Economic bubble
Period when asset prices far exceed intrinsic value, often ending in crash.
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An economic bubble is a rapid rise in asset prices that many investors initially mistake as justified.[1] Bubbles are often only identified with certainty after prices have already crashed.[1]
Quick Facts
- Origin of term
- 1711–1720 British South Sea Bubble
- Types
- Equity bubble, debt bubble
- Examples
- Tulip Mania
- dot-com bubble
- Roaring Twenties
- 2000s US housing bubble
- cryptocurrency bubble
- Key theorists
- George Soros (reflexivity), Eugene Fama (skepticism on identification)
- Impact
- Can destroy wealth
- cause economic malaise
- and reverberate beyond borders
Facts from the source article.
Key facts and history
Economist Charles P. Kindleberger divided a speculative bubble into five phases: displacement, boom, euphoria, financial distress, and revulsion.[2] Greater fool theory states that bubbles are driven by optimistic participants who buy overvalued assets expecting to sell to even greater fools.[3] The bubble ends when the greatest fool pays the top price and can find no further buyer.[3] Economists focus their attention on two primary bubble categories: those involving equity and those involving debt.[4]
This explanation is favored by the general public, but empirical research has not yet provided full confirmation for it.[3]
What the cited sources add
A 2013 article on Gold Eagle noted that price bubbles had recently appeared in real estate markets of the United States, Australia, the United Kingdom, the Nordic countries, and Japan.[5] The same source stated that central banks can inhibit or destroy a bubble by tightening monetary policy and raising interest rates.[5] However, the article identified legal, political, and technical factors that make it difficult for central banks to intervene effectively in bubble economies.[5] The article also noted that the Japanese bubble economy of 1988-90, when land and share prices more than doubled, was possibly the largest speculative event in modern history.[5]
Soros claimed this principle gave him his "edge" as a trader.[6]
References
- Wikipedia, "Economic bubble" (CC BY-SA 4.0), which cites: Mishkin, "How Should Central Banks Respond to Asset-Price Bubbles? The 'Lean' versus 'Clean' Debate After the GFC" (original not read by us) en.wikipedia.org
- Wikipedia, "Economic bubble" (CC BY-SA 4.0), which cites: Kindleberger, "Manias, Panics and Crashes: A History of Financial Crises", Palgrave Macmillan UK, 2001-12-13, p. 13–22; Odlyzko, "The British Railway Mania of the 1840s", University of Minnesota; Tuckett, "A Psychoanalytic Interpretation of Dot.Com Stock Valuations", SSRN, February 2024 (original not read by us) en.wikipedia.org
- Wikipedia, "Economic bubble" (CC BY-SA 4.0), which cites: Lei, "Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality Vs. Actual Irrationality", Econometrica, 2001, p. 831; Levine, "The Institutional Nature of Price Bubbles", 27 June 2007 (original not read by us) en.wikipedia.org
- Wikipedia, "Economic bubble" (CC BY-SA 4.0), which cites: "5 Stages of a Bubble" (original not read by us) en.wikipedia.org
- "The Role of a Central Bank in a Bubble Economy – Section I – Gold Eagle", gold-eagle.com, 28 May 2013. facts only, no text reused. gold-eagle.com
- Wikipedia, "Economic bubble" (CC BY-SA 4.0), which cites: Journal of economic methodology, Volume 20, Issue 4, 2013: Special Issue: Reflexivity and Economics: George Soros's Theory of Reflexivity and the Methodology of (original not read by us) en.wikipedia.org
Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Economic bubble (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.
More in Economic Concepts & Models
Sources
Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.
- Wikipedia: Economic bubble (CC BY-SA 4.0).
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