6 Disastrous Economic Bubbles

6 Disastrous Economic Bubbles

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1. Tulip Mania

Tulip flowers have often been used to symbolize love, but in 17th century Holland, they came to represent doom for many overzealous investors. The Dutch fell head over heels for tulips shortly after the lilies were first introduced to Europe in the mid-16th century. Tulips became a powerful status symbol, and nobles and middle class admirers alike began scrambling to get their hands on rare specimens. By the 1630s, Tulip marts had sprung up in city centers, and bulbs were traded in the same way as modern stocks on Wall Street. A single tulip bulb often sold for the same price as everything from a carriage and a pair of horses to 1,000 pounds of cheese.

Tulip mania continued unabated until February 1637, when the market collapsed after a few of the bigger players decided to sell out. Prices plummeted, and a brief panic ensued as investors raced to dump their stores of lilies. “Substantial merchants were reduced almost to beggary,” wrote Charles Mackay, who later helped popularized the story of the tulip craze. “Many a representative of a noble line saw the fortunes of his house ruined beyond redemption.” The Dutch government formed a commission to clean up the tulip mess, but the economy sank into a minor depression in the years that followed.

READ MORE: The Real Story Behind the 17th-Century ‘Tulip Mania’ Financial Crash

2. The South Sea Bubble

Use of the term “bubble” to describe financial boom and bust first entered the lexicon in the early 18th century, when Britain’s South Sea Company collapsed and took many investors’ personal fortunes with it. The doomed enterprise had launched in 1711, when its owners agreed to take on millions in British war debt in exchange for exclusive trading rights in South America. The venture enjoyed little success—Spain still had a stranglehold on South American trade—but in 1720, a few well-placed bribes saw the South Sea Company win a new agreement to subsume Britain’s entire national debt. After spreading rumors of the vast riches they had already claimed in the South Seas, the company issued several new stock offerings to the public. Investors were allowed to pay for their shares in installments, and it wasn’t long before people from every strata of society were clamoring to get in on the action.

Share prices shot up from £128 in January to around £1,000 by June, but fortunes turned shortly thereafter, when a frenzy of selling saw South Sea Company Stock drop through the floor. By December, prices had tumbled to £124, leaving thousands of overextended investors in financial ruin. Government investigations later uncovered the bribery and corruption involved in causing the crisis, and several politicians and South Sea Company higher-ups were arrested.

3. The Mississippi Bubble

In 1716, France was plagued by crippling government debts and currency shortages. To solve the crisis, the French Regent turned to John Law, a Scottish gambler and finance wizard who proposed using paper currency to jumpstart the economy. With the Regent’s blessing, Law established a bank and began issuing paper notes that were supposedly redeemable in hard currency such as gold and silver. A year later, he formed the Mississippi Company, a trading venture that was given a monopoly over France’s Louisiana territory and its rumored deposits of gold. Law began selling stock in the company in exchange for government backed bonds and paper notes, and public interest quickly reached a fever pitch. Over less than a year, the price shot up from 500 livres to 18,000.

Law’s scheme initially boosted the economy and made many people wealthy, but his Mississippi Company never succeeded in finding riches in the Americas. His bank also overprinted paper money to meet the public’s demand to buy stock, which sent inflation soaring. The whole system came crashing down in 1720, after suspicious investors went to redeem their paper notes and found there was only enough gold in France to cover a fraction of their claims. Bank runs ensued, and the value of Mississippi Company shares plummeted. Many new millionaires were pauperized over night. Law, meanwhile, was forced to flee the country in disguise out of fear for his life.

4. The Florida land boom

Florida’s reputation as a tropical hotspot first developed after World War I, when increased prosperity saw many Americans head for the Sunshine State in search of cheap property and easy living. People began buying and selling land with reckless abandon, and by the mid-1920s, prices were often doubling every few months. In some cases, speculators didn’t even have the cash to pay for their purchases. They simply forked over the down payments and then resold at a profit before the full balance was due. As the bonanza continued, Florida’s real estate market became clogged with hucksters. Charles Ponzi—already notorious for having fleeced investors in a 1920 pyramid scheme—tricked out-of-state buyers into purchasing plots of land supposedly located in Jacksonville. The properties actually sat in a swamp some 65 miles away.

For a while it seemed as though there was no ceiling to the Florida land boom, but in early 1926, supplies of building materials and potential buyers trailed off. Investors were forced to jettison their holdings at astronomical losses. A further blow came that autumn, when a hurricane ravaged the state and destroyed scores of properties. By 1928, Florida’s bank clearings had plunged from over $1 billion to less than $150 million.

5. Railway Mania

In the 1840s, the introduction of modern railroads sparked the 19th century equivalent of a tech boom in Britain. Hundreds of new railroad lines were proposed in just a few short years, each more ambitious and opulent than the one that preceded it. Market prices exploded, and the British Parliament approved plans for more than 9,000 miles of prospective railroad track. According to scholar Andrew Odlyzko, the amount of money involved in railway construction was at one point more than double what the British government spent on its military.

Despite the frenzy of speculation, the railroad industry proved more fickle than many investors had been led to believe. After peaking in 1845, railway stocks underwent an agonizing multi-year slide. Many investments were worth less than 50 percent of their original value by 1850. Thousands of Britons felt the squeeze, including the famed novelist Charlotte Brontë, who saw the value of her shares plunge from £120 at their peak to a measly £20. “The business is certainly very bad,” she noted. “Many, very many, are by the late strange Railway System deprived almost of their daily bread.”

6. The Wall Street Crash of 1929

During the Roaring Twenties, the U.S. stock exchange boomed like never before. Legions of ordinary Americans took out loans and invested in the hope of striking it rich, and the market rewarded them by more than quadrupling between 1920 and 1929. People confidently bought stocks on “margin”—that is, by borrowing money from brokers—and banks began speculating with their customers’ money without permission. By late-1929, stock prices had climbed to seemingly irrational heights. Other parts of the economy were lagging behind the market, and there were whispers of an impending fall, yet many of the nation’s most respected economists promised that the “bull market” was here to stay.

The optimism finally evaporated on October 24, 1929, better known as “Black Thursday.” Stocks went into a nosedive that day, and panicked investors made some 13 million trades—so many that Wall Street tickers couldn’t keep up with all the action. The fall continued on “Black Tuesday,” when the market dipped even further. Billions of dollars were sucked out of the economy, launching a financial pandemonium that would see some 4,000 banks fail by 1933. The chaos helped bring on the Great Depression, which would linger over the United States for roughly a decade.

Dutch Tulip Bulb Market Bubble

The Dutch tulip bulb market bubble (or tulip mania) was a period in the Dutch Golden Age during which contract prices for some of the tulip bulbs reached extraordinarily high levels and then dramatically collapsed in February 1637 the rarest tulip bulbs traded for as much as six times the average person&rsquos annual salary at the height of the market.

The tulip mania was one of the most famous market bubbles (or crashes) of all time and is generally considered more of a hitherto unknown socio-economic phenomenon than a significant economic crisis. Metaphorically, the term &ldquotulip mania&rdquo is now often used to refer to any large economic bubble when asset prices deviate from intrinsic values.

Historically, the phenomenon did not critically influence the prosperity of the Dutch Republic, which was the world&rsquos leading financial and economic power in the 17 th century. The Dutch even recorded the highest per capita income in the world at that time.


  • The Dutch tulip bulb market bubble (or tulip mania) was a period in the Dutch Golden Age during which contract prices for some of the tulip bulbs reached extraordinarily high levels and then dramatically collapsed in February 1637.
  • Metaphorically, the term &ldquotulip mania&rdquo is now often used to refer to any large economic bubble when asset prices deviate from intrinsic values.
  • In all the frenzy, nobody thought that they were staking everything on a bit of greenery, which did not have any intrinsic value. Dealers refused to honor contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted.

History of the Dutch Tulip Bulb Market&rsquos Bubble

Tulip bulbs, along with potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century and commanded the same exoticism that spices and oriental rugs did. The introduction of the tulip in Europe is usually attributed to Ogier de Busbecq, the ambassador of Ferdinand I, Holy Roman Emperor, to the Sultan of Turkey, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire.

