The good times are over. At least for now. For those who did not already notice the popping real estate bubble, the Federal Reserve?s extraordinary expansion of its lending authority over the weekend and Bear Stearns? fire sale to JP Morgan to stop its implosion from its exposure to worthless mortgage-backed securities should make it clear. Those who threw good money after bad in the past five years hoping to get rich quick on real estate are hardly the first to think they could enjoy huge rewards without risk. Humanity has a long and sordid history of fueling unsustainable bubbles whose only fix is time and good sense.
In the hope that revisiting one of them may help us to avoid another, here is the tale of how tulips wreaked havoc in Holland in the 1600s. At one point, a bulb from certain species could command acres of land, thousands of pounds of cheese and numerous livestock. Excerptedfrom “Extraordinary Popular Delusions and the Madness of Crowds” by Charles Mackay (pages 97-100):
The demand for tulips of a rare species increased so much in the year 1636, that regular marts for their sale were established on the Stock Exchange of Amsterdam, in Rotterdam, Harlaem, Leyden, Alkmar, Hoorn, and other towns. Symptoms of gambling now became, for the first time, apparent. The stock-jobbers, ever on the alert for a new speculation, dealt largely in tulips, making use of all the means they so well knew how to employ to cause fluctuations in prices. At first, as in all these gambling mania, confidence was at its height, and every body gained. … Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. Everyone imagined that the passion for tulips would last forever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked of them.
… At last, however, the more prudent began to see that this folly could not last for ever. Rich people no longer bought the flowers to keep them in their gardens, but to sell them again at cent per cent profit. It was seen that somebody must lose fearfully in the end. As this conviction spread, prices fell, and never rose again. Confidence was destroyed, and a universal panic seized upon the dealers.
… Actions for breach of contract were threatened in all the courts of the country; but the latter refused to take cognisance of gambling transactions. … To find a remedy was beyond the power of the government. Those who were unlucky enough to have had the stores of tulips on hand at the time of the sudden reaction were left to bear their ruin as philosophically as they could; those who had made profits were allowed to keep them; but the commerce of the country suffered a severe shock, from which it was many years ere it recovered.
