Bubbles, Booms, and Busts (eBook)

This book provides a thorough explanation of the nature and history of booms, bubbles and busts in financial markets. The first part of the book deals with financial booms and bubbles and how they emerge, develop and collapse. It describes the distribution of wealth, inflation, rationality of bankers, monetary and fiscal policy, the role of central banks, tax policies, social security, US federal, state, municipal and personal debt, and valuation of common stocks. The book describes historical boom/bust cycles including bubbles of the 1720s, the Florida land boom and the stock market in the 1920s, the depression of the 1930s, the S&L scandal of the 1980s, the great bull market of 1982-1995, the crash of 1987, the dot.com mania of 1995-2000, corporate swindles of the 1990s and 2000s, the sub-prime fiasco of the 2000s, and Japan in the late 20th century. Most of the recent wealth generation has derived from increased debt and appreciation of paper assets. The architects of the new economics were Ronald Reagan and Arthur Greenspan. Inevitably, the US Government’s cure for excessive spending and inadequate revenues is to increase spending and cut revenues. American voters must choose between "tax and spend" Democrats and "spend and borrow" Republicans. The theme of American finance was uttered by VP Cheney: "Deficits don’t matter."

Preface 5
Contents 10
Introduction: The Holland TulipMania of 1636–1637 13
THE NATURE OF MANIAS, BUBBLES, AND CRASHES 16
INTRODUCTION 16
THE HUMAN ELEMENT 19
THE RISE OF MANIAS AND BUBBLES 24
FUELING THE BOOM 29
WEALTH AND INFLATION 30
ASSET GROWTH VS. WEALTH: CAUSE AND EFFECT? 30
INFLATION 32
SPECULATIONS, BOOTSTRAPS AND SWINDLES 38
THE RATIONALITY OF INVESTORS? 39
THE RATIONALITY OF BANKERS AND EXPERTS? 42
RATIONALITY OF BANKERS? 42
RATIONALITY OF EXPERTS? 48
MONETARY POLICY AND THE FEDERAL RESERVE SYSTEM 54
FISCAL POLICY AND TAXES 62
TAX POLICIES 62
INCOME TAX 62
ESTATE TAX 66
THE ALTERNATIVE MINIMUM TAX 69
INCOME TAX BRACKETS AND BUDGET DEFICITS 71
CAPITAL GAINS 74
SOCIAL SECURITY AND MEDICARE 77
INEQUALITY 80
WHY INEQUALITY PERSISTS AND EXPANDS 80
INEQUALITY OF WEALTH IN THE UNITED STATES 83
DEBT 86
US FEDERAL DEBT 87
STATE AND MUNICIPAL DEBT 92
HOUSEHOLD AND MORTGAGE DEBT 93
THE DOLLAR 98
BANKRUPTCIES 100
WORLD DEBT 102
DEPOSIT INSURANCE 103
REGULATION, DEREGULATION AND NO REGULATION 106
PENSION PLANS 109
CORPORATE PENSIONS 109
DEFINED BENEFIT PLANS 109
DEFINED CONTRIBUTION PLANS 111
THE PUBLIC SECTOR 114
THE VALUATION OF COMMON STOCKS 116
INTERNAL FEEDBACK AND ENDOGENOUS RISK 122
WHEN THE BUBBLE POPS 124
NOTES 126
A SHORT HISTORY OF BOOMS, BUBBLES, AND BUSTS 132
THE NEW WORLD 133
SOUTH SEAS BUBBLE 133
JOHN LAW’S MISSISSIPPI COMPANY 135
FLORIDA LAND BOOM OF THE 1920S 136
THE RISE 136
THE FALL 137
UNDERLYING CAUSES 138
THE ROARING 20S STOCK MARKET 139
THE REAL ECONOMIC BOOM OF THE 1920S 139
THE STOCK MARKET OF THE 1920S 142
THE CRASH OF 1929 145
THE GREAT DEPRESSION OF THE 1930S 146
THE SAVINGS AND LOAN SCANDAL OF THE 1980S 151
THE ORIGINAL PROBLEM 151
DEREGULATION AND NO REGULATION 156
HOW MR. REAGAN MADE A BAD PROBLEM WORSE 158
THE FALSE SPRING OF 1983 161
THE ‘‘GO–GO’’ PERIOD 164
FRAUD AND MISCONDUCT 166
THE AFTERMATH 174
THE BULL MARKET OF 1982–1995 176
THE CRASH OF 1987 184
THE DOT.COM MANIA 190
BOOM AND EUPHORIA 190
GREENSPAN AND THE ROLE OF THE FEDERAL RESERVE 192
BURSTING OF THE BUBBLE 198
MERRILL-LYNCH IS BULLISH ON AMERICA 199
OTHER BUBBLES AND SWINDLES OF THE LATE 1990S AND 2000S 201
ADELPHIA 202
ROGUE TRADERS AT BANKS 203
BARINGS BANK 203
ALLIED IRI SH BANKS 204
SOCIETE GENERALE 204
ENRON 205
LONG-TERM CAPITAL MANAGEMENT 210
ALBANIA’S PONZI SCHEMES 219
CORPORATE AND ACCOUNTING SCANDALS 221
THE SUB-PRIME REAL ESTATE BOOM 2001–2007 235
ORIGIN OF THE BOOM 235
EXPANSION OF THE BOOM 237
RESIDENCES AS ATMS 240
THE PUNCTURED BUBBLE 244
MORTGAGE-BACKED SECURITIES 248
GOVERNMENT RESPONSE TO THE PUNCTURED BUBBLE 252
INTERNATIONAL MORTGAGE DEBT 253
THE HIDDEN TIME BOMB 255
JAPAN AND EAST ASIA 256
JAPAN 1970–2007 256
BACKGROUND 256
THE JAPANESE BOOM AND BUBBLE 257
COLLAPSE OF THE JAPANESE BUBBLE 261
EAST ASIA 262
THE OIL BUBBLE 265
THE NEXT BUBBLE 271
NOTES 275
Abbreviations 283
Index 285