Talk:Economic bubble/Archive 1

Propose move to "Speculative bubble"
To comply with Wikipedia's common name rule, I propose moving this article to "Speculative bubble" because it seems to be a much more common term than "economic bubble". Investopedia uses the term "speculative bubble". Also, a quick Google search produces the following number of results:

--JHP 05:52, 24 February 2007 (UTC)
 * "Speculative bubble" - 148,000
 * "Economic bubble" - 93,600
 * "Financial bubble" - 56,900
 * "Speculative mania" - 15,600
 * "Market bubble" - 369,000 - I believe the results of this term are highly exaggerated due to the frequency of the word "stock", "bond", or "housing" immediately before the word "market".


 * Interesting, I checked Google AdWords and it appears that more people search for the term "financial bubble" than for "speculative bubble", "economic bubble", or "market bubble". BTW, the term "financial bubble" does not automatically redirect to this article. --JHP 07:33, 24 February 2007 (UTC)


 * There is no perfect solution, but "price bubble", seems the most descriptive, objective ("speculative" is a subjective interpretation, some bubbles express just plain scarcity, or examples "oil shocks") and generic notion. It covers all cases: economic (commodities, business cycles), financial (stocks, bonds, derivatives) real estate, art and collectible markets (elvis bubble ?), and plenty of other - speculative or not - either plain scarcities or collective fads, crazes and mania (tulipomania was among the firsts in history), that push up market prices beyond the stratosphere. Anyway, all redirects are possible for the more specific species of bubbles. --Pgreenfinch 08:04, 24 February 2007 (UTC)

Unreadable
The 6th paragraph under Causes, starting with "Another insufficient explanation..." is practically unreadable. It refers to events in Austrailia as if the reader is already familiar with those events. Also it is not clear what relationship they allegedly have with bubbles. I'd try to rewrite it, but I can't really figure out what it's saying. 70.162.156.229 13:02, 24 October 2007 (UTC)

Speculative Bubble?
I have always known this phenomenon as "speculative bubbles" however this is never mentioned in the entry. I live in Australia and this may be why I haven't heard the other terms, I have done a little research and found that Investopedia.com uses the term "speculative bubble" -. There is no mention of the 'bandwagon effect' that is often used to describe economic bubbles. —The preceding unsigned comment was added by Ryanesplin (talk • contribs).


 * "Speculative bubble" is a problematic term, as it presumes that speculation is the cause of the bubble. However, as the research cited in the entry shows, it is not clear that bubbles always arise due to speculation. Sslevine (talk) 07:48, 4 June 2008 (UTC)

Definition
This definition (and the related causation) does not seem to be commonly acceptable in the research literature on bubbles. Please provide a reference.

"The term refers to a market condition in which the prices of commodities or asset classes increase to absurd or unsustainable levels (that no longer reflect utility of usage and purchasing power). It occurs when speculation in the underlying asset causes the price to increase, thus encouraging even more speculation. The bubble is usually followed by a sudden drop in prices, known as a crash or a bubble burst. Both the boom and the bust phases of the bubble are examples of a positive feedback mechanism, in contrast to the negative feedback mechanism that determines the equilibrium price under normal market circumstances. Prices in an economic bubble can fluctuate chaotically, and become impossible to predict from supply and demand alone."

From Random314159: In addition to the entry above, I'll add that the definition given would not be clear to a layperson on a first reading. I find that the definition I've provided below is more clear, despite eccentric word choice, though could use some further clarification. Personally I would avoid the word "commodity" since despite the simplicity of its meaning, many people seem to struggle with the meaning of the word. "Folly" is not generally used in American English as well.

A period of wild speculation in which the price of a commodity or stock or an entire market is inflated far beyond its real value. Bubbles are said to “burst” when a general awareness of the folly emerges and the price drops.