Initially, tulips were a status item purchased for the very reason that they were expensive and were destined for the gardens of the affluent. It was deemed a proof of bad taste in any man of fortune to be without a collection of tulips. Following the affluent, the merchant middle classes of Dutch society sought to emulate their wealthier neighbors and demanded tulips too.

However, at the same time, tulips were considered to be notoriously fragile &ndash they could scarcely be transplanted or even kept alive without careful cultivation. In the early 17 th century, professional cultivators began to refine techniques to grow and produce the tulips locally, establishing a flourishing business sector that has persisted to this day.

In 1634, tulip mania swept through Holland. The obsession to possess tulip bulbs was so great that the ordinary industry of the country was neglected, and the population, even to its lowest dregs, embarked in the tulip trade. A single bulb of tulip cost as much as 4,000 to even 5,500 florins &ndash which meant that the best of tulips cost more than $750,000 in today&rsquos money.

By 1636, the demand went so high that regular marts for sale of tulips were established on the Stock Exchange of Amsterdam, and professional traders got in on the action. Everybody appeared to be minting money simply by possessing some of these rare bulbs. It seemed at the time that the price could only go up that the rage for tulips would last forever. People began using margined derivatives contracts to buy more tulips than they could afford. However, as quickly as it began, confidence tumbled.

By February 1637, prices began to fall and never looked back. The sharp decline was driven by the fact that people initially purchased bulbs on credit, hoping to repay when they sold their bulbs for a profit. However, as prices began to decline, holders were forced to sell their bulbs at any price and to declare bankruptcy Bankruptcy Bankruptcy is the legal status of a human or a non-human entity (a firm or a government agency) that is unable to repay its outstanding debts in the process. By 1638, tulip bulb prices were back to normal.

Tulip Price Index (1636-37)

Amid all the frenzy, nobody thought that they were staking everything on a bit of greenery, which lacked any intrinsic value. Dealers refused to honor contracts, prices crashed, and people were left holding a lot of beautiful flowers that nobody wanted. Though the Dutch economy did not collapse, individuals who speculated and participated in the buying and trading became impoverished overnight.

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Nobody knew, as the stock market imploded in October 1929, that years of depression lay ahead and that the market would stay seized up for years. In its regular summation of the president’s week after Black Tuesday (Oct. 29), TIME put the market crash in the No. 2 position, after devastating storms in the Great Lakes region. TIME described the stock-swoon this way: “For so many months, so many people had saved money and borrowed money and borrowed on their borrowings to possess themselves of the little pieces of paper by virtue of which they became partners of U.S. Industry. Now they were trying to get rid of them even more frantically than they had tried to get them. Stocks bought without reference to their earnings were being sold without reference to their dividends.” The crisis that began that autumn and led into the Great Depression would not fully resolve for a decade.

Read the Nov. 4, 1929, issue, here in the TIME Vault:Bankers v. Panic

Here&rsquos proof that the every-seven-years formulation hasn&rsquot always held true: The OPEC oil embargo is widely viewed as the first major, discrete event after the Crash of 󈧡 to have deep, wide-ranging economic effects that lasted for years. OPEC, responding to the United States’ involvement in the Yom Kippur War, froze oil production and hiked prices several times beginning on October 16. Oil prices eventually quadrupled, meaning that gas prices soared. The embargo, TIME warned in the days after it started, “could easily lead to cold homes, hospitals and schools, shuttered factories, slower travel, brownouts, consumer rationing, aggravated inflation and even worsened air pollution in the U.S., Europe and Japan.”

Read the 1973 cover story, here in the TIME Vault:The Oil Squeeze

The recession of the early 1980s lasted from July 1981 to November of the following year, and was marked by high interest rates, high unemployment and rising prices. Unlike market-crash-caused crises, it’s impossible to pin this one to a particular date. TIME&rsquos cover story of Feb. 8, 1982, is as good a place as any to take a sounding. Titled simply “Unemployment on the Rise,” the article examined the dire landscape and groped for solutions that would only come with an upturn in the business cycle at the end of the year. “For the first time in years, polls show that more Americans are worried about unemployment than inflation,” TIME reported. A White House source told TIME: “If unemployment breaks 10%, we’re in big trouble.&rdquo Unemployment peaked the following November at 10.8%.

Read the 1982 cover story, here in the TIME Vault:Unemployment: The Biggest Worry

If the meaning of the Crash of 󈧡 was underappreciated at the time it happened, the meaning of Black Monday 1987 was probably overblown&mdashthough understandably, given what happened. The 508-point drop in the Dow Jones Industrial Average on October 19 was, and remains, the biggest one-day percentage loss in the Dow’s history. But the reverberations weren’t all that severe by historical standards. “Almost an entire nation become paralyzed with curiosity and concern,” TIME reported. “Crowds gathered to watch the electronic tickers in brokers’ offices or stare at television monitors through plate-glass windows. In downtown Boston, police ordered a Fidelity Investments branch to turn off its ticker because a throng of nervous investors had spilled out onto Congress Street and was blocking traffic.”

Read the 1987 cover story, here in the TIME Vault:The Crash

The dot-com bubble deflated relatively slowly, and haltingly, over more than two years, but it was nevertheless a discrete, identifiable crash that paved the way for the early-2000s recession. Fueled by speculation in tech and Internet stocks, many of dubious real value, the Nasdaq peaked on March 10, 2000, at 5132. Stocks were volatile for years before and after the peak, and didn’t reach their lows until November of 2002. In an article in the Jan. 8, 2001, issue, TIME reported that market problems had spread throughout the economy. The “distress is no longer confined to young dotcommers who got rich fast and lorded it over the rest of us. And it’s no longer confined to the stock market. The economic uprising that rocked eToys, Priceline.com, Pets.com and all the other www. s has now spread to blue-chip tech companies and Old Economy stalwarts.”

Read the 2001 cover story, here in the TIME Vault:How to Survive the Slump

On Sept. 15, 2008, after rounds of negotiations between Wall Street executives and government officials, Lehman Bros. collapsed into bankruptcy. And so did AIG. Merrill Lynch was forced to sell itself to Bank of America. And that was just the beginning. TIME pulled no punches in its September 29 cover story, titled “How Wall Street Sold Out America” and written by Andy Serwer and Allan Sloan. “If you’re having a little trouble coping with what seems to be the complete unraveling of the world’s financial system, you needn’t feel bad about yourself,” the men wrote. “It’s horribly confusing, not to say terrifying even people like us, with a combined 65 years of writing about business, have never seen anything like what’s going on. They advised readers that “the four most dangerous words in the world for your financial health are ‘This time, it’s different.’ It’s never different. It’s always the same, but with bigger numbers.”

Read the 2008 cover story, here in the TIME Vault: How Wall Street Sold Out America

The History Of Income Inequality And Popping Economic Bubbles

In a significant study by economists Thomas Piketty and Emmanuel Saez, they explain the economic impact historically on capital and upper income Americans:

We find that top capital incomes were severely hit by major shocks in the first part of the century. The post-World War I depression and the Great Depression destroyed many businesses and thus significantly reduced top capital incomes. The wars generated large fiscal shocks, especially in the corporate sector that mechanically reduced distributions to stockholders. We argue that top capital incomes were never able to fully recover from these shocks, probably because of the dynamic effects of progressive taxation on capital accumulation and wealth inequality. We also show that top wage shares were flat from the 1920s until 1940 and dropped precipitously during the war. Top wage shares have started to recover from the World War II shock in the late 1960s, and they are now higher than before World War II.[1]

Piketty and Saez research and observe exactly what is indicated above – that while there has been a significant increase in the difference in income between the top 1 percent and the bottom 99 percent since the 1970s, it is largely due to the significant decrease from the 1930s. It then remained generally flat until the post-WWII period of the late 60s and 70s. From their investigations, they also conclude that “the composition of income in the top income groups has shifted dramatically over the century.”[2]

Another discovery is that the top income levels are now made up of a significant percentage of “working rich,” that is wage earners—which are not traditional capitalists, but high paid executives who have worked their way up from lower or middle income levels into the upper income quintiles. This illustrates the extensive income mobility for citizens of the United States, which will be addressed below. Moreover, they learned that, across the board of the upper 10 percent of income earners, the percent of income earned by the wage earners increased.[3] In summary, wage earners gained a substantial share of the total income during the 20 th century. Piketty and Saez reported that:

In 1998 the share of wage income has increased significantly for all top groups. Even at the very top, wage income and entrepreneurial income form the vast majority of income. The share of capital income remains small (less than 25 percent) even for the highest incomes. Therefore, the composition of high incomes at the end of the century is very different from those earlier in the century. Before World War II, the richest Americans were overwhelmingly rentiers deriving most of their income from wealth holdings (mainly in the form of dividends)….in 1998 more than half of the very top taxpayers derive the major part of their income in the form of wages and salaries.[4]

This data is critical information as it shows that productivity improvements drove the ability to earn at the highest income levels. In short, salaried managers -- many who were previously in engineer and operational roles -- drove up their value by exhibiting these specific skills abilities, which translated to much higher incomes. This, in turn, also raised the income levels of middle and lower level managers. The middle class made considerable gains.

