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If asset bubbles are part of the human condition, then why have they been so rare? There was tulip mania in Holland in 1637. The South Sea Bubble of 1719-1721.

If asset bubbles are part of the human condition, then why have they been so rare? There was tulip mania in Holland in 1637. The South Sea Bubble of 1719-1721. The canal overbuilding bubble in England in the 1820s. In the USA, there was the Florida land boom in the 1920s, ending in 1926, and then from 1926 to 1929 there was the stock market bubble. There was the Japanese real estate bubble of the 1980s, and a similar, smaller bit of overbuilding in the USA. Then there was the dotcom bubble in the USA stock market during the 1990s, and then the real estate boom of the 00s. Those are the big ones. Why were there no bubbles before 1637? In a word: government. Under a feudal regime, people are not free to do what they want with their money, therefore there were no bubbles. People were not free to bid up the prices of assets - most assets are illiquid under feudal regimes. The fact that a heavy-handed monarch can suppress markets and therefore make bubbles impossible is a fairly strong argument toward government effectiveness in stopping bubbles. Likewise, the lack of asset bubbles in the USA from 1932 to about 1982 also suggests the effectiveness of government in suppressing bubbles. Of course, one might argue that we want bubbles, that such freedom of investment has positive consequences, or that heavy-handed government, while creating some benefits, also imposes large costs that outweigh whatever benefits are being offered. But that would be a separate issue.

stretchwithme 16y ago
A lot of the things you cite became bubbles BECAUSE of government involvement. In the US and Japan, government is subsidizing the cost of borrowing. It is not freedom that is the problem. It is the socialization of risk that is the problem. In the US, the government insures private pension plans, guarantees home loans, bails out automakers and financial "innovators". There's no incentive to be prudent.
- lkrubner 16y ago
  I don't think socialization of risk was a factor in the tulip mania that gripped Holland in the 1630s. You can argue that socialization of risk has been factor that has made bubbles much more common over the last 30 or 40 years. That would go to my what I said before - government can stop bubbles, if it wants to. Or it can start them. Without government intervention, bubbles remain rare, which undercuts the thesis of the above article.
  - stretchwithme 16y ago
    The causes of each bubble are different. Some theorize that monetary expansion and a conversion of futures contracts for tulips into options contracts played a significant role in the tulip mania. Government can stop bubbles, disease, cheating on one's spouse, failure to wash dishes and a thousand other sins by simply ending freedom. Big deal. Any kidnapper can do that.
    - lkrubner 16y ago
      Are you responding to the article above?
    - lkrubner 16y ago
      You are right to say that it is a big deal. Your point I think largely disproves the article referenced above. Clearly, government regulation can stop asset bubbles. It has before and I'm sure it will again. The government can stop anything by ending freedom.
      - stretchwithme 16y ago
        The problem with government involvement is that it bails out or assumes the costs of disastrous behavior as it regulates to reduce risk. Then over time the lobbyist weaken the regs and another disaster develops, even bigger this time, with the taxpayer holding the bag. Only this time everybody piles in because they know the government will clean it up. And the government, taking the path of least resistance, plays along, amplifying the problems, even passing more laws to subsidize the risky behaviors. They'll get you a tax write-off, help the first time buyers, lower the interest rates, get rid of the capital gains tax. You name it. But the last thing they will do in the midst of a bubble is take action to counter it. Then once the bubble collapses, everybody else pushes for regulation again to restart the whole cycle, most never questioning whether government should be involved in the first place. And government, in control of the debate, finds the exploiters of their policies and offers them up as the chief perpetrators. And live to trash the economy another day.
bd_at_rivenhill 16y ago
Actually, you've missed quite a few big ones, have you read Kindlebarger? http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146/ref=sr_1_1?ie=UTF8&qid=1286052391&sr=8-1 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest... I wouldn't say that bubbles are rare at all, and it wouldn't surprise me if there were lots of them before 1637 that just aren't well recorded. The limited scope of trade in those days would mean that such events weren't as disruptive as they are today.
- lkrubner 16y ago
  I thought about also listing the panics, and I started to, but then I realized they were off-topic. This article is about asset bubbles, not about panics. Therefore, the crash 1825, in England, the crash of 1873, in the USA, the crash of 1907 in the USA - all of those are off-topic.
  - j_baker 16y ago
    I suppose one could make the argument that before a panic, bank accounts are overvalued assets.
    - lkrubner 16y ago
      That's just it, you could define it however you want, but as soon as you do, the whole conversation falls apart. If you define all panics as asset bubbles, then pretty soon you need a new term to mean what "asset bubble" used to mean. I think a lot of these conversations fall apart over semantics. So I tried to use the phrase asset bubble in something like the sense that the article above seems to.
      - bd_at_rivenhill 16y ago
        I'm not sure what you mean when you say If you define all panics as asset bubbles, then pretty soon you need a new term to mean what "asset bubble" used to mean. "Asset bubble" must always be followed by "panic" by definition, otherwise you're actually seeing an increase that could be called "fairly priced" instead of "inflated." Look at the five year chart on AAPL, is it experiencing a bubble at a P/E of around 21, or is the stock somewhere close to a fair valuation? What about AMZN trading at a P/E of around 63? As far as I'm concerned, there's no way to be certain of the answer to this question until the future happens: if the stock crashes, then it was a bubble, otherwise it was fairly priced. If you have a better answer to this question than that, then you are either a wealthy (or soon to be wealthy) portfolio manager, or you should seriously consider that as an occupation if making a lot of money is your goal.

