Higgenbotham wrote: > Somebody asked me today to help him get some historical data on
> the 1929 crash because the initial leg down was about the same as
> the one that the stock market just had (16% or so).
> I mentioned two things.
> One is the initial leg down of 16% or so in 1929 took 23 sessions
> and this recent one took only 7.
> The second was the initial leg down in the South Sea Bubble, which
> I had thought to be as fast as the current unraveling, was not
> nearly as fast.
> So the conclusion in my response to him was that I have no data
> that can help with characterizing the current situation.
If you're comparing what's happening today to historical events, theHiggenbotham wrote: > If this is the biggest bubble in history, which I believe it is by
> far, it will not pop like 1857, 1929, or any other. And it's not
> like the Tulip Mania or the South Sea Bubble either; those are
> more like Bitcoin because they didn't consume the entire
> economy.
speed with which something happens would not be relevant, since that
simply means that the technology has changed.
What's important is to compare the behavior of entire generations or
the entire population. So I don't see why the flashcrash is relevant
at all, since it was purely technology.
By contrast, Tulipomania did indeed consumer the entire economy.
Here's what I wrote in my book:
The key to comparing financial behavior in different historical"*** Tulipomania
By way of example, let's start with one of the most famous bubbles
in history. However, it occurred in Europe, not in America. It's
the first reasonably well-documented bubble in history, and it was
called "Tulip Mania" or "Tulipomania" -- because it had to do with
the pricing of Dutch tulips in the early 1600s. This bubble grew
for decades, but it only burst completely in 1637, just as France
was entering a major "world war" of that time, the Thirty Years'
War.
It's almost hilarious to compare the Internet products of the
1990s with tulips of the 1630s, but in fact, tulips were the
high-tech product in the Netherlands at that time.
- Tulips
Those were heady days in the Dutch Republic. Amsterdam was the
major gateway between London and Paris, and the city had benefited
hugely from having established Europe's first central bank in
1609, giving Dutch merchants a big competitive advantage around
the world. It was still the biggest bank in Europe in the 1630s,
and the whole of the Netherlands was prosperous, not having yet
been affected by the Thirty Years War.
Tulips did not originate with the Dutch. The first bulbs had
arrived from Turkey only a few years earlier, in the late
1500s. By means of breeding experiments, Dutch botanists were able
to produce tulips with spectacular colors. These tulips were
sought by wealthy people, and by 1624, one particularly
spectacular bulb sold for the cost of a small house.
Prices remained elevated for over another decade, and soon
investors from all over Europe began purchasing a kind of "Tulip
future," a certificate purchased in the fall which can be traded
for a specific actual tulip to be grown the following spring. In
some ways, these certificates were similar to "stock options" in
the 1990s.
In 1636, speculation in tulip futures went through the roof, and
on February 3, 1637, the tulip market suddenly crashed, causing
the loss of enormous sums of money, even by ordinary people,
including many ordinary people in France and other countries.
A mood of retribution began immediately, and even the tulips
themselves suffered. Evrard Forstius, a professor of botany,
became so reviled by the mere sight of tulips that he attacked
them with sticks whenever he saw them! At this point, the Thirty
Years War enveloped all of Europe, as we'll discuss in a later
chapter."
eras is the use of securitization of debt. People think of "printing
money" as a physical printing press spewing out green pieces of
paper. But in fact anyone can "print money" by issuing IOU certificates.
The extent to which a serious bubble is created depends on how
much these certificates are abused.
Each of the five major financial catastrophes since the 1600s has
been based on abuse of securitization of debt. One place where I
wrote about this extensively was in
** The bubble that broke the world
** http://www.generationaldynamics.com/pg/ ... 071009.htm
Here's a summary:
- The 1637 Tulipomania bubble was based on a market in tulip
futures, securitized with personal credit notes. - The 1721 South Sea Bubble was securitized by shares of the South
Sea company, a company operating in South America. - The 1789-1795 bankruptcy of the French monarchy was securitized by
"assignats," bills of credit based on lands confiscated from the
clergy. - The Panic of 1857 was securitized by railway shares.
- The 1929 Wall Street crash was securitized by stock shares, and
also securitized by bonds from well over 100 foreign
countries.
Tulipomania crisis, as described in Edward Chancellor's 1999 book,
Devil Take the Hindmost, a history of financial speculation:
So these are the kinds of things to be looking for when comparing"No actual delivery of tulips took place during the
height of the boom in late 1636 and early 1637 as the bulbs
remained snug in the ground. A market in tulip futures appeared,
known as the windhandel (the wind trade): sellers promised
to deliver a bulb of a certain type and weight the following
spring, buyers took the right to delivery -- in the meantime, cash
settlement could be made for any difference in market price. Most
transactions were expedited with personal credit notes which also
fell due in the spring when the bulbs would be dug up and
delivered. Gaergoedt boasts of having made 60,000 guilders from
his tulip speculations but admits that he has only received "other
people's writing." By the later stages of the mania, the fusion
of the windhandel with paper credit created a perfect
symmetry of insubstantiality: most transactions were for tulip
bulbs that could never be delivered because they didn't exist and
were paid for with credit notes that could never be honoured
because the money wasn't there."
historical eras. There is nothing new under the sun.