According to Piketty and Saez, up until 1940, the top 1 percent’s income composed mostly of capital income, while the rest of the top ten percent had incomes composed of wages. Then, during the significant downturns, those incomes which were mainly capital suffered the worst, while those in the top percentages comprised of wage earnings remained reasonably nominal in their income loss. However, the capital based income earners did recover at a more rapid rate during the recovery cycles of the 1920s and mid-1930s. [5]

Piketty and Saez also found that “[t]he negative effect of the wars on top incomes is due in part to the large tax increases enacted to finance them.” Moreover, “[d]uring both wars, the corporate income tax (as well as the individual income tax) was drastically increased and this mechanically reduced the distribution to stockholders. […] [D]uring World War II, corporate profits surged, but dividend distributions stagnated mostly because of the increase in the corporate tax (that increased from less than 20 percent to over 50 percent) but also because retained earnings increased sharply.”[6]

The sharp tax increase during these periods was instituted against the higher income quintiles significantly to the level where the top 10 percent paid 55 percent of the total federal tax liabilities, while the top 1 percent of income earners paid 28.1 percent of all federal taxes according to the Congressional Budget Office (CBO), [7] compared to less than 20 percent in the 1970s.[8] The CBO states that, “[t]he federal tax system is progressive – that is, average tax rates generally rise with income. […] [T]he top 1 percent faced an average rate of 29.5 percent,” compared to the bottom 20 percent average of only 4 percent.[9] In fact, in a study on the macroeconomic effects of tax changes, Christina and David Romer, economists at the University of California, Berkeley, concluded that the “baseline specification suggests that an exogenous tax increase of one percent of GDP lowers real GDP by roughly three percent.”[10] This conclusion parallels economist Arthur Laffer’s Laffer Curve[11] and the potential negative impact on federal revenue when raising tax rates.

Author and global investor Hunter Lewis perhaps summarizes it best and alludes to the catastrophic results of economic bubbles when writing for the Mises Institute. Lewis concludes:

The amount of U.S. income controlled by the top 10 percent of earners starts at about 40 percent in 1910, rises to about 50 percent before the Crash of 1929, falls thereafter, returns to about 40 percent in 1995, and thereafter again rises to about 50 percent before falling somewhat after the Crash of 2008. Let’s think about what this really means. Relative income of the top 10 percent did not rise inexorably over this period. Instead it peaked at two times: just before the great crashes of 1929 and 2008. In other words, inequality rose during the great economic bubble eras and fell thereafter.[12]

[1] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 3.

[2] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 3.

[3] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 15, see Table III, Income Composition by Size of Total Income, 1916-1998.

[4] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 17.

[5] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 13. Also see Figure II on page 12.

[6] Thomas Piketty and Emmanuel Saez, February 2003, “Income Inequality in the United States, 1913-1998,” (The Quarterly Journal of Economics, Vol. CXVIII, Issue 1), p. 13.

[7] Congressional Budget Office, June 1, 2010 (accessed May 24, 2012), “Average Federal Taxes by Income Group,” [http://www.cbo.gov/publication/42870].

[8] Peter Wehner and Robert P. Beschel, Jr., Spring 2012, “How to Think about Inequality,” National Affairs, Number 11, p. 98.

[9] Congressional Budget Office, June 1, 2010 (accessed May 24, 2012), “Average Federal Taxes by Income Group,” [http://www.cbo.gov/publication/42870]. 2007 data.

[10] Christina D. Romer and David H. Romer, June 2010, “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks,” (American Economic Review, Vol. 100, No. 3), p. 799, [http://emlab.berkeley.edu/users/dromer/papers/RomerandRomerAERJune2010.pdf].

[11] Arthur B. Laffer, June 1, 2004, “The Laffer Curve: Past, Present, and Future,” Executive Summary Backgrounder, (Washington DC: The Heritage Foundation).

25 Major Factors That Caused or Contributed to the Financial Crisis

Most people have an opinion about what or who caused the financial crisis of 2008-09. It was securitization. Or greed. Or deregulation. Or any number of other things that, truth be told, probably did play a role in the unusually severe economic downturn.

But after reading a good portion of the books written about the crisis from a variety of viewpoints -- journalists, regulators, and private-sector participants -- I've concluded that it can't be boiled down to one, two, or even a handful of root causes. It was instead the product of dozens of factors. Some of these are widely known, but many others are not.

Image source: Getty Images.

I was reminded of this after flipping through former-FDIC chairman William Isaac's book on the crisis Senseless Panic: How Washington Failed America. In the back of Isaac's book, I wrote out a list of 39 factors that played an important role in not only allowing the subprime-mortgage bubble to inflate, but also in allowing its deflation to wreak such havoc. What follows, in turn, is a scaled-down version of this list.

1. Mark-to-market accounting. In the early 1990s, the Securities and Exchange Commission and the Financial Accounting Standards Board started requiring public companies to value their assets at market value as opposed to historical cost -- a practice that had been discredited and abandoned during the Great Depression. This pushed virtually every bank in the country into insolvency from an accounting standpoint when the credit markets seized in 2008 and 2009, thereby making it impossible to value assets.

2. Ratings agencies. The financial crisis couldn't have happened if the three ratings agencies -- Standard & Poor's, Fitch, and Moody's -- hadn't classified subprime securities as investment grade. Part of this was incompetence. Part of it stemmed from a conflict of interest, as the ratings agencies were paid by issuers to rate the securities.

3. Infighting among financial regulators. Since its inception in 1934, the FDIC has been the most robust bank regulator in the country -- the others have, at one time or another, included the Office of the Comptroller of the Currency, the Federal Reserve, the Office of Thrift Supervision, the Securities and Exchange Commission, the Federal Savings and Loan Insurance Corporation, and an assortment of state regulatory agencies. But thanks to infighting among regulators, the FDIC was effectively excluded from examining savings and investment banks within the OTS's and SEC's primary jurisdiction between 1993 and 2004. Not coincidentally, those were the firms that ended up wreaking the most havoc.

4. Securitization of loans. Banks traditionally retained most of the loans that they originated. Doing so gave lenders incentive, albeit imperfectly, to underwrite loans that had only a small chance of defaulting. That approach went by the wayside, however, with the introduction and proliferation of securitization. Because the originating bank doesn't hold securitized loans, there is less incentive to closely monitor the quality of underwriting standards.

5. Credit default swaps. These are fancy financial instruments JPMorgan Chase developed in the 1990s that allowed banks and other institutional investors to insure against loan defaults. This situation led many people in the financial industry to proclaim an end to credit risk. The problem, of course, is that credit risk was just replaced by counterparty risk, as companies such as American International Group accumulated far more liability than they could ever hope to cover.

6. Economic ideology. As the 1970s and '80s progressed, a growing cohort of economists began proselytizing about the omniscience of unrestrained free markets. This talk fueled the deregulatory fervor coursing through the economy at the time, and it led to the belief that, among other things, there should be no regulatory body overseeing credit default swaps.

7. Greed. The desire to get rich isn't a bad thing from an economic standpoint. I'd even go so far as to say that it's necessary to fuel economic growth. But greed becomes bad when it's taken to the extreme. And that's what happened in the lead-up to the crisis. Homeowners wanted to get rich quick by flipping real estate. Mortgage originators went to great lengths, legal and otherwise, to maximize loan volumes. Home appraisers did the same. Bankers were paid absurd amounts of money to securitize toxic subprime mortgages. Rating agencies raked in profits by classifying otherwise toxic securities as investment-grade. Regulators were focused on getting a bigger paycheck in the private sector. And politicians sought to gain popularity by forcing banks to lend money to their un-creditworthy constituents.

