A Short History of Booms, Bubbles, and Busts

Rapp, Donald

doi:10.1007/978-1-4939-1092-2_2

Donald Rapp²

2665 Accesses

Abstract

The first section of this book reviews the various theories for why financial bubbles occur, including human nature and perceptions, subjective valuation of assets, and external events. Most financial bubbles are based on reasonable expectations for growth in productivity from new developments, but quickly get out of hand when assets are bought and sold only for resale to a new investor. The second part of this book reviews most of the major financial bubbles starting in the 18th century and ending with the housing bubble that ended in 2007–8.

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Notes

1.
Bordo (2003).
2.
Wood (1999).
3.
World Economic Outlook, IMF, April, 2003 http://www.imf.org/external/pubs/ft/weo/2003/01/pdf/chapter2.pdf.
4.
Smith (2004).
5.
Jiménez (2011).
6.
Smith (2004).
7.
Allen (1931).
8.
Allen (1931).
9.
Aylen (2001).
10.
Post War Boom and Bust (1920–1929), http://www.flowofhistory.com/category/export/html/151.
11.
Janeway (1990).
12.
Brocker and Hanes (2012).
13.
Wachter and Orlando (2011).
14.
Brocker and Hanes (2012).
15.
Snowden (2010).
16.
White (2014, pp. 115−158).
17.
Galbraith (1954).
18.
I am reminded of a New Yorker cartoon that shows the manager of a professional baseball team going out to the mound to talk to his pitcher. In the background, one can perceive a stock market ticker in the dugout, and the conversation at the mound is not about baseball, but about investments.
19.
Ricke (2004).
20.
Shiller (2004).
21.
In late 1929, margin interest rates often approached 20 % and investors were happy to pay that.
22.
Bierman (1998).
23.
Samuelson (2007).
24.
Romer (2003).
25.
Bordo (2003).
26.
Galbraith (1958–1998).
27.
Friedman and Schwartz (1971).
28.
Stiglitz (2012).
29.
Brocker and Hanes (2013).
30.
Glaeser et al. (2008).
31.
FDIC (1996).
32.
Lowy (1991) and Pizzo et al. (1989).^.
33.
FDIC (1996).
34.
As an example: At the height of the OPEC oil embargo in 1973, when the economy was in dire straits, Congress passed two pieces of legislation to combat the shortage of oil: (1) the 55-mph speed limit and (2) extended daylight savings time. Neither policy had any significant effect. But Congress had shown that it could take “action.”
35.
FDIC (1996).
36.
FDIC (1996).
37.
Lowy (1991).
38.
Lowy (1991).
39.
FDIC (1996).
40.
Lewis (1989).
41.
Pizzo et al. (1989).
42.
Pizzo et al. (1989).
43.
Pizzo et al. (1989).
44.
Nisbet, Mary and Donald R. Loster, Lincoln Savings And Loan, AICPA Case Development Program Case No. 96-05, http://www.aicpa.org/download/edu/96-05a.pdf.
45.
Pizzo et al. (1989).
46.
Pizzo et al. (1989).
47.
Nowicki and Muller (2007).
48.
Mahar (2003).
49.
Lowy (1991).
50.
Smith (2004).
51.
Cassidy (2002).
52.
Cassidy (2002).
53.
Cassidy (2002).
54.
U. S. Bureau of Labor Statistics.
55.
Carlson (2007).
56.
Danielsson and Shin (2002).
57.
MacKenzie (2004).
58.
Stock Market Crash: A History of Financial Train Wrecks, http://www.stock-market-crash.net/nasdaq.htm.
59.
Cassidy (2002).
60.
Stock Market Crash: A History of Financial Train Wrecks, loc cit.
61.
Mahar (2003).
62.
Mahar (2003).
63.
In a speech on January 13, 2000, in New York.
64.
Mahar (2003).
65.
Maggie Mahar shows that Blodget had severe doubts about the staying power of the dot.com craze but his career depended on not voicing these views. In fact, Mr. Blodgett received death threats for every hint that the dot.com stocks were overpriced (Mahar 2003, p. xxi).
66.
Swensen (2005).
67.
United States District Court, Southern District of New York, Master File No. 02 MDL 1484, Judge Milton Pollack.
68.
