[PEN-L:28475] RE: Re: RE: Charles P. Kindleberger

["Devine, James" <jdevine@xxxxxxx>]

Title: RE: [PEN-L:28474] Re: RE: Charles P. Kindleberger

> I know of any grounds for believing that rationality is the norm in speculative markets.<

shouldn't there be a "not" in there somewhere?

Jim Devine jdevine@xxxxxxx &  http://bellarmine.lmu.edu/~jdevine

> -----Original Message-----
> From: Michael Perelman [mailto:michael@xxxxxxxxxxxxxxxxx]
> Sent: Thursday, July 25, 2002 8:55 AM
> To: pen-l@xxxxxxxxxxxxxxxxxxx
> Subject: [PEN-L:28474] Re: RE: Charles P. Kindleberger
>
>
> > "Devine, James" wrote:
> >
> > does anyone know anything about the following book?
> >
> > -------------------------
> > >Book Description for Peter M. Garber, _Famous First
> Bubbles: The Fundamentals of Early Manias_:
>
> I refer to the book [well, the articles on which the book was
> based] in a section of a new book that I am doing.  Here it
> is.  Any comments would be appreciated.
>
> Here again, the experience of the Dutch is instructive.  In
> 1634, the Dutch became infatuated with the Tulip, a plant
> native to Turkey.  Because the tulip multiplies asexually,
> growers could not increase the supply nearly as fast as the
> demand.  Consequently, the value of tulips, measured by their
> market price, skyrocketed:
> ##In 1634, the rage among the Dutch to posses them (tulips)
> was so great that the ordinary industry of the country was
> neglected, and the population, even to its lowest dregs,
> embarked in the tulip trade.  As the mania increased, prices
> augmented, until, in the year 1635, many persons were known
> to invest a fortune of 100,000 florins in the purchase of
> forty roots.  It became necessary to sell them by their
> weight in perits, a small weight less than a grain.  [McKay
> 1841, p. 90]
> A single Semper Augustus fetched a price of 5,500 guilders,
> equivalent to more than 100 ounces of gold (Garber 1989a, p.
> 53).  The market, of course, eventually crashed.
> Later commentators referred to this speculative frenzy as
> tulipomania.  Peter Garber began studying this phenomenon
> shortly after the October 1987 stock market crash.  According
> to Edward Chancellor, another student of speculation,
> Garber's work "was written with the intention of heading off
> proposed government regulation of stock futures markets"
> (Chancellor 1999, p. 24).  Garber attempted to explain that
> the speculation had a rational basis.  However, even he had
> to admit that the one-month 20-fold price surge for common
> bulbs in January 1637 does defy explanation (Garber 1989b, p. 556).
> The lessons of tulipomania were lost on later generations. 
> Periodic euphoria seems to be endemic to market economies. 
> The great dot.com bubble pushed the NASDAQ index to 4,800 in
> March 2000.  Giddy with the success of the stock market,
> pundits began predicting that the stock market would soon
> reach even more fanciful levels.  Publishers marketed books
> with titles, such as "Dow 36,000* (Glassman and Hassett
> 1999), "Dow 40,000* (Elias 1999), and "Dow 100,000* (Kadlec
> and Acampora 1999).
> The fortunate run on the NASDAQ market did not last
> indefinitely.  By April 2001, the meltdown had sunk the index
> to below 1,640.  By late March 2001, an estimated $4.6
> trillion worth of value that the NASDAQ had enjoyed in March
> 2000 had evaporated (Vickers 2001).
> Retrospectively, the eventual collapse of a speculative
> bubble might seem to offer evidence that in the long run
> value returns to a level that is consistent with the
> underlying material basis.  Of course, nobody can precisely
> identify the underlying material basis of value, even in
> retrospect.  The enthusiasts of the dot.com bubble believed
> that the soaring stocks were justified in terms of material
> fundamentals.  They argued that the computer, the Internet,
> and modern communications technologies had so revolutionized
> the productive system that future earnings with more than
> justify what the skeptics believed to be excessive stock prices.
> The idea that speculative bubbles occur from time to time and
> then disappear suggests that rationality is the norm, except
> for the periodic lapses that cause the bubbles.  I know of
> any grounds for believing that rationality is the norm in
> speculative markets.
> In addition, nobody has a firm basis for identifying what the
> appropriate value of a speculation should be.  Even after the
> NASDAQ market crashed, observers continued to debate whether
> the market was still overvalued or whether investors had
> overreacted been driven stock prices below what market
> analysts considered to be their fundamental values.
> Economists typically write about bubbles as if they were
> anomalies.  I would argue, instead, that bubbles are extreme
> cases of a common phenomenon.  A thick fog of ignorance and
> uncertainty engulfs the future.  Lacking adequate knowledge,
> people can only rely on educated guesses or follow others who
> might seem to have better information.  This situation leads
> to a kind of herd behavior, which is conducive to bubbles.
> Some bubbles grow to grotesque sizes.  Others are more modest
> and pass unnoticed.  But these bubbles are everywhere, not
> just among stock or bond traders or option dealers.  In a
> market economy, virtually every investment is a speculation,
> whether opening a restaurant or investing in some complicated
> financial instrument.
>
> --
>
> Michael Perelman
> Economics Department
> California State University
> michael@xxxxxxxxxxxxxxxxx
> Chico, CA 95929
> 530-898-5321
> fax 530-898-5901
>