8. Fraud. While very few financiers have been prosecuted for their role in the financial crisis, don't interpret that to mean that they didn't commit fraud. Indeed, the evidence is overwhelming that firms up and down Wall Street knowingly securitized and sold toxic mortgage-backed securities to institutional investors, including insurance companies, pension funds, university endowments, and sovereign wealth funds, among others.

9. Short-term investment horizons. In the lead-up to the crisis, analysts and investors castigated well-run firms such as JPMorgan Chase and Wells Fargo for not following their peers' lead into the riskiest types of subprime mortgages, securities, and derivatives. Meanwhile, the firms that succumbed to the siren song of a quick profit -- Citigroup, for instance -- were the first to fail when the house of cards came tumbling down.

10. Politics. Since the 1980s, bankers and politicians have formed an uneasy alliance. By conditioning the approval of bank mergers on the Community Reinvestment Act, politicians from both sides of the aisle have effectively blackmailed banks into providing loans to un-creditworthy borrowers. While banks and institutional investors absorbed the risks, politicians trumpeted their role in expanding the American dream of homeownership.

11. Off-balance-sheet risk. Why did investors allow financial firms to assume so much risk? The answer is that no one knew what they were up to because most of the risky assets weren't reflected on their balance sheets. They had been securitized and sold off to institutional investors, albeit with residual liability stemming from warranties that accompanied the sales, or were corralled in so-called special-purposes entities, which are independent trusts that the banks established and administered. Suffice it to say that all of the residual liability flooded back onto the banks' balance sheets only after the you-know-what hit the fan.

12. Bad economic assumptions. As moronic as it seems in hindsight, it was generally assumed before the crisis that home prices would never decline simultaneously on a nationwide basis. This belief led underwriters of and investors in mortgage-backed securities to believe that geographically diversified pools of mortgages were essentially risk-free when they obviously were not.

13. High oil prices. Beginning with the twin oil embargoes of the 1970s, oil-producing countries began accumulating massive reserves of so-called petrodollars which were then recycled back into the U.S. financial system. This situation pressured banks and other types of financial firms to put the money to work in increasingly marginal ways, such as subprime mortgages.

14. A broken international monetary system. One of the most underappreciated causes of the financial crisis was the trade imbalance between the developing and developed worlds. By keeping their currencies artificially depressed versus the U.S. dollar -- which is done by buying dollars with newly printed native currencies -- export-oriented nations such as China accumulated massive reserves of dollars. Like the petrodollars of the 1980s and '90s, these funds were then recycled back into the U.S. financial system. To put this money to use, financial firms had little choice but to lower underwriting standards and thereby grow the pool of potential borrowers.

15. The rescue of Bear Stearns. In March 2008, the Federal Reserve saved Bear Stearns with a last-minute $30 billion loan supplied through JPMorgan Chase. As opposed to failing, the nation's fifth-largest investment bank at the time ended up being sold for $10 a share. The problem with the rescue, however, was that it reduced the incentive on Lehman Brothers CEO Dick Fuld to find a private-sector solution to its even bigger, and eventually fatal, problems. In hindsight, it seems relatively clear that the Fed should have either let Bear Stearns fail or, much more preferably, bailed both of them out.

16. Lehman Brothers' bankruptcy. Allowing Lehman Brothers to fail was a mistake of epic proportions. History clearly demonstrates that the downfall of a major money-center bank -- be it a commercial or investment bank -- almost always triggers wide-scale financial panics. In 1873, it was Jay Cooke & Company. In 1884, it was Grant & Ward. In 1907, it was the Knickerbocker Trust Company. I could go on and on with examples. The point being, despite the admittedly unsavory thought of bailing out someone as aggressively offensive as Dick Fuld, it would have been a small price to pay to avoid the subsequent economic carnage.

17. The "Greenspan put." For two decades following the stock market crash of 1987, the Federal Reserve, guided by then-Chairman Alan Greenspan, lowered interest rates after every major financial shock, a trend that became known as the Greenspan put. It was this strategy, intended to stop financial shocks from transforming into economic downturns, that led the central bank to drop the Fed funds rate after the 9/11 terrorist attacks. And it was this drop that provided the oxygen, if you will, to inflate the housing bubble.

18. Monetary policy from 2004 to 2006. Just as low interest rates led to the housing bubble, the Fed's policy of raising rates from 2004 to 2006 eventually caused it to burst.

19. Basel II bank capital rules. Any time an economy experiences a severe financial shock, one of the biggest problems is that undercapitalized banks will be rendered insolvent. That's true in part because of the absurd application of mark-to-market accounting during periods of acute stress in the credit markets, and in part because banks are highly leveraged, meaning that they hold only a small slice of capital relative to their assets. The so-called Basel II capital rules, which took effect in 2004, accentuated this reality. The rules allowed banks to substitute subordinated debt and convertible preferred stock in the place of tangible common equity. The net result was that tangible common equity at certain major U.S. banks declined to less than 4% on the eve of the crisis.

20. Fannie Mae and Freddie Mac. Much has been written about the role Fannie Mae and Freddie Mac played in the lead-up to the financial crisis, so I won't dwell on it here. In short, the problem was that these two quasi-public corporations became so focused on growth at all costs that they abandoned any semblance of prudent risk management. Doing so allowed mortgage-brokers-cum-criminal enterprises such as Countrywide Financial and Ameriquest Mortgage to stuff the government-sponsored entities to the gills with shoddily originated subprime mortgages.

21. The failure of IndyMac Bank. The $32 billion IndyMac Bank was the first major depository institution -- it was technically a thrift as opposed to a commercial bank -- to fail during the crisis when the Office of Thrift Supervision seized it on July 11, 2008. In a situation like this, the FDIC traditionally insures all depositors and creditors against losses, irrespective of the insurance limit. But in IndyMac's case, it didn't. The FDIC chose instead to only guarantee deposits up to $100,000. Doing so sent a shockwave of fear throughout the financial markets and played a leading role two months later in the debilitating run on Washington Mutual.

22. The failure of Washington Mutual. By the time Washington Mutual failed in September 2008, the FDIC had recognized its mistake in dealing with IndyMac Bank. But this time around, while the FDIC covered all deposits irrespective of the insurance limit, it allowed $20 billion of WaMu's bonds to default. After that, banks found it difficult, and in many cases impossible, to raise capital from anyone other than the U.S. government.

23. Pro-cyclical regulation of loan loss reserves. The more one learns about the causes of the financial crisis, the more one appreciates how incompetent the Securities and Exchange Commission is when it comes to regulating financial institutions. In 1999, the SEC brought an enforcement action against SunTrust Banks, charging it with manipulating its earnings by creating excessive loan loss reserves. At the time, default rates were extremely low, leading the SEC to conclude that SunTrust shouldn't be reserving for future losses. Banks took note and no longer set aside reserves until specific future losses are likely and can be reasonably estimated -- by which point, of course, the proverbial cat is already out of the bag.

24. Shadow banking. While hundreds of traditional banks failed in the wake of the financial crisis, they share little responsibility for what actually happened. That's because shadow banks -- i.e., investment banks and thrifts that didn't fall under the primary regulatory purview of the Federal Reserve, FDIC, or, to a lesser extent, the Office of the Comptroller of the Currency -- caused most of the damage. Here's Richard Kovacevich, the former chairman and CEO of Wells Fargo, addressing this point in a speech at the end of last year:

If you don't remember anything else I say today, please remember this: Only about 20 financial institutions perpetrated this crisis. About half were investment banks, and the other half were savings and loans. Only one, Citicorp, was a commercial bank, but [it] was operating more like an investment bank. These 20 failed in every respect, from business practices to ethics. Greed and malfeasance were their modus operandi. There was no excuse for their behavior, and they should be punished thoroughly, perhaps even criminally.

