Economic bubbles are nothing new. It seems that any unchecked enthusiasm in life in whatever sphere eventually gets pulled down by gravity. The bubble, almost universally seems to be maintained by ignoring our own private information and being guided by the decisions of others. Then, as the game takes hold, it becomes protecting the markings of distinction and moving at the crest of the in-crowd. Like the mortgage bubble, the Dutch tulip bubble of the 1630′s was greatly expanded by less knowledgeable traders entering the market and the introduction of new financial instruments to facilitate their participation in the game. All in all, financial insanity seems to cross the boundaries of era and epoch with great facility. We can look back and ask how can a single bulb cost more than an entire house, but the mortgage crisis also drew millions into a purchasing and financial cycle bound to collapse. Like the paper millionaires of the roaring twenties having to face their day of reckoning with Black October. We have always been prone to want things hard to attain, especially when a few seem to be achieving; like the Indian legend of the tortoise and the hare, we are attracted to those nutty rabbits when enough people are chasing the carrot and impervious to the looming stick.
However, it also represents some of the lessons garnered from a bubble which are less about price spikes followed by steep drops, than about given social structures and conventions within which a market is embedded.Owning a home was considered good values, beneficial for a community and part of American lore. The tragedy Madoff’s empire and victims was also socially embedded by pointing out the social connections that made sophisticated or educated investors investors forego normal verification of what seemed not quite normal, or too normal to be good, based on the expectation of returns as a socially embedded value, part of the elite’s manifest destiny.
…Tulips became sought after by the wealthy, especially in Holland and Germany – wealthy people in Amsterdam sent directly to Constantinople for bulbs, paying high prices for them. Bulbs arrived in England from Vienna in 1600.The tulip’s reputation grew to such heights that, by 1634, wealthy people who did not have a tulip collection were judged to have bad taste. Many learned men, including Pompeius de Angelis and the celebrated Lipsius of Leyden, the author of the treatise “De Constantia,” were passionately fond of tulips.
An overwhelming desire to own tulips gripped the middle classes. Merchants and shopkeepers, even those with modest incomes, began to vie with each other for tulips – and in the preposterous prices they paid for them. A trader from Harlaem paid half of his life savings for a single bulb. He didn’t buy for profit; he just wanted his friends to admire it. Read More:http://www.thetulipomania.com/
In 1634, the madness among the Dutch to own tulips became so great that day-to-day work was neglected. Even the lowest members of society took up the tulip trade. As the mania increased, prices rose, until, in 1635, a large number of people were investing fortunes of 100,000 florins to own forty tulip bulbs. It then became necessary to sell tulips by their weight in perits. (A perit was a small weight – less than a grain. 480 grains equalled 1 ounce.) Read More:http://www.thetulipomania.com/
The demand for rare tulips increased so much in 1636, that they were traded on Amsterdam’s Stock Exchange and in Rotterdam, Harlaem, Leyden, Alkmar, Hoorn, and other towns. For the first time, symptoms of gambling became apparent too. Stockbrokers, ever alert for a new speculation, dealt largely in tulips. They used every trick in the book to produce price fluctuations.At first, as with all gambling mania, confidence was high – everybody gained. The tulip-brokers speculated in the rise and fall of tulip stocks. They made large profits, buying when prices fell, and selling when they rose.
Many individuals suddenly gre
ch. People now rushed to trade in tulips, like flies around a honeypot. Everyone imagined that the passion for tulips would last for ever. They believed that wealthy people from all over the world would send to Holland, and pay whatever prices were asked for tulips. They dreamt that the riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty would be banished from Holland….
Noblemen, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney-sweeps and old clotheswomen, dabbled in tulips. People converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or used to pay for tulips. The frenzy spread beyond Holland’s borders and money poured into Holland from all directions. Inflation then reared its ugly head and the prices of life’s necessities rose strongly. Houses and lands, horses and carriages, and luxuries of every sort, rose in value. The tulip trade became so wide spread and detailed that new laws were enacted for the guidance of the dealers. Officials were appointed who devoted themselves exclusively to the tulip trade. Read more:http://www.thetulipomania.com/
The fetish of the quick dollar. The implication that we can be social fools more readily than economically stupid. In the sub-prime crisis, a central argument is that the ratings agencies, perhaps corrupted, or plausibly ignorant of the full risk involved, mis-valued the CDO’s -collateralized debt obligations- patched together from the most vulnerable part of the mortgage market. So many so-called experts trusted S&P and Moddy’s due to a long-term relationship, figuring their judgement would prevail even if it did not jive with some private judgements. Very much the same forces that created the tulip bubble. That is, the high risk posed by very few influential big money players in the web of the high spheres of finance, making crucial decisions on financial products they did not completely understand, products which had become dissociated from the initial habitat in which they had developed and were mutating , a contagion, in the larger overall ocean of mass market finance. The old adage is that a good salesman does not usually make a good sales manager and the ratings agencies were lousy with sub-prime, but reliable in lower level comprehension. So, next time we get frothy about something. Anything. Think about tulips.