#Economic Bubbles are a Psychological phenomenon, examples of Mob Psychology. They were explained by #Charles Mackay in his book #Extraordinary Popular Delusions and the Madness of Crowds first published in 1841.
Bubbles include:-
#Tulip Mania
#South Sea Bubble
#Railway Mania
#Mississippi Company
#Stock Market Bubble
#Housing Bubble
The #Housing Bubble is on going, possibly at its peak in 2024. Will there be a collapse? People need somewhere to live. Potential new families are not being created because people on normal wages cannot afford mortgage repayments. The #Wiki does not have the answer.
Economic Bubbles ex Wiki
An economic bubble (also called a speculative bubble or a financial bubble) is a period when current asset prices greatly exceed their intrinsic valuation, being the valuation that the underlying long-term fundamentals justify. Bubbles can be caused by overly optimistic projections about the scale and sustainability of growth (e.g. dot-com bubble), and/or by the belief that intrinsic valuation is no longer relevant when making an investment (e.g. Tulip mania). They have appeared in most asset classes, including equities (e.g. Roaring Twenties), commodities (e.g. Uranium bubble), real estate (e.g. 2000s US housing bubble), and even esoteric assets (e.g. Crypto currency bubble). Bubbles usually form as a result of either excess liquidity in markets, and/or changed investor psychology. Large multi-asset bubbles (e.g. 1980s Japanese asset bubble and the 2020–21 Everything bubble), are attributed to central banking liquidity (e.g. overuse of the Fed put).In the early stages of a bubble, many investors do not recognize the bubble for what it is. People notice the prices are going up and often think it is justified. Therefore bubbles are often conclusively identified only in retrospect, after the bubble has already popped and prices have crashed.
Origin of term
The term "bubble", in reference to financial crisis, originated in the 1711–1720 British South Sea Bubble, and originally referred to the companies themselves, and their inflated stock, rather than to the crisis itself. This was one of the earliest modern financial crises; other episodes were referred to as "manias", as in the Dutch Tulip Mania. The metaphor indicated that the prices of the stock were inflated and fragile – expanded based on nothing but air, and vulnerable to a sudden burst, as in fact occurred.Some later commentators have extended the metaphor to emphasize the suddenness, suggesting that economic bubbles end "All at once, and nothing first, / Just as bubbles do when they burst,"[1] though theories of financial crises such as debt deflation and the Financial Instability Hypothesis suggest instead that bubbles burst progressively, with the most vulnerable (most highly-leveraged) assets failing first, and then the collapse spreading throughout the economy[2].[citation needed]
Charles Mackay
Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841 under the title Memoirs of Extraordinary Popular Delusions.[1] The book was published in three volumes: "National Delusions", "Peculiar Follies", and "Philosophical Delusions".[2] Mackay was an accomplished teller of stories, though he wrote in a journalistic and somewhat sensational style.The subjects of Mackay's debunking include alchemy, crusades, duels, economic bubbles, fortune-telling, haunted houses, the Drummer of Tedworth, the influence of politics and religion on the shapes of beards and hair, magnetisers (influence of imagination in curing disease), murder through poisoning, prophecies, popular admiration of great thieves, popular follies of great cities, and relics. Present-day writers on economics, such as Michael Lewis and Andrew Tobias, laud the three chapters on economic bubbles.[3]
In later editions, Mackay added a footnote referencing the Railway Mania of the 1840s as another "popular delusion" which was at least as important as the South Sea Bubble. In the 21st century, the mathematician Andrew Odlyzko pointed out, in a published lecture, that Mackay himself played a role in this economic bubble; as a leader writer in The Glasgow Argus, Mackay wrote on 2 October 1845: "There is no reason whatever to fear a crash".[4][5]
Extraordinary Popular Delusions and the Madness of Crowds
Extraordinary Popular Delusions and the Madness of Crowds is an early study of crowd psychology by Scottish journalist Charles Mackay, first published in 1841 under the title Memoirs of Extraordinary Popular Delusions.[1] The book was published in three volumes: "National Delusions", "Peculiar Follies", and "Philosophical Delusions".[2] Mackay was an accomplished teller of stories, though he wrote in a journalistic and somewhat sensational style.The subjects of Mackay's debunking include alchemy, crusades, duels, economic bubbles, fortune-telling, haunted houses, the Drummer of Tedworth, the influence of politics and religion on the shapes of beards and hair, magnetisers (influence of imagination in curing disease), murder through poisoning, prophecies, popular admiration of great thieves, popular follies of great cities, and relics. Present-day writers on economics, such as Michael Lewis and Andrew Tobias, laud the three chapters on economic bubbles.[3]