The Top 10 Biggest Market Crashes

1. The 1673 Tulip Craze

In 1593 tulips were first brought to The Netherlands from Turkey and quickly became widely sought after. After some time, tulips contracted a non-fatal tulip-specific mosaic virus, known as the ‘Tulip breaking virus’, which started giving the petals multicolour effects of flame-like streaks. The colour patterns came in a wide variety, which made the already popular flower even more exotic and unique. Tulips, which were already selling at a premium, grew more and more in popularity and attracted more and more bulb buyers. Prices, especially for bulbs with the virus, rose steadily and soon Dutch people began trading their land, life savings and any other assets they could liquidate to get their hands on more tulip bulbs. The craze got to a stage where the originally overpriced tulips saw a 20 fold increase in value in one month.

The 1673 Tulip Mania is now known as the first recorded economic bubble. And as it goes in many speculative bubbles, some people decided to sell and crystallise their profits which resulted in a domino effect of lower and lower prices. Everyone was trying to sell their bulbs, but no one was interested in buying them anymore. The prices were progressively plummeting and everyone was selling despite the losses. The Dutch Government tried to step in and offered to honour contracts at 10% of the face value, which only resulted in the market diving even lower. No one emerged undamaged from the crash and even the people who got out early were impacted by the depression that followed the Tulip Craze.

Tulip Mania Image credits: Krause & Johansen

2. The South Sea Bubble 1711

Another speculation-fuelled fever occurred in Europe a few decades after the Tulip Mania – this time in the British Empire. The bubble centred around the fortunes of the South Sea Company, whose purpose was to supply 4,800 slaves per year for 30 years to the Spanish plantations in Central and Southern America. Britain had secured the rights to provide Spanish America with slaves at the Treaty of Utrecht in 1713 and the South Sea Company paid the British Government £9,500,000 for the contract, assuming that it could open the door to trading with South America and that the profits from slave trading would be huge.

This was met with excitement from investors and resulted in an impressive boom in South Sea stock – the company’s shares rose from 128 1 /2 in January 1720 to over 1,000 in August. However, by September the market had crumbled and by December shares were down to 124. And the reason behind the bubble burst? Speculators paid inflated prices for the stock, which eventually led to South Sea’s dramatic collapse. The economy was damaged and a large number of investors were completely ruined, but a complete crash was avoided due to the British Empire’s prominent economic position and the government’s successful attempts to stabilise the financial industry.

Commentary on the financial disaster of the “South Sea Bubble”

3. The Stock Exchange Crash of 1873

The Vienna Stock Exchange Crash of May 1873, triggered by uncontrolled speculation, caused a massive fall in the value of shares and panic selling.

The National Bank was not able to step in and provide support because it didn’t have enough reserves available. The crash put an end to economic growth in the Monarchy, affected the wealth of bankers and some members of the imperial court and confidants of the Emperor, as well as the imperial family itself. It also led to a drop in the number of the Vienna World Exhibition visitors – a large world exposition that was held between May and October 1873 in the Austria-Hungarian capital.

Later on, the crash gradually affected the whole of Europe.

Black Friday on 9 th May 1873 at the Vienna Stock Exchange

4. The Wall Street Crash of 1929

On 29 th October 1929, now known as Black Tuesday, share prices on the New York Stock Exchange collapsed – an event that was not the sole cause of the Great Depression in the 1930s, but something that definitely contributed to it, accelerating the global economic collapse that followed after the historic day.

During the 1920s, The US stock market saw rapid expansion, which reached its peak in August 1929 after a lot of speculation. By that time, production had declined and unemployment had risen, which had left stocks in great excess of their real value. On top of this, wages were low, agriculture was struggling and there was proliferation of debt, as well as an excess of large bank loans that couldn’t be liquidated.

In September and early October, stock prices began to slowly drop. On 21 st October panic selling began and culminated on 24 th , 28 th and the fatal 29 th October, when stock prices fully collapsed and a record of 16,410,030 shares were traded on NYSE in one day. Financial giants such as William C. Durant and members of the Rockefeller family attempted to stabilise the market by buying large quantities of stocks to demonstrate their confidence in the market, but this didn’t stop the rapid decrease in prices. Because the stock tickers couldn’t handle the mammoth volume of trading, they didn’t stop running until about 7:45 pm. During the day, the market had lost $14 billion. The crash remains to this day the biggest and most significant crash in financial market history, signalling the start of the 12-year Great Depression that affected the Western world.

17 th July 2014 Washington DC, USA – A detail from one of the statue groups at the Franklin Delano Roosevelt Memorial that portrays the depth of the Great Depression

5. Black Monday 1987

On 19 th October 1987, stock markets around the world suffered one of their worst days in history, known today as Black Monday. Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms. Black Monday is remembered as the first crash of the modern financial system because it was exacerbated by new-fangled computerised trading.

The theories behind the reasons for the crash vary from a slowdown in the US economy, a drop in oil prices and escalating tensions between the US and Iran.

By the end of the month, stock markets had dropped in Hong Kong (45.5%), Australia (41.8%), Spain (31%), the United Kingdom (26.45%), the United States (22.68%) and Canada (22.5%). Unlike the 1929 market crash however, Black Monday didn’t result in an economic recession.

Following a long-running rally, the crash began in Asia, intensified in London and culminated with the Dow Jones Industrial Average down a 22.6% for the day – the worst day in the Dow’ history, in percentage terms.

6. The 1998 Asian Crash

The Asian crisis of 1998 hit a number of emerging economies in Asia, but also countries such as Russia and Brazil, having an overall impact on the global economy. The Asian crisis began in Thailand in 1997 when foreign investors lost confidence and were concerned that the country’s debt was increasing too rapidly.

The crisis in Thailand gradually spread to other countries in Asia, with Indonesia, South Korea, Hong Kong, Laos, Malaysia and the Philippines being affected the most. The loss of confidence affected those countries’ currencies – in the first six months, the Indonesian rupiah’s value was down by 80%, the Thai baht – by over 50%, the South Korean won – by nearly 50% and the Malaysian ringgit – by 45%. In the 12 months of the crisis, the economies that were most affected saw a drop in capital inflows of more than $100 billion.

7. The Dotcom Bubble Burst

In the second half of the 1990s, the commercialisation of the Internet excited and inspired many business ideas and hopes for the future of online commerce. More and more internet-based companies (‘dotcoms’) were launched and investors assumed that every company that operates online is going to one day become very profitable. Which unfortunately wasn’t the case – even businesses that were successful were extremely overvalued. As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals. The bubble that formed was fuelled by overconfidence in the market, speculation, cheap money and easy capital.

On 10 th March 2000, the NASDAQ index peaked at 5,048.62. Despite the market’s peak however, a few big high-tech companies, such as Dell and Cisco, placed huge sell orders on their stocks, which triggered panic selling among investors. The stock market lost 10% of its value, investment capital began to melt away, and many dotcom companies went out of business in the next few weeks. Within a few months, even internet companies that had reached market capitalisation in the hundreds of millions of dollars became worthless. By 2002, the Dotcom crash cost investors a whopping $5 trillion.

As long as a company had the ‘.com’ suffix after its name, venture capitalists would recklessly invest in it, fully failing to consider traditional fundamentals.

8. The 2008 Financial Crisis

This market crash needs no introduction – we all must remember how ten years ago Wall Street banks’ high-risk trading practices nearly resulted in a collapse of the US economy. Considered to be the worst economic disaster since the Great Depression, the 2008 global financial crisis was fed by deregulation in the financial industry which allowed banks to engage in hedge fund trading with derivatives. To support the profitable sale of these derivatives, banks then demanded more mortgages and created interest-only loans that subprime borrowers were able to afford. As the interest rates on these new mortgages reset, the Federal Reserve upped the fed funds rates. Supply outplaced demand and housing prices began to decrease, which made things difficult for homeowners who couldn’t meet their mortgage loan obligations, but also couldn’t sell their house. The derivatives plummeted in value and banks stopped lending to each other.

Lehman Brothers filed for bankruptcy on 15 th September 2008. Merrill Lynch, AIG, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo Real Estate, and Alliance & Leicester which were all expected to follow however were saved by bailouts paid by national governments. Despite this, stock markets across the globe were falling.

And we all remember what followed… The bursting of the US housing bubble and Lehman Brothers’ collapse nearly crushed the world’s financial system and resulted in a damaged house market, business failures and a wounded global economy.

