Financial Market Bubbles and Crashes

Overview

“Every age has its peculiar folly; some scheme, project, or fantasy into which it plunges, spurred on either by the love of gain, the necessity of excitement, or the mere force of imitation,” wrote Mackay (1841, p. 354), who early on recognized the main features in humanity's long history of financial speculation.

Circumstantial and anecdotal evidence of speculation, some of which is sketched below, goes back as far as ancient Rome and Greece and Babylon (Mesopotamia). It is important to recognize, however, that as the term is loosely understood today, a “bubble” cannot occur without speculation, but there can be speculation without a “bubble.” The presence of mere speculation alone, which was clearly an aspect of trade in the ancient world, is not sufficient to make an asset price “bubble.”

Bubbles are instead characterized by a frenzy of speculation that, as will later be demonstrated, is apparently fueled by a ready availability of money and credit that collectively invites, stimulates, and enables broad and extreme participation by the public at large. The major bubbles of the last 400 years – Dutch tulip bulbs in the 1600s and the South Sea and Mississippi Bubbles in the 1700s, the 1929 U.S. stock market, Japanese real estate and equities in the 1980s, and the Internet stock boom of the 1990s – all had these features in common.