Bubbles, Booms, and Busts: The Human Spectacle of Spectacular Speculation

Jiakai Jeremy Chua

Where is the market discipline?

The cacoethes for collective speculation has always been ignited and sustained by some kind of spectacular imagination, a community fantasy in which everyone could ride the next wealth bandwagon to riches. In the all-too familiar human inclination to avarice, there is nothing out of the ordinary to echo: “If John Smith across the street can do it in three days, why not me?” This is in spite of the leaves in our history textbooks, which have time and time again forewarned us to the economic disasters that greet us at the sphincter of an upward tract. We simply do not digest fiber in the lessons of our predecessors very well.

Yet, to refuse trotting behind the financial shepherds of our times yields an opportunity cost that human greed cannot brook. An iterated prisoner’s dilemma of sorts emerges, accompanied by a dangerous faith in the infallibility of the self, the genius of our economic gurus, and the supremacy of our capitalist systems. Not unlike religion, such is the nature of financial euphoria, where true long-term rationality is often forsake.

In the age of science and reason, the inanity of the infamous 17th-century “Tulpengekte” would have seem condemned to the trashcan of yesteryears. Unfortunately, a tulip by any other name would smell as sweet. 200 years after the economic fallout in Holland, the Victorians found affinity with another horticultural frenzy. Although “Orchidelirium” did not develop or unravel in dramatic fashion as its Tulip counterpart, an irrational demand fueled by mass speculation for the ornamental flower shoved asset prices way above its intrinsic value. Once the vogue withered away, the market value of the orchids tumbled too.

Closer to the last decade, the tiny island of Singapore has experienced its fair share of economic fads, ranging from Hello-Kitty products, bubble-tea stands, to the Flower Horn “Luohan” fish. In 2003, the Khaleej times reported a record of 0.32 Million USD for a single specimen of the Flower Horn fish at the height of its popularity. As with the Tulip craze, “even thieves were going after the Flower Horn fish rather than hard cash.” One detects a common thread here: the bubbles for largely non-functional products always begin with love, turning into lust as people discover that a business can be spun out of it. When the public bites the bait, it becomes lunacy. If not the work of human stupidity, such bubbles certainly play to the Greater Fool Theory, in which people rationalize that their own shaky investments can be offloaded to the “greater fool”, a symptom of sheer hubris.

While the aforementioned examples pale in comparison to other financial bubbles which have adversely affected the global economy, the underlying story remains unremarkably familiar. The only vectors adjusted are an expanded dramatis personae and the heightened stakes of the game: corporations, countries, government agencies, unbridled loans, and impossible debts. In the latest financial crisis, the world saw mammoth financial institutions and other key businesses collapse, trillions of dollars in consumer wealth wiped out, countries pile on billions more in sovereign debt, job loss in the millions, and a substantial retardation of overall economic activity. Most commonly proposed as the runaway train was a liquidity shortfall caused by the reckless and myopic management of mortgage-related financial products in the U.S housing market – encouraged by the exponential demand for home ownership. Once the housing bubble went rogue in 2007, the global value of securities lost credibility and other existing economic bubbles flew into a bed of needles. It was essentially a foam party on the balcony of a house of cards, waiting for the market police to crash.

Yet, the alarms have been blaring for decades before the latest recession. Little caveat was given to the Japanese Lost Decade, 1997 Asian Financial Crisis, and the Dot-Com Bubble Bust, which have made many pithy statements about discretion in lending and borrowing, especially with investments in potentially short-term trends. Nevertheless, financial memory has always been relatively limited, usually 20 years as John Gabraith suggests. But with how rapidly information is exchanged and decisions made today, it seems that idiocy and obstinacy recur at a more shocking frequency just to fulfill brief bouts of investment happiness. It was certainly for good reason that a headline for The Onion read: “Recession-Plagued Nation Demands New Bubble To Invest In.”

The problem is not in our financial pied pipers and economic systems, it is the sheep in ourselves. Al Gore has spoken at lengths about making sensible decisions to take ownership of the ecology on our planet. In the same way that our financial threads are now strung globally in a zero-sum game, the situation has never been more dire for a new conception of an ecology of economics where common sense and better risk management are at the helm.