Don’t miss our articles on the impact of the Lehman Brothers’ collapse:

9. The Flash Crash 2010

On 6 th May 2010, the US stock market underwent a crash that lasted approximately 36 minutes, but managed to wipe billions of dollars off the share prices of big US companies. The decrease occurred at a speed never seen before, but ended up having a very minimal impact on the American economy.

With the opening of the market on 6 th May 2010, there were general market concerns related to the Greek debt crisis and the UK general election. This led to the beginning of the flash crash at 2:30pm – Dow Jones had declined by more than 300 points, while the S&P 500 and NASDAQ composite were affected too. In the next five minutes, Dow Jones had dropped a further 600 points, reaching a loss of nearly 1000 points for the day. By 3:07pm things were looking better and the market had regained much of the decrease and only closed at 3% lower than it opened. The potential reasons behind the crash vary from ‘fat-fingered’ trading (a keyboard error in technical trading) to an illegal cyberattack. However, a joint report by the US Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) stated that the extreme price movement could have been caused by the combination of prevailing market conditions and the large automated sell order.

As some securities lost 99% of their value in a few minutes, this was one of the most impressive stock market crashes in modern history.

10. 2015–16 Chinese Market Crash

After a few years of being viewed in an increasingly favourable light, China’s Stock Market burst on 12 th June 2015 and fell again on 27 th July and 24 th August 2015. Despite the Chinese Government attempt to stabilise the market, additional drops occurred on 4 th and 7 th January and 14 th June 2016. Chaotic panic selling in July 2015 wiped more than $3 trillion off the value of mainland shares in just three weeks, as fear of complete market seizure and systemic financial risks grew across the country.

Surprise devaluation of the Chinese yuan on 11th August and a weakening outlook for Chinese growth are believed to have been the causes for the crash that also put pressure on other emerging economies.

The Bottom Line

"A rapid price rise, high trading volume, and word-of-mouth spread are the hallmarks of typical bubbles," says Timothy R. Burch, an Associate Professor of Finance at the Miami Herbert Business School. "If you learn of an investment opportunity with dreams of unusually high profits from social media or friends, be particularly wary—in most cases, you’ll need uncanny timing to come out ahead."

As Minsky and a number of other experts opine, speculative bubbles in some asset or the other are inevitable in a free-market economy. However, becoming familiar with the steps involved in bubble formation may help you to spot the next one and avoid becoming an unwitting participant in it.

What actually happened

The real reasons behind the bubble are complex. The South Sea Company, which gave its name to the event, helped the government manage its debt and also traded enslaved Africans to the Spanish colonies of the Americas. The government struggled to pay holders of its debt on time and investors had difficulty selling on their debt to others due to legal difficulties.

So debt holders were encouraged to hand their debt instruments to the South Sea Company in exchange for shares. The company would collect an annual interest payment from the government, instead of the government paying out interest to a large number of debt-holders. The company would then pass on the interest payment in the form of dividends, along with profits from its trading arm. Shareholders could easily sell on their shares or simply collect dividends.

The debt management and slaving aspects of the company’s history have often been misunderstood or downplayed. Older accounts state that the company did not actually trade at all. It did. The South Sea Company shipped thousands of people across the Atlantic as slaves, working with an established slave trading company called the Royal African Company. It also received convoy protection from the Royal Navy. Shareholders were interested in the South Sea Company because it was strongly backed by the British state.

By the summer of 1720, South Sea Company shares became overvalued and other companies also saw their share prices increase. This was partly because new investors came into the market and got carried away. In addition, money came in from France. The French economy had undergone a huge set of reforms under the control of a Scottish economist called John Law.

Law’s ideas were ahead of his time, but he moved too quickly. His attempts to modernise France’s economy did not work, partly because the rigid social system remained unchanged. The French stock market boomed and then crashed. Investors took their money out of the Paris market – some moved it to London, helping push up share prices there.

The rapid rise and fall of South Sea Company shares. Wikimedia

Once the South Sea Bubble had started to inflate, it attracted more naive investors and those who would prey upon them. While it was clear that the high prices were unsustainable, canny speculators bought in hoping to sell out in time. This pushed up prices even more, in the short term. The stock price went up from £100 in 1719 to more than £1,000 by August 1720. The inevitable crash back down to £100 per share by the end of the year came as a shock to those who thought they could make their fortunes overnight.

6 Disastrous Economic Bubbles - HISTORY

(FORTUNE Magazine) &ndash It is, surely, the most told tale in financial history: In 1630s Holland, prices for tulip bulbs soared in a way that would have done early Yahoo investors proud. A bulb of an exceptionally prized and rare variety could sell for as much as a house on the best canal in Amsterdam. At the height of the mania, during the plague winter of 1636-37, traders huddled in taverns and frantically bought and sold futures on third-rate bulbs for sums greater than what they could have hoped to earn in a decade at their previous job of shopkeeper or artisan or laborer.

The speculative frenzy couldn't go on forever, and it didn't. On the first Tuesday of February 1637, prices stopped going up. Because participants in the tulip futures market were following what's now known as the greater-fool theory of investing (that is, they paid such spectacularly high prices on the assumption that some other nitwit would come along willing to pay even more), the market almost immediately collapsed.

It wasn't the first pricking of a speculative bubble, and it certainly wouldn't be the last. But the tale of the tulips was memorable and, unlike most other market phenomena, it doesn't require a Ph.D. in economics to understand. Its most important popularizer was Charles Mackay, a Scottish newspaperman and poet whose entertaining but unreliable 1841 book, Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, tells of the tulips and two more complicated 18th-century financial bubbles--France's Mississippi scheme and Britain's South Sea episode--before delving into the likes of alchemy, witch hunts, and the Crusades. The book is a perennial favorite on Wall Street: Financier Bernard Baruch recommended it in the 1930s, and in March 2000 money manager Ron Baron handed out copies to all 42 of his employees (at least that's what it says in the latest Baron Funds semiannual report).

The tulip episode also figures prominently in such widely read surveys of financial history as Charles Kindleberger's Manias, Panics, and Crashes and John Kenneth Galbraith's A Short History of Financial Euphoria. And with the tech- stock boom of the late 1990s came a veritable tulipomania mania. A quick check of Dow Jones News Retrieval's database returns 433 articles mentioning "tulipmania" or "tulip mania" since the beginning of 1999--and that's excluding all mentions of the annual Tulipmania flower festival on San Francisco's Pier 39. Two new popular histories of the tulip frenzy appeared in 1999 to great interest (most of the tulip-related history in this article is taken from one of them, Tulipomania, by Mike Dash), as did a novel, Tulip Fever, the motion picture rights to which are now in the hands of one Steven Spielberg. That year also saw the high-profile publication of Devil Take the Hindmost, a history of financial speculation that of course included a section on tulips. In 2000 economist Peter Garber came out with a book called Famous First Bubbles in which he argued that investors in tulips, the Mississippi scheme, and the South Sea Co. were actually acting rationally--perhaps a soothing notion to a modern reader who happened to be neck deep in dot-com stocks, although in Garber's telling it turns out that even rational investors can lose all their money.

There's nothing wrong with all this attention to preposterously expensive flowers--nothing wrong at all. But now that the Nasdaq bubble has popped, we really don't need anybody to remind us--for the next few years at least--that what goes up in financial markets can just as easily come crashing down. What would be far more useful is some clue as to what comes next. The stock market (or at least the part of the market that investors had become most infatuated with) has undeniably crashed. Does that mean it will stay down? Does it mean a depression is ahead? Does it mean the dawning of an austere era in which Wall Street is a dirty word (well, two words), risk taking is frowned upon, and musical comedies featuring tap dancers dominate the box office?

That last riff is, of course, a reference to the excruciatingly austere decade that followed the speculative bubble of the 1920s and the Great Crash of 1929. If tulips dominate the popular view of what speculative manias look like on the way up, it is the Great Depression that most people--at least in the U.S.--have in mind when they talk about what happens afterward.

