be super destructive. And we find historically the bubbles are super destructive when banks are lending to finance the new technology or to finance whatever the bubble stocks are. So, regulation plays a super important role in making sure that we don't pour fuel on the fire, that the banks, that other financial institutions are not extending credit in imprudent ways. So, that's a super important thing.

At the same time, governments sometimes can get worried about, oh, there's a bubble. And the central bank, especially, is saying, "Okay. What should we do here?" Should we lean? In other words, push up interest rates and pop the bubble or should we just clean? In other words, after the bubbles burst, they set about cleaning up things and acting as a lender of last resort, providing some sort of support and stimulus. So, that lean versus clean is always a tension. With technology, I would always suggest clean, because if you lean into something, you could actually damage the creation of the technology and the innovation that's going to happen.

Dr Laurence Mussio:

Yeah. I'm completely aligned on that. I think one of the great challenges is that public policymakers need to understand that long run analysis. And I think sometimes that is so often missing. A great banker once told me that, the higher you go, the deeper context you need. And that is perhaps where we'll leave it today. John, thank you very much for sharing your insights today. I think our conversation really does highlight how understanding cycles and patterns in history can provide at least some clarity in the contemporary volatility we face in the markets.

For our listeners, I highly recommend John's book, Boom and Bust: A Global History of Financial Bubbles. It really is an award-winning, but also very interesting exploration of financial cycles that offer some very serious lessons for anyone interested in the markets. So, thank you all for joining us on Markets Plus. Remember, history dissolves mystery, even in markets. So, stay informed, stay engaged, and let's continue this important conversation. And so until next time, I'm Lawrence Mussio.

John Turner:

Thank you very much, Lawrence.

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