Famous First Bubbles: The Fundamentals of Early Manias

• Publisher:   The MIT Press
• Number Of Pages:   175
• Publication Date:   2000-06-12
• ISBN-10 / ASIN:   0262072041
• ISBN-13 / EAN:   9780262072045

The jargon of economics and finance contains numerous colorful terms for market-asset prices at odds with any reasonable economic explanation. Examples include "bubble," "tulipmania," "chain letter," "Ponzi scheme," "panic," "crash," "herding," and "irrational exuberance." Although such a term suggests that an event is inexplicably crowd-driven, what it really means, claims Peter Garber, is that we have grasped a near-empty explanation rather than expend the effort to understand the event.

In this book Garber offers market-fundamental explanations for the three most famous bubbles: the Dutch Tulipmania (1634-1637), the Mississippi Bubble (1719-1720), and the closely connected South Sea Bubble (1720). He focuses most closely on the Tulipmania because it is the event that most modern observers view as clearly crazy. Comparing the pattern of price declines for initially rare eighteenth-century bulbs to that of seventeenth-century bulbs, he concludes that the extremely high prices for rare bulbs and their rapid decline reflects normal pricing behavior. In the cases of the Mississippi and South Sea Bubbles, he describes the asset markets and financial manipulations involved in these episodes and casts them as market fundamentals.

During the collapse of the so-called Internet bubble, the legendary Dutch fiscal intoxication with tulips, called tulipmania, was widely cited as a lesson from history. The financial press hyped stories of deluded Dutch farmers who mortgaged all their worldly possessions to purchase a single prize tulip bulb, only to meet financial ruin when the bubble inevitably burst. Economist Peter M. Garber dug into history, and found that most of the common wisdom about the tulipmania was false. So, if you ever wondered how Dutch investors could have been so foolish, there is a simple answer: they weren't. Famous First Bubbles clearly evolved from a series of academic papers but, nonetheless, the book is entertaining. The primary focus on the tulip bubble makes the sections on the Mississippi and South Sea Bubbles seem like afterthoughts. We recommend this to iconoclasts who enjoy debunking historical legends and to bubble watchers everywhere.

The author does an excellent job debunking the myth about the Dutch tulipmania from 1634 to 1637. He conducted detailed economics and historical research, and uncovered that just about everything about tulipmania as described in Charles Mackay book "Extraordinary popular Delusions and the Madness of Crowds" is either inaccurate, or exaggerated. The Dutch never mortgaged their entire properties for a single bulb. Also, Holland did not suffer a depression after the tulip market crashed. According to the author, very little net wealth was actually wiped out. Instead, the price of rare tulips was driven by rational economic considerations reflecting the short supply and the rising demand for this rare tulip bulb type. The price of these tulip bulbs at anyone time reflected expected investment returns from investors. Other economists have also documented that the price of tulip bulbs did go back up to similar level several centuries later associated with favorable economics change in this market.

The author goes on to further explain the rational economics fundamentals behind the Mississippi Bubble of 1719-1720 resulting from an attempt to swap French government debt for equity in a private company, financed by printing paper money. He similarly explains out in similar economics terms the South Sea Bubble of 1720 which was the equivalent of a leveraged buyout of the national debt of Great Britain. Both investment schemes ultimately collapsed, but their respective economics and strong government support at the onset gave these investment propositions very strong fundamentals. These investments are not so different than investments today in GSEs like Freddie Mac, Fannie Mae, and Sallie Mae. Because of accounting irregularities, the stocks in these GSEs have recently taken a beating. But, there is no ground for talking about a GSE stock bubble.

The author has strong credentials to support his iconoclastic thesis that is not that well known by the economics establishment. He is a global strategist at Global Markets Research at Deutsche Bank and Professor of Economics at Brown University.

The Internet bubble has often been compared to the three investment bubbles mentioned above. Sadly enough, internet stock investors were by far the most foolish among investors of these four different investment bubbles. This is because at the onset the fundamentals behind internet stocks were far weaker and speculative than the ones associated with the investments associated with any of the three other bubbles.

During the collapse of the so-called Internet bubble, the legendary Dutch fiscal intoxication with tulips, called tulipmania, was widely cited as a lesson from history. The financial press hyped stories of deluded Dutch farmers who mortgaged all their worldly possessions to purchase a single prize tulip bulb, only to meet financial ruin when the bubble inevitably burst. Economist Peter M. Garber dug into history, and found that most of the common wisdom about the tulipmania was false. So, if you ever wondered how Dutch investors could have been so foolish, there is a simple answer: they weren't. Famous First Bubbles clearly evolved from a series of academic papers but, nonetheless, the book is entertaining. The primary focus on the tulip bubble makes the sections on the Mississippi and South Sea Bubbles seem like afterthoughts. We from getAbstract recommend this to iconoclasts who enjoy debunking historical legends and to bubble watchers everywhere.

Episodes as the Tulip Mania, The South See Bubble, the Crash of 1929 are going to leave a permanent trace in financial science. So they deserve close investigation. The Author has achieved to make really a very interesting and vivid one. His ideas are very controversial, but exactly they make the book amusing. However, I haven't seen anywhere in the book a formula, integral, etc. Perhaps the purpose was to give more informal treatment of the bubbles phenomena, but it will be very interesting a formal one to be made in future by fitting concrete rational expectations models in the historical data.
Vilimir Yordanov, Bulgaria

I picked up this book with high expectations as the topic is very timely, the author has a good reputaiton, and given the size of the volume thought it would efficientyl get to the point.

While the arguements made are important they are lost in a difficult ot read academic writing style. Hence while I did get the point, I didn't enjoy the process. The three events discussed, "Tulipmania", the "Missiissippi" and "South Sea Companies" are well know within financial circles. Each carries a lore and mythology which is what perpetuates them today. Humanizing the narrative would have been a more effective way to make the points that each had logical explnations other than manias that distorted asset prices.

Finally, particularly as the author is works in contemporary finance, the book really should have a chapter on the lessons applied to today.

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