Famous First Bubbles

The jargon of economics and finance contains numerous colorful terms for market-asset prices at odds with any reasonable economic explanation. Examples include "bubble," "tulipmania," "chain letter," "Ponzi scheme," "panic," "crash," "herding," and "irrational exuberance." Although such a term suggests that an event is inexplicably crowd-driven, what it really means, claims Peter Garber, is that we have grasped a near-empty explanation rather than expend the effort to understand the event. In this book Garber offers market-fundamental explanations for the three most famous bubbles: the Dutch Tulipmania (1634-1637), the Mississippi Bubble (1719-1720), and the closely connected South Sea Bubble (1720). He focuses most closely on the Tulipmania because it is the event that most modern observers view as clearly crazy. Comparing the pattern of price declines for initially rare eighteenth-century bulbs to that of seventeenth-century bulbs, he concludes that the extremely high prices for rare bulbs and their rapid decline reflects normal pricing behavior. In the cases of the Mississippi and South Sea Bubbles, he describes the asset markets and financial manipulations involved in these episodes and casts them as market fundamentals.

The Housing Bubble was hardly the first in human history. What's eluded historians is the same issue that eludes commentators today: the underlying cause of bubbles. This book is the first (and only) book to solve the mystery of the most famous bubble in world history: Tulipmania in 17th century Netherlands. It Is a legendary event but explanations have been lacking. People blame irrational exuberance, free markets, and an unleashed aristocracy. Douglas French takes a different route: he follows the money to prove that the bubble resulted from a government intervention that dramatically exploded the money supply and fueled the tulip-price bubble – not altogether different from modern bubbles. This book was French’s Master’s thesis written under the direction of Murray Rothbard and examining three of the most famous speculative bubble episodes in history through the lens of Austrian Business Cycle Theory. Although each of these episodes is well documented, this book examines the monetary interventions that engendered each of these events showing that not only the Mississippi Bubble and the South Sea Bubble were caused by government meddling, but Tulipmania was as well. Tulipmania was unique in that it was the sound money policy of the Dutch combined with free coinage laws that led to an acute increase in the supply of money and fostered an atmosphere that was ripe for speculation and malinvestment, manifesting itself in the intense trading of tulip bulbs. The author examines not only the Mississippi Bubble but also the life and monetary theories of its architect, John Law. Professor Joe Salerno calls Law the world’s first macroeconomist who implemented a Keynesian monetary system in France nearly two hundred years before Keynes was born. At the same time across the English Channel, a nearly bankrupt British government looked on with envy at Law’s system, believing that he was working a financial miracle. It was anything but this and investors in both countries were devastated. Although these episodes occurred centuries ago, readers will find the events eerily similar to today’s bubbles and busts: low interest rates, easy credit terms, widespread public participation, bankrupt governments, price inflation, frantic attempts by government to keep the booms going, and government bailouts of companies after the crash. When will we learn? We first have to get cause and effect in history straight. This book is an excellent contribution to that effort.

Why do stock and housing markets sometimes experience amazing booms followed by massive busts and why is this happening more and more frequently? Boom and Bust reveals why bubbles happen, and why some bubbles have catastrophic economic, social and political consequences, whilst others have actually benefited society.

The papers in this book are grouped into three sections: the first on price bubbles is primarily financial; the second on speculative attacks (on exchange rate regimes) is international in scope; and the third, on policy switching, is concerned with monetary policy.

The jargon of economics and finance contains numerous colorful terms for market-asset prices at odds with any reasonable economic explanation. Examples include "bubble," "tulipmania," "chain letter," "Ponzi scheme," "panic," "crash," "herding," and "irrational exuberance." Although such a term suggests that an event is inexplicably crowd-driven, what it really means, claims Peter Garber, is that we have grasped a near-empty explanation rather than expend the effort to understand the event. In this book Garber offers market-fundamental explanations for the three most famous bubbles: the Dutch Tulipmania (1634-1637), the Mississippi Bubble (1719-1720), and the closely connected South Sea Bubble (1720). He focuses most closely on the Tulipmania because it is the event that most modern observers view as clearly crazy. Comparing the pattern of price declines for initially rare eighteenth-century bulbs to that of seventeenth-century bulbs, he concludes that the extremely high prices for rare bulbs and their rapid decline reflects normal pricing behavior. In the cases of the Mississippi and South Sea Bubbles, he describes the asset markets and financial manipulations involved in these episodes and casts them as market fundamentals.

This classic account of the first great British financial scandal is a brilliant recreation of eighteenth-century social and economic life and will interest anyone fascinated by scandal, corruption, and human vanity.

“An interesting take on some factors that facilitate the development and bursting of bubbles in technology industries. . . . Highly recommended.” —Choice Financial market bubbles are recurring, often painful, reminders of the costs and benefits of capitalism. While many books have studied financial manias and crises, most fail to compare times of turmoil with times of stability. In Bubbles and Crashes, Brent Goldfarb and David A. Kirsch give us new insights into the causes of speculative booms and busts. They identify a class of assets—major technological innovations—that can, but does not necessarily, produce bubbles. This methodological twist is essential: Only by comparing similar events that sometimes lead to booms and busts can we ascertain the root causes of bubbles. Using a sample of eighty-eight technologies spanning 150 years, Goldfarb and Kirsch find that four factors play a key role in these episodes: the degree of uncertainty surrounding a particular innovation; the attentive presence of novice investors; the opportunity to directly invest in companies that specialize in the technology; and whether or not a technology is a good protagonist in a narrative. Goldfarb and Kirsch consider the implications of their analysis for technology bubbles that may be in the works today, offer tools for investors to identify whether a bubble is happening, and propose policy measures that may mitigate the risks associated with future speculative episodes.

From Nobel Prize–winning economist and New York Times bestselling author Robert Shiller, a groundbreaking account of how stories help drive economic events—and why financial panics can spread like epidemic viruses Stories people tell—about financial confidence or panic, housing booms, or Bitcoin—can go viral and powerfully affect economies, but such narratives have traditionally been ignored in economics and finance because they seem anecdotal and unscientific. In this groundbreaking book, Robert Shiller explains why we ignore these stories at our peril—and how we can begin to take them seriously. Using a rich array of examples and data, Shiller argues that studying popular stories that influence individual and collective economic behavior—what he calls "narrative economics"—may vastly improve our ability to predict, prepare for, and lessen the damage of financial crises and other major economic events. The result is nothing less than a new way to think about the economy, economic change, and economics. In a new preface, Shiller reflects on some of the challenges facing narrative economics, discusses the connection between disease epidemics and economic epidemics, and suggests why epidemiology may hold lessons for fighting economic contagions.