Op-Ed: A Brief History of Bubbles
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.
Bubble, Bubble
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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The whole housing bubble curve has me scratching my head. Curves, at some level, reflect mass psychology and ones that go asymptotic like the housing bubble shown, reflect mania price premiums based on the belief that prices, will not only increase, but accelerate their rise. Now, the government may stabilize prices though one means or the other. But the belief in a sixty year streak of unbroken prices increases should take the next sixty years to recreate. And the the way I see it, the only way to recreate the belief that future price rises will accelerate is to pair the value with something that will accelerate it's downward value over time. Yikes! I guess we all know what that means.
In the mean time, belief in the systems has been ripped from the current generation of borrowers and won't be easy to restore. To me the saddest thing is all these people who were suckered by all the commisioned Realtors and hoodwinked by the fee based lenders. Those people who are now in foreclosure, or bankruptcy or both. I know half a dozen of them. Their stories are different but a lot of the results are the same. Lots of time spent overpaying for a piece of the American dream that was not spent perfecting relationships which are now, commonly, in failure mode as well. They are some of the hardest working people I have ever met, all were dual income households.
I have my theories on what went wrong along the way and how on an individual level people can right their ships but none of my ideas involve leveraging two professional incomes thirty years into the future to buy a house that only takes a couple of man years of mostly semi-skilled labor to build and should depreciate with age.
Looks like GS is acting poorly. Does this mean that investors think their big brother is broke?
Darwin got it right a long time ago. It isn't the strongest, or the most attractive, or smartest that survive. It is the ones that can adapt.
Being able to adapt is what makes the difference. Those individuals who are 30 year in debt situation, will not admit their mistake. As much as some parents with kids won't admit they are no longer in love.
Yesterday was the end. From now on Treasury auction will not be allowed to fail. Perception is the last thing that 'they' will hold on to. Only those who can see past this scam and prepare will survive.
This isn't a game. This one is for real. An end of an empire; which at one point I had mountains of respect for. Now I'll respect only it failure. Because living a lie, isn't living at all. And if your good name is all that you have, I'm not sure what to call this anymore.
Please, it's not even close to that. It's more like 61%. You may want to cite some sources. Check this out:
http:
//en.wikipedia.org/wiki/File:USDebt.png
But you should leave off the Tulip Bubble. In retrospect, there is little to support the stories that the bubble was so large or pervasive. Very little exists in the way of written records, and the "bubble" is assumed to have occurred based on Mackay's analysis of irrational behavior. Upon review, it seems that the bubble was limited in its scope, and probably size.
Written records are limited, and the few that exist show vast differentiation in pricing. There is no consistent evidence that a tulip bubble took place on a large scale, or that prices were bid up exponentially. The existing evidence is primarily anecdotal, and typically from unreliable or unexamined sources.
The other bubbles, however, have been analyzed quite well and have been documented extensively. Interestingly, no bubble has ever been allowed to die of its own accord, except perhaps the NASDAQ bubble. However, government intervention due to so many other financial items of the time (Y2K, Asian debt, etc.) may have played a mitigating role with regard to the long term effects of the NASDAQ bubble.
So, realistically, we have no idea what would really happen if we let the problems sort themselves out. In all likelyhood, things would be much better off.
Here is a link to the article from John Mauldin's website.
You are quoting the Federal Government debt, which WAS 62% of GDP before another $2 Trillon was added since the Wiki article was last updated.
The article is talking about TOTAL US debt, meaning Federal, State, County, City, Town and all the citizens of the United States.
That number is 340% of GDP (I suspect even that number is outdated) and is the common measurement to use when you need to decide if you should stop digging the hole you're currently in.
It's also the method used when comparing other nations to the US. Total debt, not Federal debt.