In later editions, Mackay added a footnote referencing the Railway Mania of the 1840s as another "popular delusion" which was at least as important as the South Sea Bubble. In the 21st century, the mathematician Andrew Odlyzko pointed out, in a published lecture, that Mackay himself played a role in this economic bubble; as a leader writer in The Glasgow Argus, Mackay wrote on 2 October 1845: "There is no reason whatever to fear a crash".[4][5]
Housing Bubble ex Wiki
housing bubble (or a housing price bubble) is one of several types of asset price bubbles which periodically occur in the market. The basic concept of a housing bubble is the same as for other asset bubbles, consisting of two main phases. First there is a period where house prices increase dramatically, driven more and more by speculation. In the second phase, house prices fall dramatically. Housing bubbles tend to be among the asset bubbles with the largest effect on the real economy, because they are credit-fueled,[1] because a large number of households participate and not just investors, and because the wealth effect from housing tends to be larger than for other types of financial assets.[2]Housing bubble definition
Most research papers on housing bubbles use standard asset price definitions. There are many definitions of bubbles. Most of them are normative definitions, like that of Joseph Stiglitz (1990),[3] that try to describe bubbles as periods involving speculation, or argue that bubbles involve prices that cannot be justified by fundamentals. Examples are Palgrave (1926),[4] Flood and Hodrick (1990),[5] Robert J. Shiller (2015),[6] Smith and Smith (2006)[7] and Cochrane (2010).[8]Stiglitz's definition is: "...the basic intuition is straightforward: if the reason that the price is high today is only because investors believe that the selling price will be high tomorrow—when ‘fundamental' factors do not seem to justify such a price—then a bubble exists." (Stiglitz 1990, p. 13)[3]
Lind (2009)[9] argued that we needed a new definition of price bubbles in the housing market, an "anti-Stiglitz" definition. His point is that traditional definitions such as that of Stiglitz (1990),[3] in which bubbles are proposed as arising from prices not being determined by fundamentals, are problematic. This is primarily because the concept "fundamentals" is vague, but also because these type of nominal definitions typically do not refer to a bubble episode as a whole—with both an increase and a decrease of the price. Lind claims that the solution is to define a bubble by focusing only on the specific development of prices and not on why prices have developed in a certain way. The general definition of a bubble would then simply be: "There is a bubble if the (real) price of an asset first increases dramatically over a period of several months or years and then almost immediately falls dramatically." (Lind 2009, p. 80)[9]
Inspired by Lind (2009),[9] Oust and Hrafnkelsson (2017) created the following housing bubble definition: "A large housing price bubble has a dramatic increase in real prices, at least 50% during a five-year period or 35% during a three-year period, followed by an immediate dramatic fall in the prices of at least 35%. A small bubble has a dramatic increase in real prices, at least 35% during a five-year period or 20% during a three-year period, followed by an immediate dramatic fall in the prices of at least 20%."[10]
Railway Mania
Causes
Railway Mania was a stock market bubble in the rail transportation industry of the United Kingdom of Great Britain and Ireland in the 1840s.[1] It followed a common pattern: as the price of railway shares increased, speculators invested more money, which further increased the price of railway shares, until the share price collapsed. The mania reached its zenith in 1846, when 263 Acts of Parliament for setting up new railway companies were passed, with the proposed routes totalling 9,500 miles (15,300 km). About a third of the railways authorised were never built—the companies either collapsed due to poor financial planning, were bought out by larger competitors before they could build their line, or turned out to be fraudulent enterprises to channel investors' money into other businesses.[2]
The world's first recognizably modern inter-city railway, the Liverpool and Manchester Railway (the L&M), opened its railway in 1830 and proved to be successful for transporting both passengers and freight. In the late 1830s and early 1840s, the British economy slowed. Interest rates rose, making it more attractive to invest money in government bonds—the main source of investment at the time, and political and social unrest deterred banks and businesses from investing the huge sums of money required to build railways; the L&M cost £637,000 (£55,210,000 adjusted for 2015).[3]By the mid-1840s, the economy was improving and the manufacturing industries were once again growing. The Bank of England cut interest rates, making government bonds less attractive investments, and existing railway companies' shares began to boom as they moved ever-increasing amounts of cargo and people, making people willing to invest in new railways.