In this view, reinforced by such works as John Kenneth Galbraith's The Great Crash 1929, the hard times were the inevitable result of the giddy excess that went before. That moralistic interpretation isn't new. In 17th-century Holland pamphlets and artwork castigating tulip speculators were churned out for years after the crash. "The elite viewed this degeneration of business into gambling with deep misgivings," writes historian Simon Schama in The Embarrassment of Riches--yes, yet another serious book with stuff about tulips in it. "It was the contagion of pandemia: The gullible masses driven to folly and ruin by their thirst for unearned gain."

Disdain for speculation and for unearned gain has been a common thread in popular discussion of market bubbles ever since. It isn't an entirely misguided attitude. If all of us spent all our time playing the markets, the actual economic activity upon which those markets rely would presumably cease. What's more, most of us simply aren't very good at speculating and are likely to lose money at it. But none of that proves that financial speculation is always a bad thing or that it invariably leads to big trouble.

If it did, then every speculative bubble should as a matter of course result in economic disaster. And even the most superficial reading of economic history reveals that that simply is not the case.

To begin with, the tulips: Although Mackay writes, "The commerce of the country suffered a severe shock, from which it was years ere it recovered"--and many subsequent chroniclers have simply accepted his claim as truth--historians who have actually looked through the archives have found nothing to back it up. Prices on financial markets (Amsterdam already had a stock exchange at the time) kept on rising well after 1637, and there is absolutely no evidence of widespread economic distress. In fact, the tulip craze played out smack in the middle of the Netherlands' economic Golden Age, a time when the country became the richest in Europe.

Of the other two early bubbles mentioned in Mackay's book, Britain's South Sea episode--in which a company formed to refinance government debt quickly turned into a pyramid scheme that inspired scores of imitators--seems to have left few if any economic scars. However, John Law's Mississippi scheme in France, an even more ambitious bit of financial engineering that involved both refinancing the French government's debt and issuing vast quantities of money in the novel form of paper, does appear to have caused real economic turmoil when it collapsed.

In general, though, it's probably a mistake to attach too much significance to the economic consequences (or lack thereof) of 17th- and 18th-century financial crises. That's because starting in the late 18th century, the economies of first Britain and then Continental Europe and the U.S. were transformed. And the dawning Industrial Revolution, with its voracious appetite for capital to build factories and machines, meant that financial market fluctuations would have a much bigger impact on overall economic activity than they'd had in the days of tulipomania.

The first century of industrialization saw repeated cycles of investor euphoria--for canals, railroads, electricity, and scores of other less significant innovations--each followed by busts in which oodles of companies went under and thousands of speculators lost their shirts (among them, according to family legend, this writer's great-grandfather, who lost nearly everything in the Panic of 1893). The more significant of the crashes had an economic impact that went far beyond punishing those who played the markets.

The reasons for the impact were twofold: First, investor enthusiasm could lead to overinvestment in the new technology. That is, if more railroads were built than were needed to satisfy current demand, railroad building would grind to a halt and with it all the economic activity surrounding the construction of railroads. A few years later demand might catch up, and all those railroads would be put to productive use, but in the meantime the economy was subject to a significant drag. The other economic danger was that financial distress would lead to bank panics, which, when they happened--and they happened a lot in 19th-century America--shut off the cash spigot on which the new industrial economy depended.

Still, things usually got better before too long. The estimates of U.S. gross national product from 1869 to 1918 compiled by University of California at Berkeley economist Christina Romer show downturns, sure, but none that lasted more than two years. Not surprisingly, most economists of the time tended to believe that the downswings of the business cycle were unavoidable, even healthy, correctives to the excesses of the good times.

Which helps explain why, in the early 1930s, economist Joseph Schumpeter told his Harvard students--as memorably recounted by one of them, Robert Heilbroner, in his book The Worldly Philosophers--"Chentlemen, you are vorried about the Depression. You should not be. For capitalism, depression is a good cold douche." ("Douche," in just about every Western European language other than English, means "shower.")

But the Depression of the 1930s was more than just a cold shower. It was far and away the worst economic disaster the industrialized world has ever experienced. Nothing else even compares. And while popular accounts of the tragedy tend to place most of the blame for what followed on the exuberant, excessive 1920s (it was all Jay Gatsby's fault!), that's not the way economists see it. In their view the main reason the stock market crash was followed not by a run-of-the-mill recession but by a wrenching, seemingly unending depression was that central bankers in the U.S. and elsewhere royally screwed up.

Milton Friedman and Anna Schwartz, in their 1963 epic, A Monetary History of the United States, 1867-1960, were the first to make the case that overly tight monetary policy was the chief cause of the Great Depression. For a long time that was a controversial view. It isn't anymore. What happened in the 1930s, economists now almost universally agree, is that the Fed and other central banks around the world were so concerned with trying to maintain the international gold standard, which had been wobbling ever since the outbreak of World War I, that they ignored the needs of their national economies. Or, to put it in terms that a modern reader might better understand, the Fed effectively started jacking up interest rates a year before the Crash of 1929, and kept raising them (or at least didn't ease them) for almost four years afterward. And when banks started failing around the world in 1931, the Fed and its overseas counterparts didn't do anything (or at least didn't do enough) to halt the panic.

As the aggressive actions of Alan Greenspan's Fed during the past few months and in the midst of the global financial scare of 1998 attest, those mistakes probably aren't going to be repeated. In post-war America, market crashes simply haven't been allowed to cause major economic problems. Yes, the collapse of the Nifty Fifty stock market boom in 1973 and 1974 (a far steeper decline in the overall stock market, as represented by the S&P 500, than the recent crash) coincided with a recession, but the oil crisis, not the stock market, is usually fingered as the culprit. And the harrowing 1987 crash (again sharper, although less prolonged, than the 2000-01 variety) seems to have had no impact on the economy at all.

It is true that Americans now have far more of their wealth tied up in the stock market than they did in 1973 or 1987, and that this wealth effect provides yet another channel for financial market fluctuations to be transmitted to the real economy. It's also probably true that economic policymakers will eventually find new, as yet undreamed-of mistakes to make. But the history of the 1929 Crash and of other bubble collapses that didn't lead to great depressions does seem to suggest that, for things to get really horrible, something more than just a 60% Nasdaq drop has to happen.

And it could, it could: A continued rise in energy prices, a boneheaded move by a President or central banker somewhere, a bond market crisis, a plague, a war, you name it--this is not a risk-free world. If anything, it seems to have become a tad riskier lately. Japan is mired in a post-bubble slump with depression-like staying power, although its severity is nothing at all like the real thing. In Southeast Asia, the crash of 1997 resulted in economic downturns that packed nearly as much wallop as the Great Depression, particularly in Indonesia, but didn't last nearly as long. Again, there are causes for those slumps beyond the mere collapse of financial bubbles: In Japan the flurry of asset write-offs, bankruptcies, and other efforts to begin anew that usually follow a financial market crash in a capitalist economy--and typically clear the way for a recovery--have, for reasons both cultural and legal, been happening in infuriating slow motion. In Indonesia the heavy reliance on investment denominated in foreign currencies meant that the country's central bank really couldn't follow an expansionary monetary policy, since it had no control over the Japanese, European, and American money that mattered most to the economy. The country's political instability didn't help either.

All in all, it's hard not to conclude that speculative bubbles have gotten a bad rap. Yes, by steering investment in the wrong direction (or too far in the right direction), they can cause economic pain. But they cannot, by themselves, wreak true economic havoc. And there is a long history of investment bubbles helping pave the way for major technological and economic advances--albeit advances that generally become apparent only long after the bubble has deflated.

That this has been true for railroads, electricity, and automobiles is widely known. But it may even be the case for tulips. Think about it: By giving the Dutch a huge head start over their European neighbors in tulip "technology," the mania of the 1630s laid the groundwork for what is now, according to the Flower Council of Holland, a $4 billion industry employing more than 90,000 people. The Dutch tulip fields are even providing employment to at least one American dot-com refugee, according to an article that recently appeared in Silicon Valley's hometown newspaper, the San Jose Mercury News. To be sure, the formerly wealthy 22-year-old is simply helping out on the bulb farm owned by his girlfriend's family. But it's nevertheless a pretty powerful testament to the fact that even the most seemingly absurd investment manias don't have to end in disaster.

Tulip mania: the classic story of a Dutch financial bubble is mostly wrong

Anne Goldgar has received funding from the US National Endowment for the Humanities.


