Slide show of the DutchTulip Mania and its meaning for modern real estate bubbles.

1. Asset BubblesHow Much is That Doggie in the Window Really Worth?

2. Ordinary Tulips Tulips originated in Turkey and became an exotic oriental flower to European elites in the seventeenth century. Ordinary Tulips are of a solid colour They propagate most rapidly asexually by the splitting or budding or their bulbs Bulbs will mature in two to three years Flowers grown from seeds mature in seven to twelve years. They flower in June and then must be dug up to be replanted in September

3. Extraordinary Tulips A mosaic virus can infect or break bulbs The resultant mutations can result in flowers of varied and sometimes spectacular colours It is ironically these broken bulbs and there mutant breeding strains that became the focus of tulip speculation

4. Tulips for the Lady The ultimate market for the flowers was the ballrooms of France Baths were not frequent and ladies took to wearing not only perfume but adorning the bodice of their dress with fresh flowers No woman wants to go to the ball wearing either the same dress or the same flower as another lady Gentlemen in Paris would pay a thousand guilders for the right flower.

5. A Scarce Commodity Thus extraordinary tulip flower became a valuable commodity Because they by nature mutant accidents of nature And took a relatively long period of time to grow in volume because of the long maturing period for seeds And of the relatively few bulb buds if reproduced asexually The fashion demand of Paris drove up prices

6. A Natural Futures Contract Middle men had an eight month period between Sept & June to place the order for future delivery This made a natural futures contract As we now realize any derivative is essentially equivalent to borrowing the money current to buy a commodity. Thus the Black Scholes model its value is a function of the risk free interest rate and the volatility of the underlying commodity price. The point here is that the futures contract provided speculators instant credit for the future purchase of tulips.

7. SPECUALTORS Between 1634 and 1637 the clubby caste of Dutch flower growers was invaded by speculators The large profits from the Paris market attracted what we would call today arbitragers intent on capturing the profit between the grower and the Paris market A nascent stock market in the Dutch Joint Venture Companies provided the model Taverns became trading floors The futures contract was verbal The Option price was wine money

8. The Elements of an Asset Bubble Scarce Commodity Rapid expansion of money or credit Moral Hazard Playing with very little of your own money and a lot of someone else's You don't have a lot to use

9. 1637 the Collapse The rapid expansion of credit inherent in the futures contracts seem to have driven up the prices between 1634 - 1636. In 1636 an extra ingredient was added to the brew of Moral Hazard. The plague struck a number of Dutch communities and there may have been some correlation between the highest levels of speculation and plague outbreak By February 1637 individual cities were setting the terms to pay forfeiture fees of 3-4% to allow contract cancellations and allow growers to resell on the open market

10. Lessons Learned The traditional lesson handed down to us is that people are irrational speculation is immoral The facts indicate perhaps something different There is no indication that the actual price or value of the final market in tulip bulbs collapsed There was little legal structure to the tulip contact market Speculation in contract over about a two month period in Jan-Feb of 1637 led to wide price fluctuations Individual municipalities had to intervene to allow the orderly cancellation of contracts to allow growers to sell on the open market in June

11. Morality or Self Interest Prices go up until they come down. Tulips were intrinsically valuable and the prices did not get too high until the last month or two before the collapse in the futures market Is the moral indignation of the Dutch commentators justified Or is it the self interested comments of growers who want to keep arbitragers out of their monopolistic and highly profitable market How much would you spend on that girl? How much would you spend on house?