Crucially, there were more investors in British business. The Industrial Revolution was creating a new, increasingly affluent middle class. While earlier business ventures had relied on a small number of banks, businessmen and wealthy aristocrats for investment, a prospective railway company also had a large, literate section of population with savings to invest. In 1825 the government had repealed the Bubble Act, brought in during the near-disastrous South Sea Bubble of 1720, which had put close limits on the formation of new business ventures and, importantly, had limited joint stock companies to a maximum of five separate investors. With these limits removed anyone could invest money (and hopefully earn a return) on a new company and railways were heavily promoted as a foolproof venture. New media such as newspapers and the emergence of the modern stock market made it easy for companies to promote themselves and provide the means for the general public to invest. Shares could be purchased for a 10% deposit, with the railway company holding the right to call in the remainder at any time. The railways were so heavily promoted as a foolproof venture that thousands of investors on modest incomes bought large numbers of shares, whilst only being able to afford the deposit. Many families invested their entire savings in prospective railway companies—and many of those lost everything when the bubble collapsed and the companies called in the remainder of their due payments.[4]
The British government promoted an almost totally 'laissez-faire' system of non-regulation in the railways. Companies had to submit a bill to Parliament to gain the right to acquire land for the line, which required the route of the proposed railway to be approved, but there were no limits on the number of companies and no real checks on the financial viability of a line. Anyone could form a company, gain investment and submit a bill to Parliament. Since many Members of Parliament (MPs) were heavy investors in such schemes, it was rare for a bill to not pass during the peak of the mania in 1846, although Parliament did reject schemes that were blatantly misleading or impossible to construct—at the mania's peak there were several schemes floated for 'direct' railways which ran in vast, straight lines across swathes of countryside[citation needed] that would have been difficult to construct and nearly impossible for the locomotives of the day to work on.
Stock Market Bubble
A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation.Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.[1] In the laboratory, uncertainty is eliminated and calculating the expected returns should be a simple mathematical exercise, because participants are endowed with assets that are defined to have a finite lifespan and a known probability distribution of dividends[clarification needed][citation needed]. Other theoretical explanations of stock market bubbles have suggested that they are rational,[2] intrinsic,[3] and contagious.[4]
Historically, early stock market bubbles and crashes have their roots in financial activities of the 17th-century Dutch Republic, the birthplace of the first formal (official) stock exchange and market in history.[5][6][7][8][9] The Dutch tulip mania, of the 1630s, is generally considered the world's first recorded speculative bubble (or economic bubble).[citation needed]
Tulip Mania
[ A bulb ] was offered for sale for between 3,000 and 4,200 guilders (florins) depending on weight (gewooge). A skilled craftsworker at the time earned about 300 guilders a year.[1]Tulip mania (Dutch: tulpenmanie) was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The major acceleration started in 1634 and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative bubble or asset bubble in history.[2] In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis. It had no critical influence on the prosperity of the Dutch Republic, which was one of the world's leading economic and financial powers in the 17th century, with the highest per capita income in the world from about 1600 to about 1720.[3][4] The term tulip mania is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.[5][6]
Forward markets appeared in the Dutch Republic during the 17th century. Among the most notable was one centred on the tulip market.[7][8] At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled artisan. Research is difficult because of the limited economic data from the 1630s, much of which come from biased and speculative sources.[9][10] Some modern economists have proposed rational explanations, rather than a speculative mania, for the rise and fall in prices. For example, other flowers, such as the hyacinth, also had high initial prices at the time of their introduction, which then fell as the plants were propagated. The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small cost, thus lowering the risk to buyers.
South Sea Bubble
The South Sea Company (officially: The Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of the Fishery)[3] was a British joint-stock company founded in January 1711, created as a public-private partnership to consolidate and reduce the cost of the national debt. To generate income, in 1713 the company was granted a monopoly (the Asiento de Negros) to supply African slaves to the islands in the "South Seas" and South America.[4] When the company was created, Britain was involved in the War of the Spanish Succession and Spain and Portugal controlled most of South America. There was thus no realistic prospect that trade would take place, and as it turned out, the Company never realised any significant profit from its monopoly. However, Company stock rose greatly in value as it expanded its operations dealing in government debt, and peaked in 1720 before suddenly collapsing to little above its original flotation price. The notorious economic bubble thus created, which ruined thousands of investors, became known as the South Sea Bubble.The Bubble Act 1720 (6 Geo. 1 c. 18), which forbade the creation of joint-stock companies without royal charter, was promoted by the South Sea Company itself before its collapse.
