Some Past Financial Bubbles

Some Past Financial Bubbles

bubble_economy

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.

800px-Tulip_price_index1_svg

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.

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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).

Railroad Bubble

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?

20 Responses to Some Past Financial Bubbles

  1. I agree on the colleges. That would not surprise me to see that one pop. Getting a college education these days does not guarantee a good paying job anymore. Those days seem to be vanishing like my 401k.

    • I have no proof but I am almost positive that the market pops everytime I get paid so I keep buying at short term pops LOL

  2. You missed the Ostrich eggs and Ostriches in the 1980s. I don’t know if I would call it a bubble but it was highly speculative. The meat of an ostrich is low in fat and was supposedly going to replace hamburgers. At least that was part of the hype. I never ate it. The sad part is that when it crashed many Ostriches were killed because the price to feed them was more then they were worth. They paid for are greed.Others that come to mind,from the 1980s,are metals in raw form used in the defense industry,worm farms,race horses, and fine art.I agree that college degrees are getting watered down,but since most colleges are public funded and very politically connected , I don’t see them going anywhere. I would even venture to say that more private colleges will be created for specific educational purposes such as teaching nurses.

    • I couldn’t find any links to that – but I would LOVE to read about an Ostrich boom. I have tried an Ostrich Burger before, it was good.

  3. I have to agree with you that a college bubble seems to be a good bet. With all these online/alternative colleges popping up, I wonder what the value of a college degree relative to its cost will be in a few years? Especially since you can basically learn anything you need to know online if you have the desire.

  4. Perhaps government is the next bubble to burst. We’ve had a pretty big run up in government over the last 100 years; is this based on “intrinsic value” (as evaluated by the participants), or is it reaching bubble status? What do you think?

    • Wow that is interesting concept. I like it!
      – Everyone believes that bigger gov’t is better
      – Bigger gov’t is rushed into
      – Gov’t is too big to sustain itself
      – Implosion.

      But does implosion lead to Communism like Marx believed?

  5. I see this: http://athousandnations.com/ as a realistic evolution of a bursting bubble in government. I see this: http://en.wikipedia.org/wiki/Voluntaryism as a utopian endgame of the previous. We might not actually get there, but I believe the evolution past a government bubble plus trends in technology could approximate that goal.

    I don’t know about communism; I do think that it’s people’s free choice to voluntarily join communes, if they wish :) I do believe that food, shelter, clothing, and medicine will one day be cheap enough and advanced enough that nobody will lack for them. That’s been the trend since the beginning of history, save for a few dark periods here and there.

  6. I sure hope you are right about the college bubble! I don’t want to spend half a million dollars to send my kids to college!!!

    I think sending your kids to college is viewed as the golden ticket so success. So much so that parents and students accumulate massive debt to do so. In some ways I wish they were right, but I don’t think they are…

    I really thought the recession would bring down the college tuition prices a bit, but I don’t think it made any difference. :(

    • MFO and Invest it,

      Just stick with it! I love writing my random thoughts…sometimes I get yelled at (see 2 posts ago about teaching lol) and sometimes I have meaningful conversations

  7. Invest it wisely, I wish the government were the next bubble to burst. I believe the government is too big already, it is all rushed into, and it’s just about too big to sustain itself (well said Evan).

    Well, let’s just hope for all of our sakes that the next bubble is not PF blogging!:)

  8. If college tuition declines in price, that doesn’t mean it previously existed as a bubble. A lot of value evaporated from the newspaper and recorded music industries in recent years: does that mean newspapers and CDs were “bubbles”?

    If you define a bubble as rampant inflation of an item’s price, far out of proportion to its utility, it’s hard to think of anything that still counts. Does anyone still spend money recklessly on something of questionable value that they didn’t spend such money on before?

    • 2 thoughts:
      1) I think the bubble definition has to do with the speed that price inflates. Newspaper prices (to the public) grew with inflation over the course of 150 – 200 years (maybe it was faster or slower than inflation during certain periods). While the price of a single tulip grew at 100x inflation within a year.

      2) Does anyone still spend money recklessly on something of questionable value that they didn’t spend such money on before?
      100000% Yes. 100000000% Yes. Gold lol…joking I don’t know enough about the gold market.

      • It took me a day, but I did think of one thing that might count as a bubble: tech stocks with tons of users but no obvious way to generate decent revenue.

        Meaning stuff like Digg and Facebook. I think it’s already starting to pop. A year ago, people were seriously evaluating Digg’s worth at $250 million. For the ability to read my home bookmarks on my work computer? Yes, because that’s a feature I can’t live without. Same deal with Facebook. It might be a worthwhile diversion for millions of people, but again, in 2009 it had been estimated to be worth as much as $15 billion. Forgive me if I think that Cigna and Kroger, who provide something tangible, are better investments than an economy built on FarmVille credits. Investors are as excited about Facebook’s eventual public debut as they were when News Corp. bought MySpace, which News Corp. can’t give away today.

        • Hmmm Tech II bubble. I would HOPE that investors remember all those dot coms with no income. We shall see if you are right as soon as facebook opens its books

  9. I always found the tulip bubble fascinating. People today might think it was crazy to be so obsessed with tulips, but are more recent crazes over beanie babies and Tickle Me Elmo dolls any better?

    • Any “it” Christmas toy! HA!

      Also, I don’t know much about it, but I have read int he past that there was a baseball card bust in the late 90s (that is when I realized I didn’t give a sh!t about baseball or their cards).

  10. That’s pretty crazy – tulips? My history would have started me at the trading company, how did you find out about the flower mania?

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