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8:30 AM EST Wednesday, January 16, 2008: A couple bought a $300,000 condo in 2006 for $1,500. That means someone loaned them 99.5% of the purchase price. That someone sold that "loan" to someone else, who probably combined it with other "choice" loans and sold them all to someone else. Once the loan resets to a higher interest rate, the borrower will probably not be able to afford the new higher payments. That will set in motion a long, protracted, painful process of renegotiation, default, foreclosure, re-sale, or ...

I am at Ground Zero. "For sale" signs decorate vast swaths of Southern California. This is Subprime Country.

My friend is looking for a $1.5 million house. The area he has chosen is littered with houses in default. Prices have dropped 15% to 20%. But not much is moving. He believes prices will drop another 15% to 20%. "People are not scared enough," he says. Five years ago, the same $1.5 million house sold for $750,000. "There's room for it to drop more," he says.

My friend is doing a rigorous search, mapping his community with prices asked and prices received (see Zillow.com). He reports several of the houses he has visited has been stripped clean of everything -- from appliances to light fixtures. He visited one where the toilets had been taken. He hasn't seen one trashed, but expects to.

Despite the huge losses reported by Citibank, Merrill Lynch, hedge funds and others, this is a slowly evolving crisis. There are a zillion bouncing balls. Dealing with millions of defaulted borrowers, caretaking thousands of empty homes, and assigning values to balance sheets are immensely complex tasks.

Yesterday I extolled Alan Greenspan's new book, The Age of Turbulence, which I was listening to. Reader John Clark emailed me this delicious quote:

"Innovation has brought about a multitude of new products, such as sub-prime loans and niche credit programs for immigrants. . . . With these advances in technology, lenders have taken advantage of credit-scoring models and other techniques for efficiently extending credit to a broader spectrum of consumers. . . Where once more-marginal applicants would simply have been denied credit, lenders are now able to quite efficiently judge the risk posed by individual applicants and to price that risk appropriately. These improvements have led to rapid growth in sub-prime mortgage lending . . . fostering constructive innovation that is both responsive to market demand and beneficial to consumers."

Yes, that was Mr. Greenspan speaking.

I'm in San Diego checking some real estate "investments," most of which are doing shit. That's a technical term for being in foreclosure.... The theory of diversification is that some of your investments do good. Those that do good more than compensate for those that do poorly. Sometimes the theory works.

Once upon a time bubbles occurred once every hundred years. This subprime bubble is the second one in a decade. Remember the dotcoms and the Tech Wreck?

My father was an investment banker. He loaned money to entrepreneurs. He paid his depositors 24% interest and still made a handsome living. We lived in a nice house and had tennis court in the backyard. He could do this because money was in short supply; opportunities to invest the money were plentiful.

Now it's reversed. Money is plentiful. Opportunities to invest it are scarce.

There are 8,000 hedge funds chasing the same opportunities. This upvalues assets -- like subprime loans, real estate (commercial and residential), commodities (like oil and gold). The pressure to profitably invest creates desperation. And desperation creates bubbles.

It's thus appropriate that the cover story of the latest issue of Harper's Magazine is "The Next Bubble. Priming the Markets for Tomorrow's Big Crash."

The article begins:

A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. Bubbles were once very rare—one every hundred years or so. ...

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being. Spurred by the actions of the Federal Reserve, financed by exotic credit derivatives and debt securitiztion, an already massive real estate sales-and-marketing program expanded to include the desperate issuance of mortgages to the poor and feckless, compounding their troubles and ours.

I want you to read the entire article. There are neat charts and great logic. But I know everyone wants to know the conclusion. Drum roll. The Next Bubble is.

There are a number of plausible candidates for the next bubble, but only a few meet all the criteria. Health care must expand to meet the needs of the aging baby boomers, but there is as yet no enabling government legislation to make way for a health-care bubble; the same holds true of the pharmaceutical industry, which could hyperinflate only if the Food and Drug Administration was gutted of its power. A second technology boom—under the rubric “Web 2.0”—is based on improvements to existing technology rather than any new discovery. The capital-intensive biotechnology industry will not inflate, as it requires too much specialized intelligence.

There is one industry that fits the bill: alternative energy, the development of more energy-efficient products, along with viable alternatives to oil, including wind, solar, and geothermal power, along with the use of nuclear energy to produce sustainable oil substitutes, such as liquefied hydrogen from water. Indeed, the next bubble is already being branded. Wired magazine, returning to its roots in boosterism, put ethanol on the cover of its October 2007 issue, advising its readers to forget oil; NBC had a “Green Week” in November 2007, with themed shows beating away at an ecological message and Al Gore making a guest appearance on the sitcom 30 Rock. Improbably, Gore threatens to become the poster boy for the new new new economy: he has joined the legendary venture-capital firm Kleiner Perkins Caufield & Byers, which assisted at the births of Amazon.com and Google, to oversee the “climate change solutions group,” thus providing a massive dose of Nobel Prize–winning credibility that will be most useful when its first alternative-energy investments are taken public before a credulous mob. Other ventures—Lazard Capital Markets, Generation Investment Management, Nth Power, EnerTech Capital, and Battery Ventures—are funding an array of startups working on improvements to solar cells, to biofuels production, to batteries, to “energy management” software, and so on. ...

The next bubble must be large enough to recover the losses from the housing bubble collapse. How bad will it be? Some rough calculations. the gross market value of all enterprises needed to develop hydroelectric power, geothermal energy, nuclear energy, wind farms, solar power, and hydrogen-powered fuel-cell technology—and the infrastructure to support it—is somewhere between $2 trillion and $4 trillion; assuming the bubble can get started, the hyperinflated fictitious value could add another $12 trillion. In a hyperinflation, infrastructure upgrades will accelerate, with plenty of opportunity for big government contractors fleeing the declining market in Iraq. Thus, we can expect to see the creation of another $8 trillion in fictitious value, which gives us an estimate of $20 trillion in speculative wealth, money that inevitably will be employed to increase share prices rather than to deliver “energy security.” When the bubble finally bursts, we will be left to mop up after yet another devastated industry. FIRE, meanwhile, will already be engineering its next opportunity. Given the current state of our economy, the only thing worse than a new bubble would be its absence.

The Harper's article was written by Eric Janszen, the founder and president of iTulip, Inc. He formerly served as managing director of the venture firm Osborn Capital, CEO of AutoCell, Inc. and Bluesocket, Inc., and entrepreneur-in-residence for Trident Capital.

My favorite recent political cartoon:

The white man's brilliance.
" Chief, 'Two Eagles, you have observed the white man for 90 years. You've seen his wars and his technological advances. You've seen his progress, and the damage he's done. Considering all these events, in your opinion, where did the white man go wrong?

The Chief stared at the government official and then calmly replied. 'When white man find land, Indians running it. No taxes, No debt, Plenty buffalo, plenty beaver, Clean Water; women did all the work, Medicine man free. Indian man spend all day hunting and fishing; all night having sex."

The chief leaned back and smiled. "Only white man dumb enough to think he can improve system like that."

The Australian Tennis Open is on. Roger Federer , Marcos Baghdatis, David Nalbandian, James Blake, Venus and Serena Williams and all the usual suspects are playing. Hence my focus is more likely to be on tennis than on investing.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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