Many people are not able to see the seriousness of our current financial crisis because they don’t see or understand its causes. This current crisis started with three speculative bubbles: the stock market in the 1990’s, closely followed by another in the housing and a third in the oil market. The Great Depression was preceded by the same three bubbles. The first was the 1920’s stock market bubble which was followed by what we all know as the great crash of 1929. The real estate bubble that burst in 1926 which started in Florida and was knows as the Florida land bubble. Finally the oil market bubble happened in 1929 and was often referred to as the fuel folly. Crude oil prices surpassed $4 a barrel,a record since the immediate aftermath of World War I, followed by a significant drop to $1.30 a barrel by 1933.
While the phrase speculative bubble is commonly tossed around, we are still ill prepared to predict or even recognize them. Bubbles are caused when people become overly influenced by speculative price changes and start to base their investment decisions on the assumption that a price increase will continue. Price increases in the stock market may incline people to feel wealthy and spend more money on all sorts of products which drives up the profits of corporations that sell those products. These rising profits are interpreted as evidence of a strong economy, and this seems to justify further stock price increases.
Price increases in the housing market encourage people to buy new homes, and this fosters construction booms and the aggregate economy. The rising economy is seen as justifying rising home prices: expecting further price increases, people bid up home prices even more.
Many individuals and financial institutions borrowed to take double or triple advantage of these price increases. Unfortunately, the high rate of price increases was unsustainable and had to break sometime. When price increase break, the extra impetus for a strong economy is removed and may not return for many years. Actually, it will not be back until the enthusiasm returns which may take an even longer time.
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