Introduction

Our recent financial crisis has resulted in the collapse of large financial institutions, the bailout of a number of banks by government, and a decline in stock markets all over the world. Not only that, it has also contributed to high unemployment, failures of many key businesses and retailers as well as declining consumer wealth. Was this all caused by a simple bubble bursting? This is not the first financial crisis to affect Britain and it most likely will not be the last. Financial crises can take a form of a crash, a bubble (i.e. a mania), a banking crisis, a recession or in the worst case a depression.

 

 

Kindleberger (1987) defines a bubble as “as a sharp rise in the price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers – generally speculators, interested in profits from trading in the asset rather than its use or earnings capacity”. This definition implies that during a bubble the price of the asset rises above its ‘fundamental value’, which is usually followed by a reversal of expectations and a sharp decline in prices (i.e. a crash).

A bubble can be classified as either a financial asset bubble or a real asset bubble. Financial asset bubbles are those which relate to stocks whereas real asset bubbles are those which relate to anything else other than stocks i.e. commodities and real estate.

This idea of bubbles dates back many centuries with the very first bubble occurring as early as the 17^th century. This first bubble was Holland’s Tulip Mania in the 1630s. Next was the South Sea bubble and Mississippi bubble in 1720, followed by the Railway Mania in the 1840s. Garber provides a great explanation of these first few bubbles in his paper 'Famous First Bubbles'. You can read the full article here.

After, came the Stock Market bubble (Wall St. Crash) in 1929 and the Great Depression in the 1930s. More recently was the Dot-com bubble in the 90s and the very familiar Housing bubble in 2005 and ‘Credit Crunch’ (2007-08).

The Mississippi bubble led to a great stock market crash in Europe in 1720. It originated from a Scotsman in France trying to start his own company. In my blog I am going to investigate the Mississippi bubble in greater detail explaining why it happened and what effect it had on Europe.



Bibliography:

Kindleberger, C.P. (1987), "Bubbles", in The New Palgrave. A Dictionary of Economics, edited by J.Eatwell, M. Milgate and P. Newman, MacMillan, London.

Garber, P.M., "Famous first bubbles," Journal of Economic Perspectives, vol.4 (2) Spring 1990