Economic activity relies on group agreement relative to the value of assets and their prices. When prices rise, people tend to get excited and buy more, bidding prices higher. This is called speculation or irrational exuberance. Values can only defy gravity for so long and when folks begin to realize assets may be over-priced, panic selling brings it all crashing down. Pop. The crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise. Here are some of the more infamous bubble bursting events and “adjustments” that have occurred since the industrial revolution and our thinking about economics began.

1. When the Bubble Bursts
Economic Bubbles, Crashes, and Crises

2. Economic Cycles
Economic activity relies on group agreement
relative to the value of assets and their prices.
When prices rise, people tend to get excited and
buy more, bidding prices higher. This is called
speculation or irrational exuberance. Values can
only defy gravity for so long and when folks
begin to realize assets may be over-priced, panic
selling brings it all crashing down. Pop.

3. Defying Gravity, for a while…
The crash which usually follows an economic
bubble can destroy a large amount of wealth
and cause continuing economic malaise.
Here are some of the more infamous bubble
bursting events and “adjustments” that have
occurred since the industrial revolution and our
thinking about economics began.

4. Tulip Mania 1634-1637
Tulip Mania or
Tulipomania was a
speculative bubble in tulip
bulbs that occurred in the
Netherlands from 1634 to
1637. Tulipomania occurred
shortly after the tulip plant
was introduced to Europe
from the Ottoman Empire,
in present-day Turkey. Tulips
had a rare and exotic beauty
for the northern Europeans.

5. Bling
• Dutch high society
cultivated and displayed
tulips as a status
symbol. As tulip prices
rose, speculators began
to buy tulip bulbs with
the intent of “flipping”
them later for higher
prices.

6. The Tulip Folly
Many got involved in the
speculation of tulip bulbs
as people saw money was
being made. It turned into
frenzy. It is sometimes
called tulipomania. People
ended up trading all of
their worldly possessions
for a single tulip bulb.

7. Jan Brueghel the Younger
Satire on Tulip Mania, c. 1640

8. What goes up…
• Many Dutch tulip
speculators became
fantastically wealthy.
Temporarily. Tulip bulb
prices peaked and
imploded, bankrupting
many speculators. The
aftermath: an economic
depression that lasted
for many years in the
Netherlands.

9. The South Sea Bubble (1716-1720)
The South Sea Bubble was
a speculative stock bubble
in Britain in the early
18th century. The South
Sea Bubble occurred at
the same time as
France’s Mississippi
Bubble. There must have
been something in the air.

10. South Sea Company
The bubble was centered on
the shares of the South Sea
Company, an international
trading company that was
granted special trading rights
by the British government in
what was then called the
South Seas and now called
South America. It was a
similar arrangement that had
been successful for a hundred
years in India with the British
East India Company.

11. South Sea Bubble

12. South Sea Bubble
South Sea Company executives
spread rumors that exaggerated the
commercial value of the company’s
trading rights, which caused its
shares and soon the shares of similar
companies to soar (think Theranos).
Shortly after the stock speculation
mania swept throughout Britain,
with scientist Isaac Newton and
author Thomas Swift, author of
Gulliver’s Travels, taking part, the
South Sea Bubble burst and caused a
very severe economic crisis. When
Newton lost a fortune in the crash,
he famously remarked, “I can
calculate the movement of the stars,
but not the madness of men.”

13. The Mississippi Bubble (1716-1720)
The Mississippi Bubble was
a speculative stock bubble in
France in the early
18th century that occurred
at the same time as
Britain’s South Sea Bubble.
The seeds of the bubble
were sown 1715, when
France was nearly insolvent
from war and sought the
help of Scottish economic
theorist John Law.

14. Millionaire
Law decided to create a national
bank that would accept deposits of
gold and silver currency and issue
“paper” money or bank notes in
return. Very soon, Law’s national
bank began to issue much more
paper currency than it received in
gold and silver currency deposits,
which created an inflationary
economic “bubble boom.” One of
Law’s international trading
companies, the Compagnie des
Indes, became one of the prime
beneficiaries of the inflationary
boom as its shares skyrocketed and
created many millionaires. This is
how the French word millionaire was
coined.

15. Pop
For a time, it seemed as if
France’s financial
problems were over, until
the Mississippi Bubble
popped and Law’s trading
company shares and
paper bank notes plunged
in value and threw France
into an even greater
economic crisis than it had
before the bubble.