http://securities.stanford.edu/1024/MER02-01/index.html.
69.
Sornette and Woodward, http://www.thic-apfa7.com/en/htm/index.html.
70.
The Illusion of the Perpetual Money Machine by Didier Sornette and Peter Cauwels, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2191509.
71.
http://tv.msn.com/tv/series/american-greed/.
72.
CFO Magazine, Adelphia Comes Clean, http://www.cfo.com/article.cfm/3011051/c_3046603?f=insidecfo.
73.
http://www.zerohedge.com/contributed/2013-07-04/men-broke-banks-rogue-traders.
74.
Barings Debacle, Risk Glossary, http://www.riskglossary.com/link/barings_debacle.htm.
75.
Sungard Bancware eRisk, http://www.erisk.com/Learning/CaseStudies/AlliedIrishBanks.asp.
76.
http://wcbstv.com/national/Societe.Generale.fraud.2.638859.html.
77.
http://www.zerohedge.com/contributed/2013-07-04/men-broke-banks-rogue-traders.
78.
http://www.nytimes.com/packages/html/national/200904_CREDITCRISIS/madoff_clients.html.
79.
http://www.reuters.com/article/2014/01/07/us-jpmorgan-madoff-deal-idUSBREA060JL20140107.
80.
http://www.ritholtz.com/blog/2010/03/what-were-the-actual-losses-in-madoffs-fraud/.
81.
Sharp (2002).
82.
Wikipedia.
83.
Sharp (2002).
84.
Sharp (2002).
85.
The Wikipedia quotes Kenneth Lay as saying: “In the final analysis, it doesn’t matter what you crazy people in California do, because I got smart guys who can always figure out how to make money.”
86.
McLean (2001).
87.
Blind Faith: How Deregulation and Enron’s Influence Over Government Looted Billions from Americans – Sen. Gramm, White House Must Be Investigated for Role in Enron’s Fraud of Consumers and Shareholders, December 2001, Public Citizen’s Critical Mass Energy & Environment Program, http://www.citizen.org.
88.
Kenneth Lay was a visitor to the White House where he was a pal of George W. Bush.
89.
It is noteworthy that Mr. Gramm surfaced again in July 2008 with his commentary on the financial crisis declaring that we have become “a nation of whiners.” The Republican Party hastened to disassociate itself from Mr. Gramm. (“McCain doesn’t need enemies. He has friends,” Newsweek, July 10, 2008).
90.
Lowenstein (2000).
91.
Unless this clarification shows the investment to be worse than was initially supposed.
92.
Danielsson and Shin (2002).
93.
Kolman (1999).
94.
Taleb (2007).
95.
Danielsson and Shin (2007).
96.
Kolman (1999).
97.
Dowd (1999).
98.
Dowd (1999).
99.
Dowd (1999).
100.
Bezemer (2001).
101.
Bezemer (2001).
102.
Price Waterhouse Coopers, Deloitte Touche Tohmatsu, KPMG International, Ernst & Young, and Arthur Andersen, each with revenues in 2001 that exceeded US$ 10 billion.
103.
Mattera (2002).
104.
Mattera (2002).
105.
Mattera (2002).
106.
It seems probable that the large accounting firms were willing to pay fines and damages that were far less than their profits. This seems to be analogous to automobile companies that would rather pay damages from suits, than pay the cost of making their cars safe.
107.
The WorldCom scandal, A Look Back at One of the Biggest Corporate Scandals in U.S. History, http://voices.yahoo.com/worldcom-scandal-look-back-one-biggest-225686.html.
108.
Skeptical CPA, http://skepticaltexascpa.blogspot.com/.
109.
Supreme Court Inc., New York Times Magazine, March 16, 2008.
110.
James B. Stewart required almost 600 pages to tell the whole story in his book: Den of Thieves, Simon and Schuster, 1991.
111.
There is a saying on Wall Street that “The bulls make money; the bears make money; and the pigs get eaten.”
112.
In this context, “parking violations” has nothing to do with vehicles. It refers to using surreptitious ownership of a stock through an intermediary to hide the true ownership.
113.
