Bubbles: Does history guide us?

A historical perspective is an excellent place for everyone to start. It is not the only tool, but it is a beginning. History is some help if one stands back and looks at things from the standpoint of fundamentals. But if we have misinformation, or are misled by fraud or lies, then history can be outweighed and we need to add other tools to the historical perspective.

Bubbles have appeared for millennia, actually.

1. A lot of speculation occurred in the Roman economy, which included money lending and some other aspects of capitalism.

2. One of the most famous manias and bubbles of all time was the tulip mania in Holland in the early 1630s. People believed that ordinary tulip bulbs, which collectors prized, had greter and greater value;. A virus randomly made bulbs of one strain change and become more valuable, introducing an unknown into the game with a gambling or speculative element. Bulbs went up in price as people simply bid them up, and one bulb could be a lot more valuable than an expensive town house. Naturally, there came a point when the market got a bit soft, and rumors went around that there were no more buyers, and so the market crashed.

Call this crazy, if you will, but it is a great lesson in how the combination of human emotions and misinformation can mislead and fool even sophisticated people, and create powerful forces.

3. There were manias surrounding the building of railroads and canals in both England and the United States, since amazing leaps in productivity and economic advantages flowed from these developments. The reality was there and lasted for a long time - twenty years in England actually - but people just got too emotional, and their emotions led them to believe that this economic expansion would last forever. Crashes were always the way these mania-driven phenomena ended. In the United Kingdom, the famous railway mania led to the British financial crisis of 1847. October 17, 1897, was know in London as the week of terror.

Interestingly, the canals and railroads in England created a genuine and huge economic expansion, which in turn created a great deal of wealth before the situation slipped into mania territory. Thus when stocks started to come down in price, the crowd, many of whom were very sophisticated, truly believed it was only a temporary pullback in an expansion that would go on indefinitely. Most of those who got rich on the reality of the expansion were so caught up in the mania that they could not distinguish reality from wishful thinking, so they eventually lost all or most of their wealth.