FocusEconomics Post: Tulipmania and Crises

From time to time the calls on the radio turn to questions about the possibilities of market corrections and the likelihood of recession, panic, depression and so on. For the most part these calls died down since 2014 or so, which may just mean they are getting ready to start up again. The number of pages devoted to the examination of economic crises, financial market and otherwise, is long and there are some good and many bad and I try to steer callers to the better ones as much as I can. To that end, Brian Dowd at FocusEconomics wrote up a really nice history of the Tulip Crisis, one of the first financial panic/crisis events we really understand as a bubble. You can find his full post here.

The story will read like most crisis events in recent years. As an example,

During this Dutch Golden Age, not only were there aristocrats with money, but middle-class merchants, artisans and tradesmen also found themselves with extra coin burning a hole in their pockets. Basically, this meant more people were able to spend money on luxuries such as cultivars that perhaps in other European countries would not have been commonplace.

As well as,

At this point, it might be pretty obvious what was to come next for the bubble. As the story is often told, almost overnight the bulb trade disappeared because as the price rose to dizzying heights, finally someone just decided not to pay, everyone lost confidence and prices plummeted. Although this is very dramatic and perhaps makes the story sound better, it may not be entirely true.

This should really depress us at some level. Financial crisis/panics follow almost an identical pattern to each other. We keep fooling ourselves into believing that something changed, which is why Carmen Reinhart and Kenneth Rogoff named their book “This Time is Different: Eight Centuries of Financial Folly.”

I talked about crisis events with my economic history undergrad students last semester. I talked about the perception that risks were lower than prices and rates indicated and that essentially free profits were available for no risk. They all thought I was talking about the housing boom and bust of the 2000s and the Great Recession. I was talking about the junk bond bust of the 1980s. The more things change the more they stay the same. The tulip crisis is viewed as one of the first examples of its type of event and Mr. Dowd gives an excellent summary.

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