Baker, Dean, The housing bubble and the financial crisis, paecon.net/PAEReview/issue46/Baker46.pdf.
114.
Note: The 10–20 % profit is on the house price. For an investor who puts 5 % down on the house, the profit on his investment is 200–400 %. For an investor who puts no money down, the profit margin is infinite.
115.
Baker (2011).
116.
By permission from Gjerstad and Smith (2009).
117.
http://www.stat.unc.edu/faculty/cji/fys/2012/Subprime%20mortgage%20crisis.pdf.
118.
Lilly (2007).
119.
Lilly (2007).
120.
Lilly (2007).
121.
Lilly put the word “homeowners” in quotes, possibly because their equity was so small that they could hardly be called owners, or possibly because many of them were speculators and did not live in the home.
122.
Stiglitz (2012).
123.
http://fcic.law.stanford.edu/report/c.
124.
Lowenstein (2008).
125.
http://www.aei.org/outlook/economics/financial-services/housing-finance/free-fall-how-government-policies-brought-down-the-housing-market/.
126.
Financial Crisis Inquiry Commission Report, http://fcic.law.stanford.edu/report..
127.
Holt (2009, pp. 120–129).
128.
By permission from Gjerstad and Smith (2009).
129.
Wall Street Journal (February 6, 2008) http://online.wsj.com/article/SB120225852189145889.html?mod=todays_us_marketplace.
130.
Jurow, Keith Here’s How Widespread Mortgage Fraud Created The Housing Bubble. http://www.businessinsider.com/how-widespread-mortgage-fraud-toppled-the-housing-bubble-2010-5
131.
http://www.huffingtonpost.com/2013/04/19/paul-krugman_0_n_3118069.html.
132.
McDonald and Stokes (2011).
133.
http://online.wsj.com/article/SB123811225716453243.html.
134.
Holt (2009).
135.
White (2014).
136.
Holt (2009).
137.
Dr. Housing Bubble, http://www.doctorhousingbubble.com.
138.
Dr. Housing Bubble, loc cit.
139.
Greenspan and Kennedy (2007).
140.
Steindel (2007).
141.
Poole (2007).
142.
David Stockman, loc cit.
143.
Yones, Med, U.S. Economy Risks and Strategies for 2007–2017, http://iim-edu.org/u.s.economyrisks/.
144.
http://online.wsj.com/article_print/SB120243369715152501.html.
145.
Los Angeles Times, February 14, 2008.
146.
Los Angeles Times, July 23, 2008.
147.
Bloomberg.com.
148.
Bloomberg.com.
149.
e.g., http://www.creditwritedowns.com/2008/05/credit-crisis-timeline.html.
150.
By permission from Gjerstad and Smith (2009).
151.
By permission from Cato Journal: White (2011).
152.
http://michellemalkin.com/2007/12/03/hillary-and-bush-agree-government-should-bail-out-homeowners/.
153.
http://www.foreignpolicy.com/story/cms.php?story_id=3976 (reporting on Morgan-Stanley data).
154.
Floyd (2008).
155.
http://bizbeatblog.dallasnews.com/2013/06/dallas-feds-richard-fisher-sees-no-u-s-housing-bubble-yet.html/.
156.
http://www.nytimes.com/2014/01/06/opinion/the-bubble-is-back.html?_r=0.
157.
http://www.doctorhousingbubble.com/2014-housing-forecasts-real-estate-2014-predictions-prices/.
158.
http://www.doctorhousingbubble.com/shadow-inventory-second-wave-foreclosure-defaults-short-sales-hidden-benefits-stimulus-of-not-paying-mortgage/.
159.
Kindleberger and Aliber (2005).
160.
Smith (2004).
161.
Adapted from Jiménez (2011).
162.
What Actually Turned the Asian Boom into Bust? ZNET, http://www.zmag.org/Instructionals/GlobalEcon/id13_cf.htm.
163.
ZNET, loc cit.
164.
ZNET, loc cit.
165.
Kindleberger and Aliber (2005).
166.
Janszen (2008).
167.
http://www.bloomberg.com/news/2013-12-30/stocks-3-7-trillion-year-beats-bonds-most-ever-as-funds-revive.html.
168.
Janszen (2008).

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Rapp, D. (2015). A Short History of Booms, Bubbles, and Busts. In: Bubbles, Booms, and Busts. Copernicus, New York, NY. https://doi.org/10.1007/978-1-4939-1092-2_2

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