5 Famous Bubbles in History and What You Can Learn From Them

by RJ

in Investing

This past decade, we’ve seen three bubbles burst. First, the dot-com era burst in 2000. Next,  the real estate crash in 2008. Followed by the credit crisis of 2008-2009. This type of behavior is nothing new to an economy. You would be surprised at how many bubbles there have been, and what made them burst, dating back to the 17th century.This post looks at famous bubbles in history and ends with what you can learn from them.

Tulip Mania

In the 17th century in Holland, tulips, yes the flower, were the rage. For just one tulip, you would have to trade 4 oxen, 8 pigs, or 12 sheep. Rare tulips were going as high as 10 X the annual salary of a craftsman.

As you probably guessed, eventually the market for tulips crashed. Those who speculated in the tulip craze, soon had nothing.

The Roaring 20′s

What caused the Great Depression? Debt of course.

For the first time in history, individuals were given access to debt. Now they could buy a house, a car, and a radio and not pay till later. Even worse, people were using credit to purchase stocks.

As we found out recently, when banks make loans to people who aren’t going to pay them back, they loose money. When banks stop making money, a bubble will burst.

The Japanese Bubble Economy

It’s a little shocking how similar the bubble in Japan was to the U.S.’s recent bubble. The Japanese Government loosened restrictions on banks. Banks made loans to people who couldn’t pay them back because it looked good in the books.

Eventually, banks stopped making money because they made loans to a lot of people who couldn’t pay them back. Sounding familiar?

The Nikkei 225, which is similar to the Dow Jones Index in the U.S., closed at 38,957.44 on December 31, 1989. As of today the Nikkei 225 is around 10,400.

Dot Com Bubble

Between 1995-2000, if a company had was considered a tech company, it’s stock price went up. It didn’t matter that the majority of these companies were not making any money. We were in a “new” era.

Here’s what ended up happening. A crazy amount of money, usually from private investors, was being thrown at small start-ups. Big corporations got greedy and acquired every start-up they could. However, the small start-ups were not making money. Big corporations tried hard to make them profitable but since they had no experience in the tech industry they couldn’t.

Remember, the site geocities.com?  This site was purchased by Yahoo for $3.57 billion. Ten years later, geocities closed down. Greed at its finest.

The Credit Crisis

You probably have heard enough by now. U.S. Government relaxes restrictions on lending. Banks make loans to people who are not going to pay them banks.

The economy goes up because now banks can make loans to almost anyone.

A couple of years later, everyone starts to default on their loans. Real estate prices drop. Banks stop making money. Plus, they now own all the  real estate that’s worth next to nothing.

What You Can Learn

In our lifetime, we can expect another bubble bursting or two or three. It’s just a matter of when.

You can tell a bubble is about to burst when people start to get greedy and when everyone is saying that the rules have changed.

The people who survive are those who are out of debt, have an emergency fund, and work hard. These are the same people who prosper during and after each bubble.

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{ 1 comment }

John HunterNo Gravatar May 19, 2010 at 9:10 pm

Good to keep in mind but I think you are way too cautious in the number of bubbles we can expect. Simple steps can protect your finances. Things like you mention – saving an emergency fund. And you need to build up your financial capital. Also avoid debt.
.-= John Hunter´s last blog ..Mortgage Foreclosure Rate Reaches Record 4.63% =-.

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