Boom and bust: a global history of financial bubbles

297 Pages·2020·2.641 MB·English

by  Quinn, William, Turner, John D

BOOM AND BUST
Whydostockandhousingmarketssometimesexperienceamazingbooms
followed by massive busts and why is this happening more and more
frequently? In order to answer these questions, William Quinn and
JohnD.Turnertakeusonarivetingridethroughthehistoryoffinancial
bubbles, visiting, among other places, Paris and London in 1720, Latin
America in the 1820s, Melbourne in the 1880s, New York in the 1920s,
Tokyointhe1980s,SiliconValleyinthe1990sandShanghaiinthe2000s.
Astheydoso,theyhelpusunderstandwhybubbleshappen,andwhysome
have catastrophic economic, social and political consequences whilst
others have actually benefited society. They reveal that bubbles start
when investors and speculators react to new technology or political
initiatives, showing that our ability to predict future bubbles will
ultimatelycomedowntobeingabletopredictthesesparks.
William Quinn is a Lecturer in Finance at Queen’s University Belfast,
whereheconductsresearchonmarketmanipulation,stockmarketsand,
aboveall,bubbles.
JohnD.TurnerisaProfessorofFinanceandFinancialHistoryatQueen’s
UniversityBelfast.HeisaFellowoftheAcademyofSocialSciencesandan
editorofTheEconomicHistoryReview.HisbookBankinginCrisis(2014)won
theWadsworthPrizein2015.

