Op-Ed: A Brief History of Bubbles
Predictions as to which will burst next.
Editor's Note: James Quinn is a senior director of strategic planning for a major university. James has held high-level financial positions with a retailer, homebuilder and a university in his 22-year career. He can be found online at www.TheBurningPlatform.com.
Never in the history of the world has a bubble burst halfway - they collapse back to where they started, or below it. The pundits on CNBC and the Sunday talkshows continue to predict housing-market stabilization. They're wrong.
The bubble won't truly burst until home values are back to 2000 levels - if we're lucky.
Some examples of incredible bursting bubbles include:
The Tulip Bubble of 1637-1638
At the peak of the mania, in February 1637, tulip contracts sold for more than 10 times the annual income of a skilled craftsman. In a matter of 7 months, fortunes were made and lost.
The South Sea Bubble of 1719-1722
The South Sea Company was the AIG (AIG) of the 1700s. A British joint-stock company, it was granted a monopoly to trade as part of a treaty during the War of Spanish Succession and assumed the national debt England had incurred during the war.
In 1719, the company proposed a scheme by which it would buy more than half the national debt of Britain (£30,981,712), again with new shares, and a promise to the government that the debt would be converted to a lower interest rate - 5% until 1727 and 4% per year thereafter.
The purpose of this conversion was similar to allowing a conversion of high-interest but difficult-to-trade debt into low-interest, readily marketable debt and shares of the South Sea Company. (These are the games that declining empires play when they've overreached.) The plan sounds a bit like Tim Geithner's good bank/ bad bank scheme - but shuffling debt from one entity to another entity doesn't get rid of it.
The price of South Sea Company stock went up from £100 a share to almost £1,000 per share. Its success caused a country-wide investing frenzy by peasants, businessmen and lords. The price reached £1,000 in early August, and the level of selling was such that the price started to fall - dropping back to £100 per share before the year was out and triggering bankruptcy among those who had bought on credit.
The English Parliament reacted to the crisis exactly the way our Congress is reacting to the AIG debacle. The estates of the directors of the South Sea Company were confiscated and used to relieve the suffering of the victims, and the stock of the South Sea Company was divided between the Bank of England and the East India Company. A resolution was introduced in Parliament suggesting the bankers be tied up in sacks filled with snakes and tipped into the Thames River.
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