The untimely end of San Francisco’s Tech and Housing Bubbles

In our neck of the woods, Vinod Khosla is currently most notorious for trying to boot people off Martins Beach, across the coastal mountains from Silicon Valley. Californians love their beaches, even if the water is frigging cold in the summer. And so when the billionaire bought the property behind the beach and closed the only public access road to the beach, all heck broke lose.

In March 2013, the Surfrider Foundation filed suit, accusing him of stepping all over the California Coastal Act. The battle has been carried out in the media and at the State Capitol, where a bill was introduced that would require the State Lands Commission to buy the road or obtain access rights so that the public could get to the beach. Khosla then did what billionaires do with politicians: he opened his wallet and hired top-tier lobbyists.

For people with longer memories, Khosla was one of the cofounders of Sun Microsystems, along with three other guys, including Scott McNealy who famously told an incredulous public in 1999 that privacy was dead. “Get over it,” he admonished us at the peak of the bubble when Sun’s stock was one of the irrationally exuberant highflyers before it crashed and burned. In 2010, reduced to a penny stock, it was scooped up by Oracle. Khosla et al. had sold much or all of their stock before it collapsed, and flush with these billions had become VCs while their detritus was sinking people’s retirement funds.

Now he has a new shtick. And it says a lot about the craziness of home prices in San Francisco and Silicon Valley and the even greater craziness of the tech bubble.

“Recently, the billionaire venture capitalist Vinod Khosla went hunting for one-bedroom apartments in San Francisco,” the San Francisco Chronicle reported. “Khosla was helping a friend find a place. What he got was sticker shock.” And for whatever reason, he was talking to the Chronicle about it. “I said, ‘No way can a housekeeper or gardener afford that,’“ he said. “For someone making $20 or $25 an hour, I don’t think they can afford a house anywhere between San Francisco and San Jose.”

And so by shopping for a one-bedroom apartment, he had an epiphany: this glaring income and wealth disparity was caused by technology. “I fundamentally believe technology will keep increasing the gap,” he said and spelled out his economic theory. Rather than an economy of land, labor, and capital, the new economy was one of ideas.

“What’s happening is if you have a great idea and the technical skills to implement it you can create disproportionate wealth very quickly,” he said. “That’s good by itself except it increases disparity.”

As the technologies of machine learning, big data, and software – the very ones that he is propagating – improve, they replace all kinds of lower level jobs. This has been happening for years. Just ask the guy who drives the shuttle bus when you go kayaking down the Russian River. He used to run an offset print shop in San Francisco that was obviated by technology. Now Google is working on driverless shuttle buses….

Khosla is convinced that machine-learning systems will relegate many doctors to the same fate, which would be good for society because these things would have better judgment than doctors. But there’d be a hiccup: “What that does is it creates more wealth and jobs for a few and takes away jobs at the bottom end of the spectrum,” he said. Such as doctors.

“Technology concentrates wealth in the hands of the creators of technology and the people who fund them,” he said. “So we will have to do something more serious about this disparity,” for example a tax rate “somewhere north of 50 percent.” Maybe he was just trying to buy back the good graces of the beachgoers.

VCs go through years of purgatory when they can’t offload their investments, those few that survive, at wild and hysterically hyped valuations to corporate America or to the public, when successes are hard to come by because investors have their eyes wide open, when even munis put their returns to shame. But then, a “healthy market” reappears and briefly, the window for mega-exits opens, when billions no longer matter, when money is just a number. And so the world changes, for the lucky ones, as the tech and housing bubbles bloom.

It happened during the dotcom bubble, it happened during the bubble before the financial crisis, and it’s happening now. The lucky ones, the billionaire VCs like Khosla and entrepreneurs who got immensely rich, these greatest beneficiaries of the money transfer machine, they feel certain that their own ingenuity got them there. They feel ingenious and cocksure and suddenly have clear and cogent economic and social theories that they’re eager to foist upon the unsuspecting public. Laudable or ludicrous as these theories may be, when this phenomenon happens, the end of the bubble is nigh.

The housekeeper and gardener Khosla was talking about with the $25-per-hour income – they faced a median home price in San Francisco of $933,500 in May. While still up 7.3% year over year, it’s down from the February peak of $945,000, which had been up 35% year over year and 16% higher than the peak of the prior bubble that blew up in November 2007. That prices would drop from February to May is unheard of. This is when home prices soar. Even in the crash years from 2008 through 2011, home prices rose during those months! So this is special; an early indication that this magnificent boom is curdling. In the tech bubble too, many recent IPOs have been eviscerated.

The more the lucky ones who’ve benefitted the most from the bubble feel cocksure and proffer their solutions for the problems of the world – the Hyperloop, splitting California into six states, and many other zany ideas – the louder the hissing sound from the bubble becomes.

Wiping out in one fell swoop six years of carefully orchestrated propaganda, St. Louis Fed President James Bullard admitted that the Fed had dropped the ball during the prior bubble that blew up the financial system, and that it’s dropping the ball again. Read….Fed’s Bullard: ‘The Bubble Was Developing Under Our Noses’

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