I haven't been able to find a suitable reference for this definition though. I found it at http://www.answers.com/bubble&r=67?nr=1&lsc=true listed as being from the Economics Dictionary by Houghton Mifflin Company, but there doesn't appear to be a book from this company with that exact title. Random314159 (talk) 04:06, 29 June 2008 (UTC)

'Intrinsic' or 'fundamental'?
Isn't 'intrinsic' the wrong word? I thought intrinsic value referred to something else. I have usually heard the 'correct' value of a financial asset (meaning the expected present discounted value of the income it generates) called its fundamental value.--Rinconsoleao (talk) 09:45, 23 July 2008 (UTC)
 * Actually part of the problem is that 'intrinsic value' was linked to Intrinsic theory of value, a philosophical topic, instead of Intrinsic value (finance), which is the relevant concept for this page. I have corrected the link. --Rinconsoleao (talk) 10:28, 28 July 2008 (UTC)

Origin of Term
I didn't see much info on the origin of the term "bubble" in relation to economics. It's an area that can be filled in. —Preceding unsigned comment added by 68.183.11.217 (talk) 08:26, 20 September 2008 (UTC)

Positive feedback, misallocation of resources
One prime example of a positive feedback that tends to cause misallocation of resources into non-optimal uses: runaway fischerian sexual selection (like the one that led to the peacock's tail which has no intrinsic value). It has the same concept of intrisic value vs "market" value (a peacock with a huge colored tail has more market value than a leaner peacock).

http://en.wikipedia.org/wiki/Fisherian_runaway Fisherian runaway is a model of sexual selection, first proposed by R.A. Fisher in 1915[1], and expanded upon in his 1930 book The Genetical Theory of Natural Selection[2], that suggests an explanation for sexual selection of traits that do not obviously increase fitness of survival, based upon a positive feedback "runaway" mechanism. 216.226.48.2 (talk) 17:44, 1 October 2008 (UTC) I got this nice story in email about how an economic bubble builds up. The story truly reflects current financial events around the world. It tries to answer the question “where does all the money go?”

A very simplistic explanation of how a “bubble” builds up.If you could read patiently and understand, it’s a great knowledge! Once there was a little island country.The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.

1) There were 3 citizens living on this island country. A owned the land B and C each owned 1 dollar.

2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar. The net asset of the country now = 3 dollars.

3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars. A has a loan to C of 1 dollar, so his net asset is 1 dollar. B sold his land and got 2 dollars, so his net asset is 2 dollars. C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar. Thus, the net asset of the country = 4 dollars.

4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar. B loaned 2 dollars to A. So his net asset is 2 dollars. C now has the 2 coins. His net asset is also 2 dollars. The net asset of the country = 5 dollars. A bubble is building up.

(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A. As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars. B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars. C loaned 2 dollars to B, so his net asset is 2 dollars. The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.

(6) Everybody has made money and everybody felt happy and prosperous.

(7) One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more.

(8) A also thought the same way. Nobody wanted to buy land anymore. So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars. B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar. C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating. The net asset of the country = 3 dollars again.

(10) So, who has stolen the 3 dollars from the country ? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B’s net asset is still 2 dollars, his heart is palpitating.

(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now. A owns the 2 coins, his net asset is 2 dollars. B is bankrupt, his net asset is 0 dollar. ( he lost everything ). C got no choice but end up with a land worth only 1 dollar. The net asset of the country = 3 dollars.


 * **End of the story; BUT ************

There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared. A few points worth noting.

1) When a bubble is building up, the debt of individuals to one another in a country is also building up.

2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island’s own currency. Hence, there is no net loss.

3) An over-damped system is assumed when the bubble burst, meaning the land’s value did not go down to below 1 dollar.

4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.

5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land go up and dow like a see saw.

6) When the bubble was in the growing phase, everybody made money.

7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A ) and take part in the game. But you must know when you should change everything back to cash.

As in the case of land, the above phenomenon applies to stocks as well.

9) The actual worth of land or stocks depend largely on psychology.

Credit: No idea from where this story came from since I got it in email. But who ever wrote it, explained in detail as to how bubble builds up. Two thumbs up to him or her! —Preceding unsigned comment added by 194.7.233.20 (talk) 14:50, 26 November 2008 (UTC)

Link to the lithograph
I'm curious, why was the link to http://upload.wikimedia.org/wikipedia/en/a/ad/The_Way_to_Grow_Poor,_The_Way_to_Grow_Rich_--_Currier_%26_Ives_1875.jpg removed? An IP on 30 September 2008 apparently deleted the description because the image itself was gone, but the previous edit did have the image. 212.156.164.185 (talk) 22:37, 23 February 2009 (UTC)

