Sunday, April 8, 2007

Lessons from another bubble

In the 1630's there was a great financial bubble in Holland involving tulips. It took six years to build to a peak and at one point one tulip bulb was worth the value of an entire ship, also it's crew's wages and upkeep for a year!
One Bulb!

At the time there was wild speculation in the tulip futures markets and people were mortgaging their homes to buy into tulip operations or start their own.

With the onset of irrational exuberance, lenders loosened credit standards and even men who could not read or write were granted loans on the strength of their ink scratch on a loan agreement. Essentially, at the time, if you had a pulse you could get a loan.

Toward the end, some noticed the fundamentals were out of whack. The cost to produce and the cost at the retail end did not justify the soaring stock prices. Still, the tulip bull-market fever raged on...

In 1637 the bubble popped. It took six years to expand and six days to deflate. An avalanche of lawsuits ensued. Many investors lost everything plus found themselves on the wrong side of crushing debts as a result of leveraging everything they had to get in on the party that was 'tulipmania'.

Does any of this sound familiar?

We saw something like it with the tech bubble in 2000, and still again with the current housing bubble.

Will we learn from the past? The Dutch didn’t. Less than a hundred years later they had a similar bubble, just with a different flower, the Hyacinth.

It doesn't look like we will prove any wiser.
Vern

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