16. The Mississippi Project
The Mississippi project was so successful that the Regent took an
enthusiastic interest in his schemes. The country went crazy over the
Mississippi project. Reports were circulated of the discovery of
marvelous mines there, bursting with gold and silver. The shares of the
company, which had been issued to sell at $100 each, were sold for
ten, twenty, and at last even forty times their value. All the hoarded
wealth of France was brought out, with which to speculate. Nobles
sold their jewels and family plate to buy stock. Metal money was so
inconvenient in such large sums that the paper of the government was
accepted blindly, and passed swiftly from hand to hand. Nearly a
billion dollars of it was soon in circulation, while all France contained
less than a quarter of that amount in actual coin. Law was terrified by
his own success. He tried vainly to check the government’s reckless
issues of paper. He knew that his Mississippi shares could not possibly
be worth the enormous sums people paid for them.

17. The Mississippi Folly
The shrewder speculators also became alarmed. They began
to sell their shares of stock, and hoard in gold the enormous
wealth they had acquired. This resulted in a demand on the
government for metal in exchange for its paper, and soon the
government had no metal to give. Then the crash came. Those
who had the government paper could buy nothing with it.
Those who held the Mississippi stock could scarce give it away.
It was worthless. The government itself refused to accept its
own paper for taxes. A few lucky speculators had made vast
fortunes; but thou-sands of families, especially among the
wealthier classes, were ruined. Suicides were numerous. Law
barely escaped being torn to pieces, and fled in abject poverty
from France.

18. Get the Popcorn!
• Here is a fun little animated movie
dramatizing the Mississippi Bubble and John
Law.
• https://www.youtube.com/watch?v=diEVmQZ
1QfM

19. John Law cartoon

20. The British "Railway Mania" Bubble
Railway Mania was an economic bubble in the United Kingdom in the
1840s that involved a railroad development frenzy and a speculative
bubble in the shares of railroad companies. Like the Dot-com bubble of
the late 1990s, the British Railway Mania was the result of over-
exuberance toward the business prospects of a disruptive innovation.
Railroads were revolutionary when they were first introduced. As
railroad stocks soared to astounding heights, railroad companies
massively overbuilt thousands of kilometers of railway lines
throughout the UK. When the Railway Mania bubble eventually
popped, many railroad companies went out of business, railway stock
investors were ruined and enormous debts were left throughout the
country. A similar thing happened with the overbuilding of fiber optic
cables in the early 2000s and in both cases the overbuilt infrastructure
ultimately spurred economic growth. Just not to the benefit of the
original investors.

21. US disruptive booms and busts
There were several boom and bust cycles in the
late 1800s and early 1900s in the US that were
very disruptive. The response was in 1913 to
create the Federal Reserve, the central bank of
the U.S.

22. Creation of U.S. Central Bank
the Federal Reserve
A central bank or monetary
authority is a monopolized
and often nationalized
institution given privileged
control over the production
and distribution of money
and credit. In modern
economies, the central bank
is usually responsible for the
formulation of monetary
policy and the regulation of
member banks.

23. Fed as chaperone to markets
• The Fed’s job is to take away the
punch bowl just as the party is
getting started.
• Mr. Martin owned up that the
Federal Reserve “is in the position
of the chaperone who ordered
the punch bowl removed just
when the party was really
warming up.” But it was done
because there are economic
danger signals in sight. “If we fail
to apply the brakes sufficiently,
and in time, we shall go over the
cliff.”
• 1951-1970 William McChesney
Martin Jr.

24. Florida Real Estate Bubble of the 1920s
• The Florida Real Estate Bubble was a speculative property bubble
that occurred in Florida in the early and mid-1920s. Up until the
1920s, the state of Florida was relatively unpopulated and large
parts of the state consisted of undeveloped swampland. The
Roaring Twenties economic boom, and eventual bubble, made
many people wealthy and created a new class of people who could
afford to go on vacations. Florida’s beautiful weather and beaches
made it a natural destination for America’s burgeoning “leisure
class” and land developers and speculators quickly took notice.
Soon Florida land prices were skyrocketing and incredible amounts
of money were flowing in from “Up North” – cold but affluent
states such as New York, Connecticut and Massachusetts. The
Florida Real Estate Bubble created many millionaires until it finally
crashed in 1925 and devastated the state’s economy.