Intrinsic value, again
We have defined Economic bubble in terms of a deviation from intrinsic value. But it looks to me like the definition (or at least some of the examples) on the page for Intrinsic value (finance) is incorrect. Usually an economic bubble is usually defined in terms of deviation from expected present discounted value. But the intrinsic value (finance) page says that an option has zero intrinsic value when it is 'out of the money'. That claim is inconsistent with defining intrinsic value as expected present discounted value. It would be helpful if someone would take a look at the Intrinsic value (finance) page. --Rinconsoleao (talk) 11:22, 17 February 2009 (UTC)


 * This comment may be correct, but it would fit better in the discussion of Intrinsic value (finance). Sslevine (talk) 09:05, 15 March 2009 (UTC)

"high volumes"?
I don't dispute that bubbles in financial assets trade at high volumes, but is it true to claim that real estate bubbles trade at high volumes? How does one define "high volumes"? Houses certainly aren't day-traded. Sure there are home flippers, but they only make up a small portion of the market. Can anyone provide statistical evidence that homes have been trading at significantly higher than normal volumes during the U.S. housing bubble? --JHP (talk) 08:20, 3 February 2009 (UTC)


 * The definition above is commonplace in the economics literature, and debating it constitutes original research. This is not the right forum for that. --Sslevine (talk) 09:06, 15 March 2009 (UTC)

Bubble Skepticism
There should probably be a mention in the article of the minority view, held by some of the hardcore Chicago school, that "bubbles" don't really exist and that they actually reflect a rational pricing of assets. Nwlaw63 (talk) 17:55, 9 February 2010 (UTC)

Excellent.
Cool & Cool. Touhidul Alam71 (talk) 02:40, 11 February 2014 (UTC)

NPOV in first paragraph
The definition of economic bubbles as "trade in high volumes at prices that are considerably at variance from intrinsic values" is very problematic. It comes from a single (probably biased) source and it sounds suspiciously like thinly-veiled propaganda by Austrian School worshippers. Austrian-schoolers are well known for their belief that economic bubbles don't exist, at least not as an intrinsic property of markets. Their view is that bubbles are caused purely by external influences such as government meddling. By defining bubbles in terms of the intrinsic value theory, which has been discredited by most economists, they seem to be setting up a Straw man argument to disprove the idea that market-induced bubbles are a sound economic theory (which has NOT been discredited by most economists). I suggest including AT LEAST one alternative definition of economic bubbles in the first paragraph. For instance, a definition in terms of utility, purchasing power, and equilibrium price should be included. Does anybody know a source? Cambrasa (talk) 17:19, 12 March 2008 (UTC)
 * It sounds like a standard definition to me. I'm not aware of an alternative definition in terms of utility, purchasing power, or equilibrium price (unless equilibrium price is interpreted as that based on 'intrinsic' or 'fundamental' values). And I'm no Austrian. --Rinconsoleao (talk) 15:53, 13 March 2008 (UTC)
 * As the reference shows, the definition comes from three foremost students of bubbles, including Nobel laureate Vernon A. Smith. It is widely accepted among researchers of bubbles. -- Sslevine (talk) 07:46, 4 June 2008 (UTC)
 * Cambrasa, from your writing ("Austrian School worshippers") it can be inferred that looking in the mirror should lead you to find the "thinly-veiled propaganda" and bias you seek. 142.90.85.163 (talk) 17:56, 30 July 2014 (UTC)

Merge from Boom and bust
Boom and bust is a badly written article about the same topic, thoughts on merging from? Darx9url (talk) 03:55, 24 February 2015 (UTC)


 * Since there are no objections, I'm just going to go ahead and do it. Darx9url (talk) 18:49, 8 March 2015 (UTC)

"The central bank"?
"Therefore, it is imperative for the central bank to keep its eyes on asset price appreciation and promptly take preemptive measures to curb high level of speculative activity in financial assets." Really? Maybe it's just imperative that people learn not to do stupid things? The idea that (a) there is a central bank and (b) that if there is one, it should get involved in speculative bubbles seem to me to be unwarranted assumptions. There is no guarantee that any given economy that generates a speculative bubble will have a central bank, and I'm sure that it is hotly debated among finance geeks whether such an entity should intervene in a situation like this. --Michaeljsouth 11:23, 19 March 2007 (UTC)

