Anyone who lived through the late 90s knows there was a dot com bubble, and that it left many people in a lurch.. Same with the housing bubble that led up to the 2008 financial crisis. But what actually constitutes an economic bubble specifically?
A bubble is a type of economic cycle: it features rapid escalation of asset prices followed by swift contraction, like a bubble inflating and popping. Bubbles are usually caused by overly exuberant economic behavior that ignores fundamentals of the asset. They usually occur due to a major policy change, such as deregulation of banks in Japan in the 1980s, or a major shift in technology, such as the earlier mentioned tech boom. In the latter case, investors bought tech stocks at high prices, thinking they could sell them for even higher. Eventually, confidence was lost and a crash occurred.
A classic early case of a speculative bubble still taught in schools is the Tulipomania of late sixteenth and early seventeenth century Holland. Tulip bulbs were first brought to Europe from Constantinople in the 1550s. A few decades later, a Flemish botanist introduced them to the Low Countries, finding them amenable to the harsh conditions of the region. The flower soon became a status symbol, and the wealthy collected rare varieties as luxury goods. Many less fortunate sold their belongings to speculate in the market. As demand increased, the price surged. At the height of the trade, tulips could be used to purchase entire estates. By February 1643, prices got so high that buyers could not be found, causing a severe plummet. The Dutch government tried to alleviate the crash, but the results were still disastrous for rich and poor alike.
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