A speculative bubble is created when objectivity, reasoning, and valuation give way to greed and an insatiable desire for profits.
October 29, 2002 2:08 AM   Subscribe

A speculative bubble is created when objectivity, reasoning, and valuation give way to greed and an insatiable desire for profits. On this date in history... October 29, 1929: The date of the stock market crash that marked the start of the Great Depression in the United States. Could it have been averted by the reading of Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay?
posted by puddsharp (20 comments total)
Interesting stuff. More here on the South Seas Company Bubble as mentioned in the article.
posted by saintsguy at 3:39 AM on October 29, 2002

Re: question - no, because most people don't read. And, human greed is eternal - unless we choose to edit it from the genome, but then we would probably lose some positive traits like initiative, maybe optimism......
posted by troutfishing at 3:44 AM on October 29, 2002

And don't forget the Tulip Bubble which almost ruined The Netherlands in the 1600's.
posted by PenDevil at 4:19 AM on October 29, 2002

Oh come on puddsharp, that's all in the past now - We've learned from our mistakes. Investors are better informed and more media savvy than ever, they can see past cheap media hype and evaluate a company on its true worth.

On an entirely different note: can I interest you in a discount emu farm?
posted by backOfYourMind at 4:42 AM on October 29, 2002

you laugh, but emu farming will transform the way we do business. come shovel emu shit for me 18 hours per day and i'll buy you lunch at mcdonalds and give you lucrative emu stock options! man, we are gonna be sooooo rich.
posted by quonsar at 5:17 AM on October 29, 2002

Blue horseshoe loves the emu farm!
posted by MzB at 5:30 AM on October 29, 2002

A couple of years ago, I heard a rumour that the emu bubble had burst and that abandoned emus were running amock in some areas of Texas.....anyone ever eaten an Emu burger? Ostrich is pretty good (very lean, strong flavour), so I wonder if those emus are good eatin'....
posted by troutfishing at 6:03 AM on October 29, 2002

No, reading Mackay would not avert the bubble. While some people get swept up in the mindless-media-fuelled belief that "things are different" this time and that "the fundamentals have changed for good," a large number of active traders during a bubble are fully aware that equity prices are inflated beyond sustainable levels. We're all convinced of our personal genius, we're all addicted to winning and spoils, and we're all sure that we can tell the temporary setbacks from the start of the tailspin. All we need is enough of those other silly people to keep things going for us, and we all know there are plenty of silly people out there.

I started grad school in economics in 1997. I remember distinctly several conversations with fellow students and professors in 1997-99 in which we took it for granted that we were witnessing a large speculative bubble. Nevertheless, we were all curious if we could still make a killing before the bubble burst. Quite fortuitously, as a student, I was buried in debt and unable to lose any money in the market when it tanked; I can't say the same for some friends. We knew it would tank, we just didn't know when.
posted by dilettanti at 6:14 AM on October 29, 2002

I work for Elliott Wave International, a company that tries to predict the stock market using an unusual form of techincal analysis that relies on anticpating patterns in mass psychology.

The president of EWI, Bob Prechter (named financial guru of the decade in the 80s by fnn, now CNBC), has been forecasting a dowturn in the Dow that won't stop until it's around 1,000.

His new book, Conquer the Crash, is an interesting read and it's slowly gaining the attention of the mainstream financial press.
posted by Pinwheel at 6:17 AM on October 29, 2002

I just finished reading "Dot.Con: The Greatest Story Ever Sold" by John Cassidy, a book which documents both the last stock bubble as well as the connections to the speculative bubbles of the past. Obviously, the final chapter in our latest saga isn't written yet... but the parallels are rather striking.

Anyway, the conclusion that John Cassidy reaches is that it's very difficult to identify a speculative bubble when you're in the middle of it. Remember, a few years ago people really seemed to believe that we'd created a "new economy." Of course, it's obvious now that they should've known better...

The other question is, what should someone like Greenspan have done? Raised interest rates earlier and attempted to deflate the bubble? Perhaps, but there were good reasons why he didn't at the time...

Anyway, it's a good read. The author seems extraordinarily bitter about the whole thing, which adds to the fun.
posted by ph00dz at 6:18 AM on October 29, 2002

If anyone'd like a closer look at Mackay's book, this would appear to be the complete e-text.

And what's the go with emu farming? Kangaroo farming looks a bit more viable. And the results? Kanga Burgers!
posted by lambchops at 6:19 AM on October 29, 2002

Greenspan's assumed ability to affect the markets has been swollen way out of control. Slashing Federal interest rates only suggests a rate that banks should loan EACH OTHER money -- it can't force banks to lend out money any cheaper than they wish.

And what happens when he cuts rates to zero? He'll have run out of ammo.

We created a God out of him when the markets were booming, and now that they've turned the other way, we'll see him hang.
posted by Pinwheel at 6:22 AM on October 29, 2002

what should someone like Greenspan have done?

he's been criticised for not raising the margin requirement and had to defend himself with, i think, a not-very-convincing and convoluted rationale as to why.

i dunno, many brokerages started raising their own internal margin requirements on targeted speculative stocks, but it seemed rather half-hearted, and obviously didn't help much. so it's arguable whether the fed's doing it would have sent a stronger message. but i also think they should have taken the lead in such a situation, which could have limited some of the fallout if they had been implemented more broadly and publicly. i mean for speculative excess, margin accounts are a pretty easy call and the the fed, as umpire, missed it.
posted by kliuless at 7:07 AM on October 29, 2002

Right. That's exactly the view the Greenspan was working under. Besides, he apparently felt like, "Hey! Who am I to second guess the wisdom of the market?"
posted by ph00dz at 9:37 AM on October 29, 2002

Not an excerpt nor an Amazon link.
Get it right: there's the whole damn book in the second link.

On topic and horizon: Real Estate Bubble
posted by y2karl at 9:39 AM on October 29, 2002

Another topic on the horizon:

Rampant deflation.
posted by Pinwheel at 10:02 AM on October 29, 2002

More housing bubble information. This is the paper to which Krugman refers.
posted by electro at 11:29 AM on October 29, 2002

I read the Mackay book in 1999 and felt slightly ill as I realised that we were in the height of a bubble. I'd just seen a company prospectus that was the modern equivalent of "Gentlemen wanted to subscribe 100 pounds ea. to a venture of a great profit to all, noone to know what it is, meet at Mrs Miggins' Pie Shop".

I then bleated like Cassandra while doing my best to make out like a bandit ;-)

Read Mackay. It's still a good book, highly entertaining, and full of common sense, even after a century and a half.
posted by i_am_joe's_spleen at 1:16 PM on October 29, 2002

Mackay's book is great. But one oddity is that there's a chapter devoted to inner city slang. He mentions everyone saying "quoz," which I think we should bring back.
posted by inksyndicate at 2:12 PM on October 29, 2002

The slang chapter isn't really an oddity. Mackay is describing how catchphrases (like "quoz") spread in a community - to him, epidemic verbal tics are also part of the madness of crowds.
posted by i_am_joe's_spleen at 9:25 PM on October 29, 2002

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