August 23, 2005
ONE OF THESE THINGS IS NOT LIKE THE OTHERS:
Bubble fever (Bruce Bartlett, August 23, 2005, Townhall)
Financial bubbles have fascinated economists for hundreds of years. One of the earliest and best documented occurred in the early 1600s in Holland, where investors became obsessed with buying and selling tulip bulbs -- the rarest and most beautiful tulips sold, for the equivalent today of thousands of dollars each.A brilliant financier named John Law, who induced huge investments in Mississippi land, engineered another bubble in France in the early 1700s. It eventually came crashing down in one of the most spectacular market collapses in history, wiping out the wealth and savings of thousands of Frenchmen.
At about the same time, something similar was going on in Britain involving the South Sea Company, which held a monopoly on Britain's trade with the Americas and also owned a big chunk of its national debt.
Since then, there have been many other cases where bubbles have emerged, and economists continue to study them. Most recently, millions of Americans had direct experience with the huge run-up in the stock market in the late 1990s and subsequent crash in the 2000s.
A classic episode of a children's show explains the difference In Arthur Rides the Bandwagon, our aardvark hero gets caught up in the mania to own a silly kids toy, called a woogle. As the fever grips the young of Ellwood the woogles become scarce, richer kids start hoarding them, their prices skyrocket, and desperate youngsters will do anything to get ahold of one. Then the next craze comes along; everyone realizes that the woogle has no intrinsic value; and you can't give them away. The same thing can and did happen with tulips and internet stocks, but do you think when the housing market corrects you'll be able to get houses for free? Posted by Orrin Judd at August 23, 2005 6:31 AM
Which is why real estate holds value, but that does not mean there is not speculation or a bubble. There have been real estate bubbles and collapses in the past, and there will be those in the future. But good points in using Arthur.
Posted by: Chris Durnell at August 23, 2005 11:36 AMoj. A housing glut that reduces the value of a home to zero cannot be imagined in any context other than a global disaster that has killed off the vast majority of the people on earth. A concept that doesn't even bear imagining.
The classic book on this subject is :
Extraordinary Popular Delusions & the Madness of Crowds
http://www.amazon.com/exec/obidos/tg/detail/-/051788433X/qid=1124814668/sr=2-1/ref=pd_bbs_b_2_1/102-4789224-8203330?v=glance&s=books
No, you won't be able to get houses for free, just like you couldn't get tulips for free. But houses won't be worth near what they are now and a lot of people will lose a lot of money.
Posted by: Brandon at August 23, 2005 12:32 PMTulips were left to rot on the docks at the end of the tulip craze. They were worth nothing. Think houses will be?
Posted by: oj at August 23, 2005 12:57 PMWhen houses start staying on the market for a year with no takers, they'll be effectively worth nothing.
Posted by: Brandon at August 23, 2005 2:53 PMBrandon:
Go tell an owner that and see if he lets you move in. The notion is risible.
Posted by: oj at August 23, 2005 3:09 PMHe'll let me move in if I pay rent. Anyway, you are way too restrictive in your definition of a bubble.
Posted by: Brandon at August 23, 2005 4:31 PMRent? A second ago the house was worth no more than a pets.com stock. How flighty.
Posted by: oj at August 23, 2005 5:23 PMYou're the one saying that a bubble requires the object to have no value when it bursts. But tulips had value before and after that bubble burst, even if pets.com stock didn't.
Posted by: Brandon at August 23, 2005 7:19 PMNo, they didn't and if you think they do now send me $25 bucks and I'll mail you one from our yard.
Posted by: oj at August 23, 2005 7:24 PMYes they do, see:
Posted by: Brandon at August 23, 2005 7:25 PMOne would suppose that there must have been some great virtue in this flower to have made it so valuable in the eyes of so prudent a people as the Dutch; but it has neither the beauty nor the perfume of the rose -- hardly the beauty of the "sweet, sweet-pea;" neither is it as enduring as either.
-Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay, LL.D.: THE TULIPOMANIA