The Next Bubble: Why Manias Happen So Damn Often

There is a length and interesting article in the February issue of Harper’s Magazine on the next bubble. Definitely worth reading, and here is the opening:

Bubbles were once very rare—one every hundred years or so was enough to motivate politicians, bearing the post-bubble ire of their newly destitute citizenry, to enact legislation that would prevent subsequent occurrences. After the dust settled from the 1720 crash of the South Sea Bubble, for instance, British Parliament passed the Bubble Act to forbid “raising or pretending to raise a transferable stock.” For a century this law did much to prevent the formation of new speculative swellings.

Nowadays we barely pause between such bouts of insanity. The dot-com crash of the early 2000s should have been followed by decades of soul-searching; instead, even before the old bubble had fully deflated, a new mania began to take hold on the foundation of our long-standing American faith that the wide expansion of home ownership can produce social harmony and national economic well-being.

So, are there more bubbles, are are we just more ardent bubble-spotters — or were we worse bubble-spotters previously? You decide.

Related posts:

  1. Hug a Stock Market Bubble Today
  2. Google Trends: Vancouver and the Real Estate Bubble
  3. The Tech Non-Bubble, Tigers, and Scraped Plates
  4. Venture Business Blows Bubbles
  5. VC is a Bubble Business

Comments

  1. duncan says:

    An equally likely explanation is that we have become more aware of the entire ‘bubble’ phenomenon. Like sticking “-gate” at the end of random political scandals, calling something a bubble is a convenient shorthand that in a single word evokes past run-ups, over-inflated valuations, abrupt valuation implosions and protracted periods of recovery.
    If we take the South Sea Bubble as an exemplar, are we sure that ALL of 1990s Japan, 2000 Telecom, 2006 US real estate, 2007 Commodity metals, 2007 Solar stocks, etc will be described as “bubbles” even 20 years from now?
    Also, do we actually know if AT THE TIME the press/pamphleteers of the 1730s and 1740s described countless short term valuation volatilities as “the powdered wig bubble”, the “coffeehouse bubble”, etcetera?
    I don’t know that they did or didn’t — but from a historical veracity perspective, even if they did so and were inaccurate, there will be very little evidence that has survived that describes their over-reporting of bubbles.

  2. I agree with Duncan – the term ‘bubble’ is used far too often and probably for media purposes and convenience if nothing else. We definitely had a stock market bubble in 1999 and we definitely had a real estate bubble last year. But how often do these things happen? Not very often at all…we’ve had crashes on Wall Street before but nothing like what we saw in 2001. We had a 3 year bear market! We haven’t had a 3 year bear market since the depression – 80 years earlier!
    So while we might see some irrational pricing take place at a more frequent pace that has more to do with human nature and the speed at which information travels today. I’d recommend adding the “Wisdom of Crowds” to your book list on the left. Not only does it help illuminate the current situation we’re seeing on the web (crowdsourcing on sites like Digg.com, Yahoo! Answers, etc.) but it also helps to explain why bubbles and panics happen.
    Enjoy!
    -Wayne

  3. Joe says:

    Another thing to consider is that the recent gyrations are all connected. I believe the root is Greenspan’s penchant for bailouts which led removin risk from the market by the big financial players (including Fannie Mae and Freddie Mac.) This was all exacerbated by absurdly low interest rates. (This isn’t just hindsight, I was highly critical of Greenspan’s actions in the 90s.)
    PS. The proposal by some politicians to bail out ARM holders, freeze rates and/or halt foreclosures is a dangerous continuation of this policy.