(The New York Stock Exchange. Image credit: Andrew Crump / Flickr)
Between 2001 and 2007, mortgage debt per household in the US surged by 63 percent from $91,500 to $149,500. To put that in context, this jump was larger than the rise in American mortgage liabilities between 1776 and 2000.
In the UK, at the height of the Victorian railway mania in 1848, railway companies accounted for a whopping 71 percent of total stock market value. Meanwhile, during the land boom that occurred in Japan during the 1990s, the total value of land throughout the country more than doubled over a six-year period to $20trn.
This detailed new history of financial bubbles reminds us of the sheer magnitude of crises that have decimated market economies at varying intervals over the last 300 years, but it underscores also that some bubbles are localized, and can serve the purpose of pushing forward technological progress. Not every crash is a systemic crisis in the making.
The collapse of the frothy cryptocurrency Bitcoin in early 2018 is perhaps a good example: the destruction of value that occurred with a 65% plunge in its price did not have systemic implications for national economies. And the development of underlying distributed ledger technology has had transformative implications for some sectors.
Quinn and Turner spell out the three characteristics necessary conditions for a financial bubble of epic proportions: the ability to speculate, the marketability of an asset, and easy access to money and credit.
Consider the bicycle mania in the UK in the 1890s: the new mode of cost-effective transport captured the imagination of the British public, it attracted investors from a cross-section of British society, and notably appealed to a middle class that had easy access to new forms of credit that came with the advent of mass consumerism.
While this new work of economic history doesn’t necessarily make it easier to spot the indicators of a bubble before they become widely visible in the public domain, what it does do very effectively is to lay out precisely why those indicators matter.
In particular, Boom and Bust shows that even the most effectively-functioning markets rely on the psychology and confidence of the herd, and that even in quasi-controlled economies such as China’s, governments frequently intervene too late to prevent bubbles from becoming full-blown systemic crises.
BOOM AND BUST is published in hardback by Cambridge University Press, pp. 296, $24.95, August 2020.
John is a reporter at Institutional Investor in New York where he covers the US property and casualty insurance markets. He has a master’s degree in social policy from the London School of Economics and his writing has appeared in The Scotsman and The Sunday Times newspapers.