Bubbles, Booms, and Busts The Rise and Fall of Financial Assets
This book provides a thorough explanation of the nature and history of booms, bubbles and busts in financial markets. The first part of the book deals with financial booms and bubbles and how they emerge, develop and collapse. It describes the distributio
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The Rise and Fall of Financial Assets
Donald Rapp
BUBBLES, BOOMS, AND BUSTS
The Rise and Fall of Financial Assets
Copernicus Books An Imprint of Springer ScienceþBusiness Media
Dr. Donald Rapp 1445 Indiana Avenue South Pasadena, CA, 91030 USA [email protected]
Springer ScienceþBusiness Media, LLC # 2009 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Published in the United States by Copernicus Books, an imprint of Springer ScienceþBusiness Media. Copernicus Books Springer ScienceþBusiness Media 233 Spring Street New York, NY 10013 www.springer.com Library of Congress Control Number: 2008938905 Manufactured in the United States of America. Printed on acid-free paper.
ISBN 978-0-387-87629-0
e-ISBN 978-0-387-87630-6
Preface
O
ne of the problems that has challenged us for as long as we can remember is: how to value assets? In response to that challenge, we have invented the ‘‘free market economy’’ in which the price of an asset is set by the give-and-take between buyer and seller, one seeking the lowest price, and the other seeking the highest possible price. The two types of assets of greatest consequence to most of us are real estate and corporate stocks. According to classical economics, ‘‘the price is right’’ because it is set by negotiation between a rational buyer and a rational seller as to the ‘‘worth’’ of the asset. Unfortunately, history shows that at frequent intervals, this system gets seriously out of whack and the pricing of assets goes haywire. Stock and real estate prices are driven to ‘‘irrational exuberance.’’ Inevitably, the bubble bursts and there is great misery throughout the land. Then the cycle repeats itself – again and again. What seems to happen is that some event, some expectation, or some development starts the asset price rise rolling. As asset prices rise, a vacuum is generated that sucks in more investors, hungry for quick profits. The momentum so generated attracts more investors. By now, most new investors ignore the original stimulus for the boom, and are only buying with the intent of selling at a profit to ‘‘a bigger fool’’ who is expected to come along soon. Greed descends upon the land like a ground fog. We have seen this process repeat itself with minor variations as far back as we can remember,1 whether in tulips in Holland in the 17th century, the South Seas bubble of the 18th century, the Florida land boom of the 1920s, the stock market 1
Early booms and busts were discussed in: McKay, Charles (1841), Extraordinary Popular Delusions and the Madness of Crowds. Richard Bentley, London. Reprinted Farrar, Strauss Giroux: New York: 1932
V
Preface
boom and crash of the 1920s, the great bull market of 1982–1995, the Japanese boom of the 1980s, the savings and loan scandal of the 1980s, the dot.com boom of 1996–2000, and most recently, the sub-prime mo
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