Considering our recent banking, and real estate bubble and all this talk about whether the 2 year run in gold is actually a bubble has me thinking about what were some of the bubble in our history? What financial bubbles did our ancestors have to deal with?
What is an Economic Bubble? According to Wikipedia,
An economic bubble (sometimes referred to as a speculative bubble, a market bubble, a price bubble, a financial bubble, a speculative mania or a balloon) is “trade in high volumes at prices that are considerably at variance with intrinsic values”. (Another way to describe it is: trade in products or assets with inflated values.)
Examples of Historical Financial Bubbles
We all know the recent bubbles (banking, real estate, tech, savings and loan), but what about all those financial bubbles that occurred before 1900? Think these are a new phenomenon…think again.
The Tulip Bubble 1636 – 1637
As you can imagine any economic data from the 1600s is questionable, but during that time the price of tulips went crazy.
Like most bubbles, the Tulip Bubble, also referred to as Tulip Mania, was started because of an irrational exuberance for exotic tulips. Shocking right? Don’t judge! How many of out there bought companies with a P/E Ratio of 30 or 40…with no profits in site?
South Sea Company Bubble
Started in 1711, the South Sea Trading Company was granted a monopoly of trade in exchange for assuming England’s national Debt. The company was basically trading shares of its own stock for England’s debt, and then,
The company then set to talking up its stock with “the most extravagant rumours” of the value of its potential trade in the New World which was followed by a wave of “speculating frenzy”. The share price had risen from the time the scheme was proposed: from £128 in January 1720, to £175 in February, £330 in March and, following the scheme’s acceptance, to £550 at the end of May.
The price finally reached £1,000 in early August and the level of selling was such that the price started to fall, dropping back to one hundred pounds per share before the year was out, triggering bankruptcies amongst those who had bought on credit, and increasing selling, even short selling—selling borrowed shares in the hope of buying them back at a profit if the price falls.
Just like today, people lost their life savings and the government responded by creating the Bubble Act trying to prevent this from happening again (they obviously failed LOL).
Like today’s bubbles the Railroad bubble was build on the idea that a paricular sector was guaranteed to go up in value.
The Railway Mania was the speculative frenzy in Britain in the 1840s. It followed a common pattern: as the price of railway shares increased, more and more money was poured in by speculators, until the inevitable collapse. It reached its zenith in 1846, when no fewer than 272 Acts of Parliament were passed, setting up new railway companies, and the proposed routes totalled 9,500 miles (15,300 km) of new railway. Around a third of the railways authorised were never built – the company either collapsed due to poor financial planning, was bought out by a larger competitor before it could build its line, or turned out to be a fraudulent enterprise to channel investors’ money into another business.
What will be the Next Bubble?
I have been saying Colleges are the next bubble to burst, but that hasn’t come true yet. What do you think is the next bubble?