It is said humans are naturally risk averse – we prefer bread today than steak tomorrow. But recent years showed once again there seem to be quite a lot of keen gamblers in human society. Betting high stakes on financial derivates and virtually blown up stocks brought us to the unpleasant situation we all know well enough. There has been (oh yes, and there WILL be a lot of discussions about the most important world event since the iron curtain fall, however every attempt counts.
Strangely, there have been no true gamblers involved in the crisis game. Why? Simply because gamblers take risks, but executives of the modern world are not connected with their decisions anymore. Old school “captains of industry” who would go down with their shopsbelong to the past, at least in big corporations. Boards of directors have enough autonomy to bet freely and offset all risks – classic example of moral hazard. But is moral hazard the only aspect to be blamed for reckless decisions, which lead to financial and asset bubbles?
Bubbles have deeper roots. While trying to explore investment bubbles, I found that history has some splendid examples which help explain recent madness. Let’s look on the forefather of all modern bubbles – the famous Tulip mania, which took place in Netherlands.
It was at the beginning of 16th century, when Netherlands was living its own golden age (not far from our New Economy era) and society became obsessed by a simple flower from Constantinople: a tulip. Price of the bulbs was skyrocketing and soon many people abandoned their daily duties and started speculating with them. One tulip bulb was worth four oxen at the peak. Naturally, bubble burst within less than three years. Price dropped in few days below 20% and left people holding just worthless weed in hands.
So are the bubbles caused by groggy masses, or powerful cliques? It seems accumulation of capital caused shift in “abilities” to cause bubbles, but it’s not so simple. Exploring the tulip mania deeper, we can discover it was actually mostly in hands of interconnected speculators (as suggested by Dr. Goldgar in her book Tulip mania: Money, Honor, and Knowledge in the Dutch Golden Age). On the other hand, in last decade thousands of minor investors threw all their money into “bulletproof” blue chips, which sunk faster than Titanic.
There is one more bridge between the Tulip Mania and “our” crisis. Often overlooked in analysis of Tulip mania is the fact Dutch were involved in a form of currency speculation at the time. Netherlands began to offer free coinage in that time, which caused massive inflow of gold into the country and encouraged people to invest it whenever possible. Similarly with interest rate manipulation? You decide…
Speculation on the market have the same scenario for centuries. Tomorrow it was tulip bulb, today real estate, tomorrow maybe green technologies. Is it caused by our shared temptation to gamble?
I believe most of the people are not natural gamblers at all. But if the real gamblers are able to persuade us, we often come under the prospect of better times which suddenly pop up in front of our eyes. And if government fuels our expectations, bubble is ready to be blown, no matter if we bet on tulip bulbs, ENRON stocks or real estate properties. Unfortunately, it’s usually the inexperienced player, who takes the bulk of the losses.