Mississippi Company
The Mississippi Company (French: Compagnie du Mississippi; founded 1684, named the Company of the West from 1717, and the Company of the Indies from 1719[1]) was a corporation holding a business monopoly in French colonies in North America and the West Indies. In 1717, the Mississippi Company received a royal grant with exclusive trading rights for 25 years.[2] The rise and fall of the company is connected with the activities of the Scottish financier and economist John Law who was then the Controller General of Finances of France. Though the company itself started to become profitable and remained solvent until the collapse of the bubble,[3] when speculation in French financial circles and land development in the region became frenzied and detached from economic reality, the Mississippi bubble became one of the earliest examples of an economic bubble.In France, the wealth of Louisiana was exaggerated in a marketing scheme for the newly formed Mississippi Company, and its value temporarily soared to the equivalent of $6.5 trillion today, which would make it the second most valuable company in history behind the Dutch East India Company. [4][5]
John Law
John Law (pronounced [lɑs] in French in the traditional approximation of Laws, the colloquial Scottish form of the name;[1][2] 21 April 1671 – 21 March 1729) was a Scottish-French[3] economist who distinguished money, a means of exchange, from national wealth dependent on trade. He served as Controller General of Finances under the Duke of Orleans, who was regent for the juvenile Louis XV of France. In 1716, Law set up a private Banque Générale in France. A year later it was nationalised at his request and renamed as Banque Royale. The private bank had been funded mainly by John Law and Louis XV; three-quarters of its capital consisted of government bills and government-accepted notes, effectively making it the nation's first central bank. Backed only partially by silver, it was a fractional reserve bank. Law also set up and directed the Mississippi Company, funded by the Banque Royale. Its chaotic collapse has been compared to the 17th-century tulip mania parable in Holland.[4] The Mississippi bubble coincided with the South Sea bubble in England, which allegedly took ideas from it. Law was a gambler who would win card games by mentally calculating odds. He propounded ideas such as the scarcity theory of value[5] and the real bills doctrine.[6] He held that money creation stimulated an economy, paper money was preferable to metal, and dividend-paying shares a superior form of money.[7] The term "millionaire" was coined for beneficiaries of Law's scheme.[8][9]PS Law was an irresponsible rogue, a gambler; not a man to be put in charge of anything. He killed a man in a duel then went on the run. Whence his trip to France.
Housing Bubble ex Investopedia
Housing Bubble Example
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A U.S. housing bubble occurred following the financial crisis of 2007-2008. Following the dot-com bubble bursting in the 1990s, investors moved their money from start-up technology company stocks into real estate. The U.S. Federal Reserve cut interest rates to combat the mild recession that followed the technology bust and to assuage uncertainty following the World Trade Center attack of Sept. 11, 2001.Government policies encouraged homeownership and financial market innovations increased the liquidity of real estate-related assets. Home prices rose as interest rates plummeted. It's estimated that 20% of mortgages in 2005 and 2006 went to buyers, known as subprime borrowers, who would not have been able to qualify under normal lending requirements.3 Over 75% of these subprime loans were adjustable-rate mortgages with low initial rates and scheduled resets after two to three years.
The government’s encouragement of broad homeownership induced banks to lower their rates and lending requirements.5 This spurred a home-buying frenzy that drove the median sales price of homes up by 55% from 2000 to 2007.6 Adjustable rate mortgages began resetting at higher rates in 2007 as signs that the economy was slowing. Housing prices declined 19% from 2007 to 2009, triggering a massive sell-off in mortgage-backed securities.
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A lot of people bought using liar loans, without proving they had the income. The result was Distress Sales, i.e. forced sales or foreclosures.
Wall Street Predators Attack Young Brits In The Housing Market [
Predatory Pricing - Wall Street Landlords Are Swooping On New Build Houses
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Hard-working British families have slammed 'Wall Street landlords' for 'pricing them out of the housing market' by buying up new builds to line their pockets............Furious renters told MailOnline that although they wanted to get on the housing ladder, giant wealth funds were driving up prices and taking away availability. Meanwhile, housing experts claim that 'predatory' investment funds were taking advantage of the housing market that keeps families paying rent for longer.
One American firm buying up British homes is investment company Blackstone, which owns Leaf Living and Sage Homes in the UK.
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Blackstone Inc. is another Vulture Fund, one driven by greed; it specialises in leveraged buyouts as well buying commercial real estate. Buying houses and charging people £2,000 a month makes far more sense than leaving it in the bank with zero interest. Plus the investment is pretty much inflation proof. House prices will keep pace with inflation.
Landlord and Tenant Act 1985
https://www.legislation.gov.uk/ukpga/1985/70
https://www.legislation.gov.uk/ukpga/1985/70
https://www.justicefortenants.org/
https://www.pettyson.co.uk/about-us/our-blog/412-advice-for-tenants a good choice of sources
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