Picture of a post-bubble economy

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President Obama spoke this week about creating a post-bubble economy. I was thrilled to hear him use the phrase because it's a concept I posted about last July. The idea behind a post-bubble economy is that we would achieve growth without excessive price bubbles -- which have created the temporary illusion of prosperity only to be followed by costly economic collapses.

As I posted, the dot-com bubble and securitization bubbles both created an illusion of prosperity. But the dot-com bubble was financed largely by stock -- in initial public offerings of companies -- many of which were unprofitable. The cost of the dot-com collapse was roughly $6 trillion in lost stock market value from the peak. By contrast, the securitization bubble resulted from using 30:1 leverage to buy securities backed by mortgages and other assets; its collapse has cost $50 trillion in lost stock market capitalization and has brought the global financial system to its knees.

President Obama did not offer too much in the way of specific for what a post-bubble economy would look like. In my post last July, I talked about limiting leverage and creating incentives for bankers that would give them a financial interest, not just in closing deals, but in their long-term profitability. But it seems to me now that we need to create positive economic incentives for investing in new technologies that will spur profitable new businesses -- and less of an incentive to put bankers in clover.

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