Humanity has been subject to these Goldrush whims of the Market, for as long as, well, there have been Markets. Markets open to both buyers and sellers, each trying to best the other, in the competitive game of Capitalist Checkers.
When the wealth that Bubbles create is based on little more than Greed, Leverage, and Speculation -- who really benefits in the long run? Real wealth results from creating things, not just from trading things. Real wealth is based on real work -- not short cuts.
Look out, when the Bubble finally pops ...
Sooner or later, any "hot commodity" -- ends up
being, not so hot ...
History of full of examples of such speculative "Boom and Bust" Cycles:
(perhaps you've heard of a few of these?)
- Tulip mania (top 1637)
...
- Railway Mania (1840s)
- Florida speculative building bubble (1926)
- 1920s American Economic Bubble (circa 1922-1929)
...
- Sports cards and comic books in the 1980s and early 1990s
- TY Beanie Babies (1996)
- The Dot-com bubble (circa 1995–2001)
- Japanese asset price bubble (1980s)
- 1997 Asian Financial Crisis (1997)
- United States housing bubble (as of 2007)
- Commodity bubble (As of 2008)
Economic bubbles are generally considered to have a negative impact on the economy because they tend to cause misallocation of resources into non-optimal uses. In addition, the crash which usually follows an economic bubble can destroy a large amount of wealth and cause continuing economic malaise.
The market patterns are the same, the results are the same, but somehow Humanity has trouble, learning History's Lessons. There are several theories why, Bubbles always reappear, sooner or later. Perhaps it's just Human Nature. Or perhaps it's just the lack of common sense Regulation. (Imagine the result of Super Bowls, if we took all the Football Ref's off the field -- Chaos!)
Here are some of the leading theories, for how and why Economic Bubbles form:
It has been variously suggested that bubbles may be rational, intrinsic, and contagious. To date, there is no widely accepted theory to explain their occurrence. Recent computer-generated agency models suggest excessive leverage could be a key factor in causing financial bubbles. ...
Greater fool theory
... According to this unsupported explanation, the bubbles continue as long as the fools can find greater fools to pay up for the overvalued asset. The bubbles will end only when the greater fool becomes the greatest fool who pays the top price for the overvalued asset and can no longer find another buyer to pay for it at a higher price.
Extrapolation
Extrapolation is projecting historical data into the future on the same basis; if prices have risen at a certain rate in the past, they will continue to rise at that rate forever. ....
Herding
... herd behavior, the fact that investors tend to buy or sell in the direction of the market trend. This is sometimes helped by technical analysis that tries precisely to detect those trends and follow them, which creates a self-fulfilling prophecy.
Liquidity
Others argue that the cause of bubbles is excessive monetary liquidity in the financial system, inducing lax or inappropriate lending standards by the banks, which then causes asset markets to be vulnerable to volatile hyperinflation caused by short-term, leveraged speculation. ...
(Emphasis added)
http://en.wikipedia.org/...
Talk about Herd Behavior, and perfect storm of "leveraged speculation" ...
... bubbles might ultimately be caused by processes of price coordination or emerging social norms.
[Ibid]
Some "social norms" can catch on quite quickly -- when "short cuts" to success are the theme of a culture (and Banks are primed and ready to fuel the stampeding Herd Behavior):
Here's the secret ... Wall Street traders, and Global Bankers know how Bubbles work. They encourage them, they fuel them, they invest in them, and then take the profits and run, leaving the "little guy" retail speculators, holding the tab. (Just ask anyone who bought into the 401k hype):
The Nature of Bubble Markets -- East Bay Housing Bubble, Feb 29, 2008
By the way, that dotted Trend Line, labeled "Mean" is the Real Wealth long-term value of an asset. Every new Bubble Economy needs a basic "core of value" like that, in order "create a new get-rich dream", inflate the price, and then sell "the dream" to "the next greater fool".
Sooner or later, any speculative asset will return to its underlying growth mean trendline. It's Valuation must ultimately be based on more than "just hot air", in order to last.
Sometimes however, all that "Hot Air" takes a while to build up, before it finally "pops the Bubble" though, sadly:
The Herd of Humanity, changes directions, slowly sometimes, kind of like the Exxon Valdez [trying to] avoid the reef.
Someday the Herd of Humanity, may actually break free, from those "hidden reins" that steer our course. Or at least, we may learn the Cycles of "Boom and Bust", that the Elite Class routinely exploits ... leaving us with the bill.
