I studied the worst financial bubbles and what i found.
- Tulip Mania (tulip bulb market bubble)
It is one of the most famous market bubbles of all time. It occurred in Holland in the early 1600s. It is considered the first recorded speculative bubble or asset bubble in history. At the height of the tulip craze, some single tulip bulbs sold for more than ten times the annual salary of a skilled artisan. At one point, 5 hectares (12 acres) of land were offered for a tulip bulb. Yeah, like today, JPEGs are sold for millions of dollars. Maybe in the future, we will see NFT and say, wow, that was sold at that. Many investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock.
2. The South Sea bubble of 1720:
The South Sea Bubble has been called the world’s first financial crash, the world’s first Ponzi scheme, and even Isaac Newton himself lost as much as £40 million of today’s money in the scheme. In 1711, a British joint stock company called “The South Sea Company” was founded. In 1713, it was granted a trading monopoly in the region, which allowed for the trading of African slaves to the Spanish and Portuguese Empires. The South Sea Company began by offering an incredible 6% interest rate to those who purchased stocks, inflating stock prices, and the company began encouraging — and in some cases bribing — their friends to purchase stock, further inflating the price and maintaining high demand.By August 1720, the stock price hit an eye-watering £1000. The trade had never materialized, so the company was simply trading itself against the debt that it had purchased. The bubble burst. Stocks plummeted, investors were ruined, people lost thousands, there was a marked increase in suicides, and there was widespread anger.
3. Mississippi Bubble
In the early 1700’s, when France was in deep, the Duke of Orleans called on his friend Jhon Law to fix this problem, as he was a smart guy in math and economics, and eventually he fixed it. After this success, he established a Mississippi trading company. He raised money to go after the rumoured vast amounts of gold and a strange new place called Louisiana. Then he started selling stock in companies, and the price of stock skyrocketed. But as time passed, he got to know that they did not have enough gold. Because they have no product for price appreciation, they start printing more money than actual gold. People start doubting romance and stock prices start falling, which causes a major crash.
4. Railway Mania
This is similar to the dot-com bubble in that people are overjoyed about this new disruptive technology called railway, which causes stock prices to rise.As time went by, investors began to realise that railways were not all as lucrative and as easy to build as they had been led to believe. Coupled to this, in late 1845, the Bank of England increased interest rates. Money began to flow out of railways, undercutting the boom.
5. The 1920s Florida land boom
In the 1920’s, Florida was the focus of one of the greatest economic and social phenomena in American history. The era of Florida land speculation lasted from 1924 to 1926 and attracted investors from all over the nation. Lack of knowledge about storm frequency and the poor building standards used by boom developers set the conditions for the first real estate bubble in Florida. A man was tricked into buying land in Florida (in beautiful Jacksonville, Florida), which is actually 65 miles away from Florida. The boom was about to end in May 1926. Florida’s negative economic decline predated the start of the Great Depression. Therefore, it had fewer resources and more debt than other regions of the
6. The 1929 Wall Street Crash
It was the most devastating stock market crash in the history of the United States. The main cause of the Wall Street crash of 1929 was the long period of speculation that preceded it, during which millions of people invested their savings or borrowed money to buy stocks, pushing prices to unsustainable levels.People invest in stocks like their prices are only going to go up in the future. But due to the collapse of world trade and several bank runs that caused the start of the great depression,
7. Japan’s asset price bubble
When Japan was in recession in 1986, the government launched a monetary stimulas policy. They allowed cheap land lending with limited to no accountibility. This causes mass speculation and creates asset price bubbles. A land in the corner of a shop was sold for 6 lakhs, even though it is too small for building anything (something like metaverse lands:)) and the imperial place in Japan was more expensive than the whole of California’s real estate and stock market combined at a time. Eventually, the bubble collapses and the entire system crashes.
The dot-com craze
The bubble is caused due to the disturtive technology called the internet. People start speculating on the stock prices of companies that include.com in their name. This causes stock prices to sky rocket, and people stop paying any attention to the market fundamentals when the fed starts increasing interest rates. The whole bubble collapses, and internet companies lose about 1.7 trillion dollars in value.
9. The 2008 US housing bubble
The same thing happened 20 years ago in Japan. The stock market and housing crash of 2008 had their origins in the unprecedented growth of the subprime mortgage market beginning in 1999. U.S. government-sponsored mortgage lenders Fannie Mae and Freddie Mac made home loans accessible to borrowers who had low credit scores and a higher risk of defaulting on loans. Again, this causes the whole system to crash down.
What do you see common in these bubbles?
