We've built a robust platform that will allow the HN community (and others) to make investments together exactly as you're desribing. I spoke to Sam Altman about this a few weeks ago at lunch. We're less than a month from launching so if you'd like to talk to me directly about this please feel free to email me with my username <at> gmail and we can talk further.
I don't think it can be a bubble when up until very recently it was illegal for 'crowds' to invest in private equity deals at all. How can there be over investment from small investors when there is currently zero investment from small investors?
The act removes restrictions on advertising of securities. It's specifically designed to get amateur investors to put money into small startup companies.
Hence, there will be large amounts of advertising aimed at encouraging the mass population to put money into risky investments that the mass population (seeing Instagram/Facebook/etc) think will make them rich beyond their wildest dreams.
Many bubbles are caused by a change in legislation that either incentivizes bubble participation or removes barriers to bubble participation.
We saw this with the policies the Bush Administration adopted to further encourage an ownership society via home ownership as well as ongoing incentives to own a house. We also saw that the changes to Glass–Steagall contributed to the economic meltdown.
I'm not arguing that we are or aren't in a bubble, but instead the legislative changes are common leading up to a bubble. Some would argue that the house bubble has been building via legislative change since the 1950s.
When he says "Bush Administration" and you say "Clinton's...Community Reinvestment Act" I think you mean to say legistlation like Roosevelt's New Deal http://en.wikipedia.org/wiki/New_Deal
I agree with your premise, and I'd add to it the governmental efforts that interfere with correcting the bubble, such as the Obama administration's work to prop up home prices.
However, it's not true that Glass-Steagall contributed to the economic crisis. If anything, it served to mitigate the problem. I think the argument here [1] is pretty slam-dunk:
<quote>
The 1933 Glass-Steagal Act [] prohibited commercial banks from owning investment banks ...
Just look at which organization’s have failed:
* Bear Stearns was an investment bank before it was sold to JP Morgan Chase (which includes a commercial bank).
* Fannie Mae were Freddie Mac were government sponsored entities before the government bought them.
* Lehman Brothers was an investment bank before it want bankrupt.
* Merrill Lynch was an investment bank befor it was sold to Bank of America (which is a commercial bank).
* AIG is an insurance company with no commercial banking division.
Remember, Glass-Steagal was passed to protect commercial banks from failure by forbidding them from investment bank practices like trading in securities and underwriting stocks and bonds. As you can see above non of the failed institutions are commercial banks that got in trouble through risky investment banking. Instead, it is the commercial banks that are providing some stability to the system by purchasing troubled investment banks.
I've mentioned it before, but there's a book called "Extraordinary Popular Delusions and the Madness of Crowds" that begs to differ on the point of "wisdom" being in the crowds. In fact, the title itself has the opposite opinion of crowds: Madness, not wisdom.
Dot-com bubble, real-estate flipping, tulip mania...