5Inflating the Bubble
Opacity and subprime attention create the necessary conditions for a market bubble in online advertising. This chapter examines how this dysfunctional market might grow overheated and then suddenly implode.
Granted, the advertising industry may resolve its many structural issues before a market crisis comes to pass. Optimists point to recent attempts to address fraud and wean people from ad blocking. They argue that it is still early for emerging channels like video and that many problems of inattention will be ironed out over time. These hypothetical changes to the industry might slowly let the air out of a bubble, preventing a sudden, damaging crash. However, these efforts would need to be effective in a way that they haven’t been to date.
Just because a problem is known doesn’t mean that it will be solved in time. The history of financial crises shows numerous situations in which buyers, sellers, and the companies running the markets failed to take sufficient action to avert a market bubble. That history has lessons here.
Two complementary factors are important. On the demand side, there needs to be a flow of cash into a marketplace that inflates a bubble in spite of the marketplace’s structural weaknesses. On the supply side, various players need to benefit from this flow of money. It becomes in their financial interest to disregard warning signs, limit structural changes, and keep the market growing even as alarm bells ring. Perverse incentives of this kind were a central cause of the 2008 subprime mortgage crisis and are present in the modern online advertising ecosystem today.The Cash Bubble
Why aren’t advertisers more wary of all the structural issues that we’ve discussed? The murkiness of the programmatic advertising market and the challenges of subprime attention are well-known, but advertisers continue, quarter after quarter, to pump money into the digital ad economy.
One might argue that this continued investment means that these problems don’t pose a serious threat to the integrity of the overall market—that people are, in effect, signaling their confidence with their dollars. Parallels to past crises in financial markets offer an alternate hypothesis: advertising budgets are pouring into this market bubble because they have nowhere else to go. Let’s return to the subprime mortgage crisis for an illustrative example.
One prevailing thesis about the origins of the 2008 crisis is known among economists as the “savings glut” hypothesis. This theory observes that fiscal instability in the 1990s encouraged developing countries around the turn of the twenty-first century to aggressively shift their money into safe assets. This process triggered a wave of purchases of U.S. Treasuries—debts of the U.S. government—by countries like China. U.S. Treasuries are widely considered the safest investments available, given that they are backed by the credit of the United States.
The scale of this shift toward safe investments was massive. Between 1996 and 2003, developing countries as a group shifted about $293 billion in this way, changing from net importers of capital (that is, bringing money from other countries into their country) to massive net exporters of capital (sending money to other countries).1 Much of that money ended up in the United States. The U.S. Financial Crisis Inquiry Commission, which was responsible for investigating the origins of the 2008 crisis, would later note that “from 2000 to 2006, U.S. Treasury debt held by foreign official public entities rose from $0.6 trillion to $1.43 trillion; as a percentage of U.S. debt held by the public, these holdings increased from 18.2% to 28.8%.”2
The savings glut hypothesis suggests that this massive shift in the movement of money created the circumstances for a broader crisis. Demand for these safe assets was so ravenous that the price of U.S. Treasuries rose, driving down their overall return. This prompted foreign investors and financial institutions to seek out new alternatives—assets that were just as safe but with higher returns. Securitized mortgages, with their reputation for stable growth over the long term, seemed like an ideal solution.
Mortgage originators were incentivized to make riskier and riskier subprime loans as the demand for these assets continued to grow. As a percentage of all mortgages, subprime mortgages rose from 8 percent of the market in 2003 to 20 percent in 2005.3 Those mortgages would go bust en masse, eventually triggering the broader financial crisis.
The key lesson of the savings glut hypothesis is that large flows of money seeking safe harbors can produce the conditions for a bubble to form. After decades of financial instability, governments in the developing world sought safe places to put their money. As the price of the safest option—U.S. government debt—rose, mortgages appeared to many financial institutions to offer an ideal combination of affordability and reliability. Those structural flows drove the market up even as warning signs began to emerge that the mortgages being issued were nowhere near as stable as was originally thought.
The savings glut hypothesis is controversial. Some argue that it understates the failure of financial regulators to address the warning signs that presaged a broader crisis. The journalist Martin Wolf says the hypothesis “may have had the right analysis, but the Fed’s was the wrong response, made worse by the failure to regulate the financial system.”4 Like many complex social and economic phenomena, no single cause brought about the 2008 subprime crisis. However, as we think about online advertising markets and their fragility, the savings glut hypothesis provides a provocative argument for explaining why ad markets may continue to grow despite their known weakness.
We have been diving deep into the programmatic advertising marketplace for the last few chapters,
