Bubbles and Crashes

The history of finance is one of the most -exciting, and sobering, parts of economics, as is illustrated by the quote from Burton talkie that leads off this section.

When a psychological frenzy seizes the market, it . can result in speculative bubbles and crashes. A speculative bubble occurs when prices rise because people think they are going to rise in the future-it is the reverse of Keynes’s just-cited dictum. A piece of land may be worth only $1000, but if you see a: land-price boom driving prices up 50 percent each year, you might buy it for $2000 hoping you can sell-it to someone else next year for $3000. f\ speculative bubble fulfills its own promises. If people buy because they think counterclockwise, their act of buying sends up the ·price of stocks, This causes people to buy even more and sends the dizzy dance off on another round. But, unlike people who play cards or dice, no one patently loses what the winners gain. Of course, the prizes are all on paper’and would disappear if everyone tried to cash them in. But why. should anyone want to sell Such lucrative securities? Prices rise because bf hopes and dreams, not because the profits and dividend-companies are soaring.

The most famous bubble of them all occurred in the American stock market in the 1920s. The “roaring twenties” saw a fabulous market boom,  when everyone bought and sold stocks, Most purchases in this wild bull market were on margin. This means a buyer of$10,OOO worth of stockist put up only , part of the price in cash and borrowed the difference, pledging the newly bought stochastic collateral for the purchase, what did it matter that you had to pay the broker 6, 10, or 15 percent per year on the borrowing when Auburn Motors or Bethlehem Steel might jump 10 perceptive in value overnight?

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