25. The Stock Market Crash of 1929
America’s Stock Market Crash of 1929 started in October of
1929 after the Roaring Twenties economic “bubble boom”
finally popped. The Roaring Twenties were a time of peace
and prosperity after WWI and the U.S. stock market soared as
new technologies such as radio, the automobile and airplanes
became commercialized. Many Americans speculated in the
stock market, often with large amounts of borrowed money,
and became extraordinarily wealthy. By the fall of 1929, the
stock market peaked and then plunged, financially-ruining
many stock investors some of whom jumped out of tall city
buildings to their deaths. As the Crash of 1929 unfolded,
thousands of banks failed, unemployment skyrocketed and
the United States entered into the Great Depression, which
lasted until the US entry into WWII.

26. Response to 1929 Crash: SEC
In addition to the Securities
Exchange Act of 1934,
which created it, the SEC
enforces the Securities Act
of 1933, the Trust Indenture
Act of 1939, the Investment
Company Act of 1940, the
Investment Advisers Act of
1940, the Sarbanes–Oxley
Act of 2002, and other
statutes.

27. Black Monday – the Stock Market
Crash of 1987
The Stock Market Crash of 1987, also known as Black Monday, was the
largest one-day market crash in history. The Crash of 1987 came on the
heels of a spectacular stock bull market that started in 1982 that was
fueled by a supercharged business environment that included hostile
takeovers, leveraged buyouts and merger mania. The Dow stock index
nearly doubled from 1986 until the fall of 1987, when the market
began to drop and encouraged investment managers to use a new tool
called “portfolio insurance” to protect their investments from further
losses as the market fell. On Monday October 19th, 1987, an avalanche
of very aggressive “sell” orders hit the market as investors began to
panic, which triggered additional “sell” orders and more use of
portfolio insurance. By the end of that day, Black Monday, the Dow lost
an incredible 22.6% of its value.

28. Japan’s Bubble Economy of the 1980s
During the late-1980s, Japan experienced its “Bubble Economy” in
which real estate and stock prices soared along with the country’s
overheated economy. Japan’s “Bubble Economy” era occurred at the
end of its three-decade old “Economic Miracle” that began after World
War II and saw the country’s fortunes blossom, as it became the
world’s automobile and electronics manufacturing powerhouse. By the
peak of Japan’s Bubble Economy in 1989, a house in Tokyo cost well
over $2 million and the land underneath Tokyo’s Imperial Palace was
rumored to be worth more than all of the land in California. Japan’s
Bubble Economy peaked in late 1989 and the country’s highly-inflated
stock and property markets began to crash. By 1992, Japan’s Nikkei
stock index plunged to 15,000 from its peak of nearly 40,000 and the
country’s real estate markets were decimated along with the rest of
the economy. Since 1989, Japan’s Bubble Economy has deflated for
over two decades, leading to this era being called the “Lost Decades.”

29. Long Term Capital Management
• Smartest guys in the
room
• John Meriwether
• Nobel laureates
• Fisher Black
• Robert Merton
• Hedge Fund

30. The Dot-com Bubble (Late 1990s)
• The Dot-com Bubble was a speculative bubble in the shares of early
Internet companies called “Dot-coms.” From the mid to late-1990s,
technology company stocks in the Nasdaq stock index soared to
incredible heights, making scores of investors and technology
company founders extremely wealthy. At this time, many people
began to believe that technology had led to the creation of a “New
Economy” where the traditional business cycle and recessions were
a thing of the past. These “New Economy” beliefs led to excessive
risk-taking in business and investments as Dot-com companies went
public such as the infamous Pets.com and Webvan even though
they had negative earnings or astronomically high business
valuations. In early 2000, the technology stock bubble crashed
spectacularly as the Nasdaq plunged from 5,000 to nearly 1,000 by
2002 and the U.S. economy was hurled into a recession.

31. 2008 What Happened?

32. Flash Crash
The May 6, 2010, Flash Crash also known as
the Crash of 2:45, the 2010 Flash Crash or simply
the Flash Crash, was a United States trillion-
dollar stock market crash, which started at
2:32 p.m. EDT and lasted for approximately 36
minutes. Stock indexes, such as the S&P
500, Dow Jones Industrial Average and Nasdaq
Composite, collapsed and rebounded very
rapidly.

33. When is the next?