MANIAS, BUBBLES, AND
PANICS IN WORLD HISTORY
THE PSYCHOLOGY OF THE MARKETS
BUBBLE QUOTES
“There is nothing as disturbing to one’s well-being
and judgment as to see a friend get rich.”
Charles P. Kindleberger
“The four most expensive words in the English
language are, this time it’s different.”
Attributed to Sir John Templeton
ECONOMIC ANALYSIS ASSUMES PEOPLE ARE
RATIONAL AND RESPOND TO INCENTIVES
LOGICALLY
•
•
•
•
•
•
•
•
•
•
•
•
•
TULIP MANIA
SOUTH SEA BUBBLE
RHODIUM BUBBLE
RAILWAY MANIA
ROMANIAN PROPERTY BUBBLE
MISSISSIPPI BUBBLE
FLORIDA LAND BOOM
POSEIDON BUBBLE
DOT-COM BUBBLE
URANIUM BUBBLE
JAPANESE ASSET BUBBLE
ROARING TWENTIES
GLOBAL HOUSING BUBBLE
A BUBBLE IS A PERIOD OF SPECULATIVE MANIA
SURROUNDING A PHYSICAL OR FINANCIAL ASSET
THE WORK OF HYMAN MINSKY
A TYPICAL BUBBLE EVENT ARRIVES IN THESE PHASES
1. DISPLACEMENT
2. BOOM
3. EUPHORIA
4. PROFIT-TAKING
5. PANIC
6. BAILOUT
DISPLACEMENT
AN OUTSIDE SHOCK TO
THE ECONOMY:
1.
2.
3.
4.
5.
6.
WAR
NEW INVENTION
POLITICAL EVENT
FINANCIAL SUCCESS
CHANGE IN POLICY
ANYTHING THAT ALTERS
THE ECONOMIC OUTLOOK
BOOM
THE OPTIMISM FROM THE
CHANGE LEADS TO A
RAPID RISE IN PRICES OF
A PHYSICAL OR
FINANCIAL ASSET AS
INVESTORS AND
SPECULATORS ATTEMPT
TO EARN PROFITS
EUPHORIA
• LENDERS OFFER MORE
CREDIT AT LOWER RATES
• PEOPLE TAKE INVESTMENT
RISKS
• DEMAND INCREASES,
DRIVING UP PRICES AND
PROFITS WHICH DRIVES UP
DEMAND-PRICES-PROFITS
• NEW FINANCIAL
INSTRUMENTS ARE CREATED
• PEOPLE SEE OTHERS MAKING
MONEY AND ARE DRAWN IN
• THE BUBBLE IS INFLATED
PROFIT TAKING
• A FEW INSIDERS
BEGIN TO TAKE THEIR
PROFITS AND PRICES
BEGIN TO LEVEL OFF
• LARGE INVESTORS
BEGIN TO REALIZE
THEY MAY BE OVEREXTENDED AND ARE
TAKING UNDUE RISK
PANIC
• A LARGE INSTITUTION
FAILS, A SWINDLE IS
DISCOVERED OR AN
INCREASE IN SUPPLY
RETURNS PEOPLE TO
THEIR SENSES
• PEOPLE START SELLING
IN AN ORDERLY
FASHION BUT SOON
CHAOS REIGNS
• PEOPLE SCRAMBLE TO
SELL AND PRICES FALL
RAPIDLY
BAILOUT
• A CENTRAL BANK MAY
BEGIN TO EXPAND THE
MONEY SUPPLY TO SAVE THE
FINANCIAL SYSTEM
• THE ENTIRE ECONOMY PAYS
FOR THOSE DIRECTLY
INVOLVED IN THE BUBBLE
CYCLE
• THE ANTICIPATION OF A
BAILOUT MAY LEAD TO
PEOPLE TAKING BIGGER
RISKS
• THIS DISREGARD FOR
CONSEQUENCES IS KNOWN
AS A MORAL HAZARD
JOHN KENNETH GALBRAITH SAID:
“Investors have a short
financial memory (or
ignorance of history) that
makes them oblivious to
previous financial
disasters.”
“ Investors have a tendency
to attribute greater
intelligence to individuals,
the more income
or assets they control.”
WHAT WAS THE EVENT THAT CREATED
THE CLIMATE FOR SPECULATION IN THE
HOUSING MARKET?
• PURSUIT OF SAFER
INVESTMENTS AFTER
THE DOT-COM
BUBBLE BURST
• THE ILLUSION THAT
HOUSING PRICES
ALWAYS RISE
• THE BROAD
AVAILABILITY OF
CHEAP CREDIT
WHY DID THE COUNTRY FALL SO QUICKLY
FOR ANOTHER SPECULATIVE
FASCINATION?
• THE REDUCTION OF INTEREST
RATES
• THE ENCOURAGEMENT OF
HOME OWNERSHIP BY THE
WHITE HOUSE
• THE FINANCIAL INNOVATIONS
THAT EXPANDED ACCESS TO
CREDIT
• THE APPARENT WILLINGNESS
OF WALL STREET TO BET
HEAVILY ON HOUSING
• THE FACT THAT SOME OF OUR
NEIGHBORS WERE GETTING
RICH AND WE WERE NOT
WHY DO INVESTORS IGNORE THE WARNINGS
FROM ALAN GREENSPAN AND OTHER
ECONOMISTS ABOUT “IRRATIONAL
EXUBERANCE”?
• THE GENERAL BELIEF THAT
“THIS TIME IS DIFFERENT”
• YOU DON’T WANT THE
DOOR OF OPPORTUNITY
SLAMMED IN YOUR FACE
• THE CONTRADICTION OF
RISING VALUES DESPITE
THE ALARMS
• TYPICALLY THE
DOOMSAYERS ARE FAR
OUTNUMBERED BY THE
OPTIMISTS
WHAT CAUSED THE REALIZATION THAT
THIS TIME WAS NO DIFFERENT THAN ANY
OTHER?
• RISING INTEREST RATES
• THE INCREASING
SUPPLY OF HOUSES
• THE GROWING NUMBER
OF MORTGAGE
DEFAULTS
• THE FAILURE OF HIGH
PROFILE FINANCIAL
INSTITUTIONS, SUCH AS
LEHMAN BROTHERS AND
BEAR STEARNS
WHY IS IT LIKELY THAT ANOTHER
SPECULATION BOOM AWAITS US?
• HUMAN NATURE SEEMS
TO LEAD US DOWN THE
PATH TO EUPHORIA
• THE NATURAL PURSUIT
OF SELF-INTEREST
• OUR EAGERNESS TO
EARN PROFITS WE SEE
OTHERS EARNING
• DESIGNING AND
ENFORCING EFFECTIVE
REGULATION IS
DIFFICULT