King's College London provides funding as a member of The Conversation UK.

The Conversation UK receives funding from these organisations

Right now, it’s Bitcoin. But in the past we’ve had dotcom stocks, the 1929 crash, 19th-century railways and the South Sea Bubble of 1720. All these were compared by contemporaries to “tulip mania”, the Dutch financial craze for tulip bulbs in the 1630s. Bitcoin, according some sceptics, is “tulip mania 2.0”.

Why this lasting fixation on tulip mania? It certainly makes an exciting story, one that has become a byword for insanity in the markets. The same aspects of it are constantly repeated, whether by casual tweeters or in widely read economics textbooks by luminaries such as John Kenneth Galbraith.

Tulip mania was irrational, the story goes. Tulip mania was a frenzy. Everyone in the Netherlands was involved, from chimney-sweeps to aristocrats. The same tulip bulb, or rather tulip future, was traded sometimes 10 times a day. No one wanted the bulbs, only the profits – it was a phenomenon of pure greed. Tulips were sold for crazy prices – the price of houses – and fortunes were won and lost. It was the foolishness of newcomers to the market that set off the crash in February 1637. Desperate bankrupts threw themselves in canals. The government finally stepped in and ceased the trade, but not before the economy of Holland was ruined.

Yes, it makes an exciting story. The trouble is, most of it is untrue.

My years of research in Dutch archives while working on a book, Tulipmania: Money, Honor and Knowledge in the Dutch Golden Age, told me a different story. It was just as illuminating, but it was different.

Gordon Gekko talks tulips. Wall Street: Money Never Sleeps / scottab140

Tulip mania wasn’t irrational. Tulips were a newish luxury product in a country rapidly expanding its wealth and trade networks. Many more people could afford luxuries – and tulips were seen as beautiful, exotic, and redolent of the good taste and learning displayed by well-educated members of the merchant class. Many of those who bought tulips also bought paintings or collected rarities like shells.

Prices rose, because tulips were hard to cultivate in a way that brought out the popular striped or speckled petals, and they were still rare. But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more.

A sign of good taste? Michiel Jansz van Mierevelt, 'Double portrait with tulip, bulb, and shell', 1606 , Author provided

Tulip mania wasn’t a frenzy, either. In fact, for much of the period trading was relatively calm, located in taverns and neighbourhoods rather than on the stock exchange. It also became increasingly organised, with companies set up in various towns to grow, buy, and sell, and committees of experts emerged to oversee the trade. Far from bulbs being traded hundreds of times, I never found a chain of buyers longer than five, and most were far shorter.

And what of the much-vaunted effect of the plague on tulip mania, supposedly making people with nothing to lose gamble their all? Again, this seems not to have existed. Despite an epidemic going on during 1636, the biggest price rises occurred in January 1637, when plague (mainly a summer disease) was on the wane. Perhaps some people inheriting money had a bit more in their pockets to spend on bulbs.

Prices could be high, but mostly they weren’t. Although it’s true that the most expensive tulips of all cost around 5,000 guilders (the price of a well-appointed house), I was able to identify only 37 people who spent more than 300 guilders on bulbs, around the yearly wage of a master craftsman. Many tulips were far cheaper. With one or two exceptions, these top buyers came from the wealthy merchant class and were well able to afford the bulbs. Far from every chimneysweep or weaver being involved in the trade, the numbers were relatively small, mainly from the merchant and skilled artisan class – and many of the buyers and sellers were connected to each other by family, religion, or neighbourhood. Sellers mainly sold to people they knew.

Patterned petals were very valuable. Hans Bollongier, 'Floral still life', 1639 (Rijksmuseum)

When the crash came, it was not because of naive and uninformed people entering the market, but probably through fears of oversupply and the unsustainability of the great price rise in the first five weeks of 1637. None of the bulbs were actually available – they were all planted in the ground – and no money would be exchanged until the bulbs could be handed over in May or June. So those who lost money in the February crash did so only notionally: they might not get paid later. Anyone who had both bought and sold a tulip on paper since the summer of 1636 had lost nothing. Only those waiting for payment were in trouble, and they were people able to bear the loss.

No one drowned themselves in canals. I found not a single bankrupt in these years who could be identified as someone dealt the fatal financial blow by tulip mania. If tulip buyers and sellers appear in the bankruptcy records, it’s because they were buying houses and goods of other people who had gone bankrupt for some reason – they still had plenty of money to spend. The Dutch economy was left completely unaffected. The “government” (not a very useful term for the federal Dutch Republic) did not shut down the trade, and indeed reacted slowly and hesitantly to demands from some traders and city councils to resolve disputes. The provincial court of Holland suggested that people talk it out among themselves and try to stay out of the courts: no government regulation here.

Monkeys dealing in tulips. When the bubble bursts, at the far right, one urinates on the now worthless flowers. Jan Brueghel the Younger, 'Satire on Tulip Mania', c1640, CC BY-SA

Why have these myths persisted? We can blame a few authors and the fact they were bestsellers. In 1637, after the crash, the Dutch tradition of satirical songs kicked in, and pamphlets were sold making fun of traders. These were picked up by writers later in the 17th century, and then by a late 18th-century German writer of a history of inventions, which had huge success and was translated into English. This book was in turn plundered by Charles Mackay, whose Extraordinary Popular Delusions and the Madness of Crowds of 1841 has had huge and undeserved success. Much of what Mackay says about tulip mania comes straight from the satirical songs of 1637 – and it is repeated endlessly on financial websites, in blogs, on Twitter, and in popular finance books like A Random Walk down Wall Street. But what we are hearing are the fears of 17th-century people about a 17th-century situation.

It was not actually the case that newcomers to the market caused the crash, or that foolishness and greed overtook those who traded in tulips. But this, and the possible social and cultural changes stemming from massive shifts in the distribution of wealth, were fears then and are fears now. Tulip mania gets brought up again and again, as a warning to investors not to be stupid, or to stay away from what some might call a good thing. But tulip mania was a historical event in a historical context, and whatever it is, Bitcoin is not tulip mania 2.0.

Nikkei Bubble – 1990

In 1945 Japan was a feudal monarchy that had suffered catastrophic defeat in World War II, but in fewer than 50 years this ruined nation would transform itself into a prosperous industrial democracy. Peasants became factory workers and the middle classes became white-collar workers – salary men – who were promised jobs for life in the mighty zaibatsu (banking and industrial conglomerates) that grew from the determined efforts of the hard-working Japanese people. As the economy boomed, zaibatsu morphed into even more powerful entities called keiretsu, alliances where big business and government worked together for the common good.

But the frugal Japanese saved rather than spent, ensuring that financial institutions were awash with investment capital – a fact leading inevitably to speculation. The keiretsu invested in each other’s shares, inflating values, and there was a massive real-estate boom. Banks also made increasingly risky loans as they put surplus capital to work, creating an overheating economy and an asset-price bubble that just couldn’t last.

Japan’s Nikkei share index hit an all-time high on December 29 1989, but that was as big as the bubble got. It didn’t exactly burst, but deflated rapidly through 1990 and into 1991.

The stock market dropped to half its peak level by August 1990 and continued to fall until hitting rock bottom in 2003. Land and property prices started a similar downward journey in 1991.

The long-term effect of the deflating Nikkei bubble on the Japanese economy was disastrous. Capital was redirected abroad. Manufacturers lost their competitive edge. Thrifty consumers further depressed the ailing economy as exports declined. An overhead indicator shows and – despite the fact that interest rates were reduced to zero – 160.03 yen at the Tokyo Stock there was a vicious deflationary spiral. Economic stagnation and Exchange on April 18 1990. Recession followed, unemployment rose and those valued ‘jobs for life’ inevitably started disappearing as the government ran enormous budget deficits.

When was the Nikkei Bubble: 1990

Where was the Nikkei Bubble: Japan

What was the Nikkei Bubble toll: With the puncturing of the Nikkei bubble, the Japanese economic miracle came to an abrupt end.

You should know: Despite a brief recovery after 2003, the Nikkei share index reached a 26-year low of 6,994 points during the global financial crisis of 2008. Way back in December 1989, at the height of the Nikkei bubble, it stood at a heady 38,915 points.