I agree, this should be changed; it has a strong bias towards government intervention which has not been proven to be effective. Sheridp (talk) 19:04, 10 December 2007 (UTC)
 * Government intervention, when it actually is done, has proven to be very effective. You must be mistaken government intervention with bailouts. — Preceding unsigned comment added by 212.130.79.38 (talk) 07:47, 21 August 2015 (UTC)

Dr. Shi's comment on this article
Dr. Shi has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:

"1. See the reference below for a formal definition of bubble>

Stiglitz, Joseph E. "Symposium on bubbles." The Journal of Economic Perspectives 4.2 (1990): 13-18.

2. "many believe that bubbles cannot be identified in advance"

Cooper, G. (2008). The Origin of Financial Crises. Harriman House Ltd, Hampshire.

4. impact of bubble

McCarthy, J. and R. W. Peach (2004). Are home prices the next bubble? Economic Policy Review 10 (3)."

We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.

We believe Dr. Shi has expertise on the topic of this article, since he has published relevant scholarly research:


 * Reference : Shu-Ping Shi & Yong Song, 2012. "Identifying Speculative Bubbles with an Infinite Hidden Markov Model," Working Paper Series 26_12, The Rimini Centre for Economic Analysis.

ExpertIdeasBot (talk) 16:07, 12 July 2016 (UTC)

Comments
economic bier bier bier bier very important. Put bier in a bubble and u have an economic bubble

-Floris Volkers. -Bryan Cuperus -Wouter Keultjes. — Preceding unsigned comment added by 145.37.134.211 (talk) 13:49, 4 October 2016 (UTC)

The section on 'liquidity' is a regurgitation of Austrian Business Cycle Theory stated as fact. In fact, the entire article has a bias towards laissez faire ideology and ABCT. Well, The role of government in a capitalist market economy is hotly debated; there is no consensus that complete non-interventionism is the correct course of action in all circumstances, nor that intervention is always the answer to economic problems. Austrian Business Cycle Theory is also hotly debated, with plenty of material written both supporting it and disputing its accuracy and logic. The article could definitely state from a NPOV that economic bubbles/speculative bubbles are a major part of most models of the business cycle; but there are quite a few models out there and they don't all skew towards laissez faire capitalism as the solution, so it'd be nice to see some of the bias excised from the article. — Preceding unsigned comment added by 173.28.194.172 (talk) 01:59, 14 September 2012 (UTC)

I did not know that the cause of bubbles was in dispute: I thought that it was a well understood phenomenon - in fact it pretty well described in the first paragraph of this article. —The preceding unsigned comment was added by 68.122.224.81 (talk • contribs).

I agree. Also, I note that there is vanishingly little discussion in the article of the contributory (indeed, causative) effects of currency inflation, which is the primary purpose for which any central bank exists. Does it seem to anyone else as if the perspectives of the Austrian school have been deliberately foresworn in the composition of this article?

In the Wikipedia article "Austrian business cycle theory" we read:


 * Austrian economists assert that inherently damaging and ineffective central bank policies are the predominant cause of most business cycles, as they tend to set "artificial" interest rates too low for too long, resulting in excessive credit creation, speculative "bubbles" and "artificially" low savings.


 * According to the theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable "monetary boom" during which the "artificially stimulated" borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas which would not attract investment if the money supply remained stable. A correction or "credit crunch" – commonly called a "recession" or "bust" – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally "clear", causing resources to be reallocated back towards more efficient uses.

This gives reason to argue for the incorporation of Austrian school thinking on this subject, especially because the originators of this article (as of 25 September 2008) cannot cease perseverating about how "The cause of bubbles is a puzzle to science."

It seems to be a "puzzle" only to those with an inadequate model and an unwillingness to acknowledge obvious realities.

-- SJ Doc —Preceding unsigned comment added by 72.82.213.200 (talk) 07:42, 25 September 2008 (UTC)

I am not an economist, but this article seems based on an extreme view of the premise that free markets are always smooth-running engines; the only possible problems come from government intervention. This important article, so important to people right now, should be rewritten. Grammardon (talk) 20:44, 9 October 2008 (UTC)

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