Part 2 of our discussion of bubbles and crashes. "This has all happened before and it will happen again," is a re-occurring theme in the re-imagined version of the TV series Battlestar Galactica, now in it's fourth and final season. We continue part 2of our discussion of history repeating itself in regards to bubbles and crashes.
The Tulip Mania is the earliest example in history of a bubble and crash. At the time the contract prices for tulip bulbs reached extraordinary prices and then experienced a sudden collapse. At the peak of the tulip bulb mania in February 1637 tulip contracts sold for more than 20 times the annual income of a skilled craftsman.It is generally considered the first recorded speculative bubble. The term "tulip mania" is often used metaphorically as an economic bubble.
At the peak of the market , a person could trade one tulip for the price of an entire estate and at the bottom the price of a common onion. It goes without saying, but the prices were not an accurate reflection of the value of a tulip bulb. As it happens in many speculative bubbles, some people decide to sell and receive their profits. A domino effect eventually takes form and prices become lower and lower as everyone tries to sell when not many are buying. Prices begin to dive, which then causes a sense of panic and sell regardless of losses.
When the tulip contracts were no longer being honored people being to realize they traded their homes for a flower.Panic turns into pandemonium and the crash is under way. The government tried to step in and honor the contracts at 10% of the face value, but then the market crashed even further. This made restitution impossible. No one escaped the crash unscathed. Even people who heavily profited by taking their profits and running suffered from the depression that ensued after the crash.
This all sounds familiar to me. The only thing is this time we are experiencing this with homes. Our Government has developed a 700 Billion bailout plan, but are things going to get worse just like they did with the Tulip crash? Let's hope not.
Up next: The South Sea Crash.
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