Boom and Bust - A great book on bubbles which is useful today

 

Boom and Bust - A Global History of Financial Bubbles by William Quinn and John Turner should be added to the reading list of anyone who is interested in the history of financial bubbles and wants to have a framework to think about bubbles today. It is deeply researched, adds new insights about booms that have not been discussed in other books and has an easily applied  framework for describing all of the historic episodes presented. 

The authors use the metaphor of a fire triangle  has to describe the three key components of a bubble:  speculation that provides heat, fuel that comes from cheap credit, and oxygen which comes from marketability or the ability to allow a bubble investment to get in the hands of investors. Every bubble will be driven by these three components, speculation from those looking for quick gain, easy credit from low interest rates, and the marketability that creates the opportunity for further speculation by allowing new market participants to play the game. 

The researchers start with some of the oldest and well-known bubbles, yet also explain why tulipmania did not meet their criteria for a significant  boom and bust event. They present some interesting cases not often discussed in other bubble books like the LATAM boom and railroad mania in the first half of the 19th century. They also review the Australian land boom and bicycle mania in the latter half of the 1800's. Of course, Quinn and Turner cover the usual suspects of the 20th century: the roaring 20's, Japan bull market, the dot-com bust, the sub-prime mess, and the Chinese stock excesses. 

They do a particularly good job of discussing how government while not always a cause, can abet booms and bust from actions that may in some cases seem well-intended but actually support or encourage the bubble fire triangle. Greed, supported by self-interest from a number of different parties often leads to unintended consequences which usually ends with well-known results. 

I now use the fire triangle metaphor to looks at current booms and it helps as a framework to show that the present is once again just a repeat of the past. The markets and situations may change but the end will still be the same.