Sir John Templeton founded Templeton Growth Fund in 1954. His fund averaged 15% annual growth for 38 years. “This time it’s different” is John’s most expensive phrase.
In financial history, investors were excited and greedy, much like with bitcoin. History is full of frantic investment markets with endless opportunities.
Burton Malkiel mentions bubbles in A Random Walk Down Wall Street.
Internet stocks surge, causing a bubble. The upswing encourages more people to acquire the stocks, which boosts TV and newspaper coverage and benefits early Internet stockholders. Successful investors think cocktail parties are effortless ways to get money, which boosts stocks and attracts additional investors. The whole operation is a Ponzi scheme in which new investors acquire stock from earlier ones.
Charles P. Kindleberger’s 1978 book Manias, Panics, and Crashes presents the Minsky-Kindleberger model of speculative bubbles (Stages include Expansion, Euphoria, Distress, Revulsion, Crisis and Contagion)
In many manias, buyers take out loans to buy assets, thinking they can pay them off if the asset grows.
These investors are vulnerable to price volatility. Short-term drops in asset prices may force them to sell since they can’t pay interest.
Minsky’s study shows that debt financing predicts asset bubble stability. History reminds us that each new generation must learn that markets can only withstand gravity for so long until reality sets in.
Bubbles and fraud are old. Opportunists and operators join mass delusions to preserve the flow of foolish money used to inflate them.
Charles Mackay’s work explores 1700s manias and delusions. Mackay’s moralizing crowd crazy represents an outdated concept that manias are “done by others.” Ken Galbraith said manias come from a lack of public sense-making and institutions willing to confront popular incoherence.
Those involved maintain their euphoria to justify their wealth. It’s maintained by ignoring, banishing, or vilifying doubters.
Populist upheavals, anti-democratic sentiment, distrust of public sense-making institutions, low-interest rates, and growing economic disparities offer a perfect field for manias to proliferate.
In Lombard Street: A Description of the Money Market, 18th-century British economist Walter Bagehot described manias. He characterized bubbles’ reality-distortion field for quick money. After contradictions are uncovered, the public will laugh at economic follies.
Affluence breeds deception. When enormous money has recently been generated, when some people are truly making it and when most people think they’re making it, there’s a happy opportunity for brilliant mendacity. Nearly everything is believed, and the worst and most astute deceivers are beyond punishment. But credit damage is worse.
Speculative assets are often built around a charismatic CEO or banker who investors believe embodies the new economy. George Hudson in the Railway Mania, Kenenth Lay in the Enron scandal, Adam Neumann in the Venture Bubble, and Elon Musk in the cryptocurrency bubble all speak to some underlying circumstance and opportunity that resonates with the zeitgeist and allows them to channel enormous amounts of capital into investments that in otherwise-rational eras would be seen as patently insane. In a market frenzy, these men act irrationally and deify themselves, thinking their business is above the law and their acts have cosmic significance. Their worst flaws show in their weird behavior. Their character is ruined.
We have six hundred years of recorded history to study the initial conditions, internal structure, and aftermath of speculation and bubbles. Previous manias had fruitful and catastrophic bubbles. Rapid technology advances or new commodities produce bubbles. Financial engineering advancements or viral mass delusions cause unproductive bubbles.
1720 South Sea Bubble
The South Sea Bubble has been referred to as the first financial crisis in history, the first Ponzi scheme in history, a fever for speculation, and a terrible illustration of what may happen when people fall to contagious group believes. The fact that it was a catastrophic financial collapse and that some of the best intellectuals of the era,...
1720 Mississippi Bubble
John Law founded Banque Générale Privée, which issued paper notes that customers could redeem for gold with fractional reserves. Law's paper notes and bank were so successful that the crown gave him a charter for the Banque Royale and custody of all French national debt. The Mississippi Company was chartered by Law. Law and the captured...
1800s Wildcat Banking
US believed in the 1800s firmly in independence. It had no governmental currency, so residents used whatever they wished. People utilized the few gold coins and banknotes legally issued by the mint, although they were in short supply. In the Americas, foreign and private currencies dominated commerce. These notes were all separately printed,...
The 1840s Railway Mania
In the 1840s, Britain was at the height of the industrial revolution, and inexpensive lending rates stimulated investment. Public money moved back into joint-stock enterprises as the middle class perceived better returns than government bonds. Early railway companies-built track and charged tolls, making them a reliable investment. Existing...
The 1929 Stock Market Crash
The 1920s saw strong economic growth, and a 9-year bull market peaked on September 3, 1929. The era included easy credit, expanding prosperity, materialism, and a liberalizing lifestyle. Faster speed, bigger shows, taller structures, looser morality, and cheaper alcohol. The Liberty Loan Act of 1917 permitted the US to issue Liberty Bonds for...
The Enron Scandal (1985 - 2007)
Houston Natural Gas and Internorth joined to establish Enron in 1985. As a tremendously diversified corporation that plays in the financialization of energy goods and the natural gas market, it would become a dominant player in the American energy markets. In the 1990s, the company's expansion and good fundamentals made it a Wall Street...
1990s Albanian pyramid schemes
In 1991, Albania transitioned from communism to a free market economy with few institutions. Most crypto acolytes want a government-free fraudsters paradise. Several development "funds" offered to invest retail money in building companies and infrastructure. Investors stepped in because they promised large yields with insignificant risk. These...
Beanie Babies (1995 - 2000)
Collectible children's toys generated a speculative craze in the 1990s. Beanie Babies were plastic pellet-filled teddy animals. They were designed by Ty Inc, an American toy maker, and initially targeted to youngsters. They rapidly become speculative adult collectibles. Rare Beanie Babies traded for ten times their retail value on sites like...
The Internet Bubble (1995 - 2001)
The 1990s dot-com bubble is the most recent in living memory. ARPANET was established to network government computer systems during the Cold War between the US and USSR. It allowed researchers at government labs and universities to share defense project information. Soon after, the internet's scope and reach moved beyond the defense industry to...
The Crisis of Subprime Mortgages (2003 – 2008)
Accounting scandals and the dot-com bust hurt American markets. Riskier stocks outperformed bonds. Banks created a mortgage-backed debt market to give investors large returns with minimal risk (MBS). Mortgage-backed securities are traded by speculators. MBS holders get borrower interest and principal. Defaulting MBS owners can foreclose. By...
Venture Capital Bubble (2010 - Present)
According to most definitions, a venture capital bubble began in the early 2000s. Venture capital businesses invest in high-risk enterprises for stock. Rich people, pension funds, or sovereign wealth funds fund venture funds (called limited partners or LPs). The venture fund invests it in early-stage companies. Most portfolio companies fail....
The Bitcoin Bubble (2016 - Present)
Crypto is an ever-growing series of economic bubbles that expand and pop, giving rise to a new bubble bath before anyone has had time to recover from or recall the last round of swindles. Any normal person can't keep up with the growing number of crypto frauds and bubbles. Crypto is a bubble, however. Bitcoin is a bubble, say eight Nobel...