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Contents
ListofFigures page vi
ListofTables viii
1 TheBubbleTriangle . . . . . . . . . . . . . . . . . . . . . . . 1
2 1720andtheInventionoftheBubble . . . . . . . . . . . . . 16
3 MarketabilityRevived:TheFirstEmergingMarketBubble . 39
4 DemocratisingSpeculation:TheGreatRailwayMania . . . . 58
5 OtherPeople’sMoney:TheAustralianLandBoom . . . . . 77
6 Wheeler-Dealers:TheBritishBicycleMania . . . . . . . . . 98
7 TheRoaringTwentiesandtheWallStreetCrash . . . . . . . 115
8 BlowingBubblesforPoliticalPurposes:Japaninthe1980s . 134
9 TheDot-ComBubble . . . . . . . . . . . . . . . . . . . . . . 152
10 ‘NoMoreBoomandBust’:TheSubprimeBubble . . . . . . 170
11 CasinoCapitalismwithChineseCharacteristics . . . . . . . 193
12 PredictingBubbles . . . . . . . . . . . . . . . . . . . . . . . 210
Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 257
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
v
Figures
1.1 Thebubbletriangle . . . . . . . . . . . . . . . . . . . . . . . . . . page5
2.1 MississippiCompanyshareprice(livres)andsubscriptiondates . . . 21
2.2 SouthSeaCompanyshareprice(£)andsubscriptiondates . . . . . . 27
2.3 Shareprices(£)oftheBankofEngland,RoyalAfricaCompany
andOldEastIndiaCompany . . . . . . . . . . . . . . . . . . . . . . . 29
2.4 SharepriceindexfortheNetherlands . . . . . . . . . . . . . . . . . 30
3.1 Stockreturnindexes,1824–6 . . . . . . . . . . . . . . . . . . . . . . . 45
4.1 WeeklystockindexesofBritishRailwaysandnon-railwayblue-chip
companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.2 Railwaystockmarketindexandweeklywordcountofrailway
companypromotionadverts . . . . . . . . . . . . . . . . . . . . . . . 64
4.3 GrosscapitalformationbyUKrailwaysasapercentageofGDP
andpaid-upequitycapitalofUKrailways . . . . . . . . . . . . . . . . 67
5.1 NewcompanyformationsinVictoria . . . . . . . . . . . . . . . . . . 80
5.2 MelbourneHousePriceIndex . . . . . . . . . . . . . . . . . . . . . . 82
5.3 Monthlyindexofland-boomcompanystocksontheStockExchange
ofMelbourne . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
6.1 Monthlygeneralandcycleshareindexes,1890–1903 . . . . . . . . . 101
7.1 Numberofnewnon-farmhousesonwhichconstructionstarted
intheUnitedStates,1917–34(thousands) . . . . . . . . . . . . . . . 118
7.2 DowJonesIndustrialAverage,1918–32 . . . . . . . . . . . . . . . . . 121
8.1 Japaneselandpriceindexforsixmajorcities,1964–2010 . . . . . . . 139
8.2 TOPIXdailyindexofJapanesestocks,1980–93 . . . . . . . . . . . . 141
9.1 UStechnologyIPOs,1980–2005 . . . . . . . . . . . . . . . . . . . . . 156
9.2 S&P500andNASDAQindexes,1990–2004 . . . . . . . . . . . . . . . 156
9.3 Globaltechnologystockpriceindexes,1995–2006 . . . . . . . . . . . 161
vi
LISTOFFIGURES
10.1 IndexofrealhousepricesfortheUnitedStates,1890–2012 . . . . . 172
10.2 IndexesofrealhousepricesforIreland,NorthernIreland,
SpainandtheUnitedKingdom,1973–2012 . . . . . . . . . . . . . . 174
11.1 NumberoflistedcompaniesonShanghaiandShenzhen
stockexchanges,1990–2016 . . . . . . . . . . . . . . . . . . . . . . . 196
11.2 ShanghaiStockExchangeCompositeIndexandShenzhen
StockExchangeCompositeIndex,1990–2015 . . . . . . . . . . . . . 197
11.3 Averagedailyturnovervalue(RMB100million)ontheShanghai
andShenzhenstockexchanges,1991–2016 . . . . . . . . . . . . . . . 207
vii
Tables
1.1 Majorfinancialbubbles . . . . . . . . . . . . . . . . . . . . . . . . page13
2.1 ComparingthefirstfinancialbubbleacrossFrance,Britain
andtheNetherlands . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.1 Joint-stockcompaniesformedin1824and1825 . . . . . . . . . . . . 42
3.2 MajorcompaniesprojectedfromFebruary1824toJanuary1825 . . . 43
5.1 AustralianGDP,GDPpercapitaandoverseasborrowing . . . . . . . 79
5.2 TheStockExchangeofMelbourneandtheland-boomcompanies . 84
5.3 ThegrowingvulnerabilityoftheAustralianbankingsystem . . . . . . 89
6.1 Capitalisationofcyclecompanies . . . . . . . . . . . . . . . . . . . . 102
6.2 Proportionofcapitalcontributedbyoccupationalgroups . . . . . . 107
7.1 UScorporatestockissues,1921–34 . . . . . . . . . . . . . . . . . . . 122
10.1 RealhousepricechangesinmajorUSmetropolitanareas . . . . . . 173
10.2 Newhousingcompletions(thousands),1990–2012 . . . . . . . . . . 174
10.3 Post-bubbleeconomicmalaiseinIreland,Spain,UnitedKingdom
andUnitedStates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
12.1 Bubblesparksandleverage . . . . . . . . . . . . . . . . . . . . . . . . 213
viii
CHAPTER 1
The Bubble Triangle
Thedefinitionofabubblewetaketobeanundertakingwhichisblownupinto
an appearance of splendour and solidity, without any probability of perma-
nence, and the name, we take it, is derived from the specious products of
puffingand soapy water,withwhich the mostof the ingenious youth ofthis
realmhavebeenlongfamiliar.1
Anon.
Wehavetoturnthepageonthebubble-and-bustmentalitythatcreatedthis
mess.2
PresidentBarackObama
W
hat is the difference between the great composer
George Frideric Handel and Shane Filan, the lead singer of
IrishboybandWestlife?Tothoseofamusicalbent,theanswerisobvious:
Handelisoneofthemostrespectedclassicalmusiciansofalltime,having
composed several famousoperas. Filan, on theother hand, largelyspe-
cialisedinsaccharinecoverversionsof1970’spopsongs.Thedifference
that interests us, however, is that while one lost all of their wealth in
a bubble, the other got out before a bubbleburst, making ahandsome
profitasaresult.
Bythetimehewas30yearsold,Handel’smusicalcompositionshad
already made him a very wealthy man, and his patron, Queen Anne,
provided him with a considerable annual income. In 1715 he invested
some of his wealth in five shares of the South Sea Company, which
would have cost about £440. Handel sold his shares before the end of
June 1719 for a profit of about £145 – just before the huge bubble in
the company’s shares.3 By the time Shane Filan was 30, Westlife was
1