Saturday, September 17, 2011

A Short History Of Financial Euphoria: Chapter 3

While there is no doubt that free enterprise gives rise to recurrent episodes of speculation, the features that are common to these episodes are rarely analyzed, according to the author of A Short History of Financial Euphoria, John Kenneth Galbraith. This book from 1990 offers perspectives on bubbles that are still useful today. By paying attention to the signs, "there is a chance - a slim chance, to be sure, given the sweeping power of financial euphoria - that otherwise vulnerable individuals will be warned."

Galbraith describes a couple of the oldest documented bubbles.

Tulipomania in the Netherlands in the 1630s is perhaps the first documented bubble. Galbraith describes the scene with anecdotes that illustrate the scene of those days. In 1637 when prices fell off a cliff, an economic depression ensued. The search for scapegoats was extreme. Alas, there was little mention of the real reason for the bubble and its bursting: mass mania.

In France in the 1700s, another massive bubble occurred. Led by John Law, shares of the Mississippi Company were bid to unsustainable levels. Following the crash, as Galbraith would predict, much blame was placed on the leaders. While John Law was lauded when he had money and things were going well, he was reviled after the bust. Those "who had lost their minds as well as their money spared themselves all censure", however.

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