stretchwithme 16y ago

A lot of the things you cite became bubbles BECAUSE of government involvement. In the US and Japan, government is subsidizing the cost of borrowing. It is not freedom that is the problem. It is the socialization of risk that is the problem. In the US, the government insures private pension plans, guarantees home loans, bails out automakers and financial "innovators". There's no incentive to be prudent.

lkrubner 16y ago
I don't think socialization of risk was a factor in the tulip mania that gripped Holland in the 1630s. You can argue that socialization of risk has been factor that has made bubbles much more common over the last 30 or 40 years. That would go to my what I said before - government can stop bubbles, if it wants to. Or it can start them. Without government intervention, bubbles remain rare, which undercuts the thesis of the above article.
- stretchwithme 16y ago
  The causes of each bubble are different. Some theorize that monetary expansion and a conversion of futures contracts for tulips into options contracts played a significant role in the tulip mania. Government can stop bubbles, disease, cheating on one's spouse, failure to wash dishes and a thousand other sins by simply ending freedom. Big deal. Any kidnapper can do that.
  - lkrubner 16y ago
    Are you responding to the article above?
  - lkrubner 16y ago
    You are right to say that it is a big deal. Your point I think largely disproves the article referenced above. Clearly, government regulation can stop asset bubbles. It has before and I'm sure it will again. The government can stop anything by ending freedom.
    - stretchwithme 16y ago
      The problem with government involvement is that it bails out or assumes the costs of disastrous behavior as it regulates to reduce risk. Then over time the lobbyist weaken the regs and another disaster develops, even bigger this time, with the taxpayer holding the bag. Only this time everybody piles in because they know the government will clean it up. And the government, taking the path of least resistance, plays along, amplifying the problems, even passing more laws to subsidize the risky behaviors. They'll get you a tax write-off, help the first time buyers, lower the interest rates, get rid of the capital gains tax. You name it. But the last thing they will do in the midst of a bubble is take action to counter it. Then once the bubble collapses, everybody else pushes for regulation again to restart the whole cycle, most never questioning whether government should be involved in the first place. And government, in control of the debate, finds the exploiters of their policies and offers them up as the chief perpetrators. And live to trash the economy another day.

bd_at_rivenhill 16y ago

Actually, you've missed quite a few big ones, have you read Kindlebarger? http://www.amazon.com/Manias-Panics-Crashes-Financial-Investment/dp/0471467146/ref=sr_1_1?ie=UTF8&qid=1286052391&sr=8-1 http://www.amazon.com/Manias-Panics-Crashes-Financial-Invest... I wouldn't say that bubbles are rare at all, and it wouldn't surprise me if there were lots of them before 1637 that just aren't well recorded. The limited scope of trade in those days would mean that such events weren't as disruptive as they are today.

lkrubner 16y ago
I thought about also listing the panics, and I started to, but then I realized they were off-topic. This article is about asset bubbles, not about panics. Therefore, the crash 1825, in England, the crash of 1873, in the USA, the crash of 1907 in the USA - all of those are off-topic.
- j_baker 16y ago
  I suppose one could make the argument that before a panic, bank accounts are overvalued assets.
  - lkrubner 16y ago
    That's just it, you could define it however you want, but as soon as you do, the whole conversation falls apart. If you define all panics as asset bubbles, then pretty soon you need a new term to mean what "asset bubble" used to mean. I think a lot of these conversations fall apart over semantics. So I tried to use the phrase asset bubble in something like the sense that the article above seems to.
    - bd_at_rivenhill 16y ago
      I'm not sure what you mean when you say If you define all panics as asset bubbles, then pretty soon you need a new term to mean what "asset bubble" used to mean. "Asset bubble" must always be followed by "panic" by definition, otherwise you're actually seeing an increase that could be called "fairly priced" instead of "inflated." Look at the five year chart on AAPL, is it experiencing a bubble at a P/E of around 21, or is the stock somewhere close to a fair valuation? What about AMZN trading at a P/E of around 63? As far as I'm concerned, there's no way to be certain of the answer to this question until the future happens: if the stock crashes, then it was a bubble, otherwise it was fairly priced. If you have a better answer to this question than that, then you are either a wealthy (or soon to be wealthy) portfolio manager, or you should seriously consider that as an occupation if making a lot of money is your goal.