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Famous First Bubbles: The Fundamentals of Early Manias, by Peter M. Garber
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Review
--Rudi Dornbusch, Ford Professor of Economics and International Management, MIT" This wonderful short book takes us behind the curtains of financial folly. It skillfully offers both anecdote and analysis of events that we may be reliving just now." --Rudi Dornbusch, Ford Professor of Economics and International Management, MIT& quot; This wonderful short book takes us behind the curtains of financial folly. It skillfully offers both anecdote and analysis of events that we may be reliving just now.& quot; --Rudi Dornbusch, Ford Professor of Economics and International Management, MIT"This wonderful short book takes us behind the curtains of financial folly. It skillfully offers both anecdote and analysis of events that we may be reliving just now."--Rudi Dornbusch, Ford Professor of Economics and International Management, MIT
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Review
This wonderful, short book takes us behind the curtains of financial folly. It skillfully offers both anecdote and analysis of events that we may bereliving just now.―Rudi Dornbusch, Ford Professor of Economics and International Management, MITFamous First Bubbles is the most thorough, and thoughtful, examination of history's legendary speculative bubbles. We hear about these bubbles in popular discourse all the time, but almost never with any real insight or information about them. Garber shows that the reasons for these major speculative price movements are more subtle than is generally recognized. This book is important to read today, since our impressions of past bubbles influence our view of the current markets.―Robert J. Shiller, Cowles Foundation for Research in Economics, Yale UniversityThis book is a wonderful antidote to the sloppy thinking and superficial research that underlies most of the talk about bubbles. Garber shows that fundamental changes were arguably driving the changes in price in the most famous historical examples of bubbles. The discussion of tulipmania is grounded in the political, social, and economic history of the Netherlands, a thorough examination of data and secondary sources, and a fascinating investigation of the biological origins of rare tulip bulbs. The treatment of the Mississippi Bubble rightly emphasizes the link between money creation and securities price fluctuations. Garber also captures the profound difficulty speculators must have faced when evaluating both the Mississippi and South sea companies, commercial schemes (which many scholars still believe might have worked), and the dangers of retrospective judgments about fundamentals based on actual collapses. The book is a model of how to combine careful theoretical reasoning with first rate-scholarship and a delightful sense of irony.―Charles Calomiris, School of Business, Columbia UniversityGarber's careful and reasoned analysis of key events in financial history provides a reality check for those who mistake uncertainty about the future for irrationality here and now.―Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets and Professor of Economics, Stern School of Business, New York UniversityPeter Garber has written the definitive book on the tulipmania and the South Sea bubbles. He integrates sound economic analysis with historical detail in a highly convincing manner. His bottom line that the earlier bubbles reflected sound economic fundamentals rather than 'irrational exuberance' should be heeded.―Michael D. Bordo, Department of Economics, Rutgers UniversityWhen stock markets boom, tulipmania, the South Sea Bubble, and the Mississippi Bubble are conjured up. These events are used to remind people that investors often yield to irrational euphorias. The authority of these famous first bubbles is invoked by journalists, policy makers, and economists to emphasize that swings in the markets are irrational and unpredictable. What is rarely remembered is that these episodes had fundamentals. In this book, Peter Garber identifies the fundamentals and debunks the ideas that these periods are bubbles. Thus, the stories of the bubbles are not cautionary tales that school us to expect a crash with every spectacular rise of the stock market.―Eugene N. White, Professor of Economics, Rutgers UniversityThis brief and to-the-point look at famous 'popular decisions' makes a good case for the view that governments rather than markets are the source of financial crises.―Mike Dooley, Economics Department, University of California, Santa Cruz
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Product details
Series: The MIT Press
Paperback: 176 pages
Publisher: The MIT Press; Reprint edition (October 1, 2001)
Language: English
ISBN-10: 0262571536
ISBN-13: 978-0262571531
Product Dimensions:
5.4 x 0.2 x 8 inches
Shipping Weight: 7.2 ounces (View shipping rates and policies)
Average Customer Review:
3.3 out of 5 stars
9 customer reviews
Amazon Best Sellers Rank:
#621,653 in Books (See Top 100 in Books)
I did not finish this book entirely but I do not like it much. It is written as if it is a scietific study with al ot of references to books that may not be available anymore. It has no scientific value because it reworks the data of others and no new insights are gained.As an inforative book it misses anything that you can call a storyline. Only the part about the Mississipi bubble is readeable.
The author does an excellent job debunking the myth about the Dutch tulipmania from 1634 to 1637. He conducted detailed economics and historical research, and uncovered that just about everything about tulipmania as described in Charles Mackay book "Extraordinary popular Delusions and the Madness of Crowds" is either inaccurate, or exaggerated. The Dutch never mortgaged their entire properties for a single bulb. Also, Holland did not suffer a depression after the tulip market crashed. According to the author, very little net wealth was actually wiped out. Instead, the price of rare tulips was driven by rational economic considerations reflecting the short supply and the rising demand for this rare tulip bulb type. The price of these tulip bulbs at anyone time reflected expected investment returns from investors. Other economists have also documented that the price of tulip bulbs did go back up to similar level several centuries later associated with favorable economics change in this market.The author goes on to further explain the rational economics fundamentals behind the Mississippi Bubble of 1719-1720 resulting from an attempt to swap French government debt for equity in a private company, financed by printing paper money. He similarly explains out in similar economics terms the South Sea Bubble of 1720 which was the equivalent of a leveraged buyout of the national debt of Great Britain. Both investment schemes ultimately collapsed, but their respective economics and strong government support at the onset gave these investment propositions very strong fundamentals. These investments are not so different than investments today in GSEs like Freddie Mac, Fannie Mae, and Sallie Mae. Because of accounting irregularities, the stocks in these GSEs have recently taken a beating. But, there is no ground for talking about a GSE stock bubble.The author has strong credentials to support his iconoclastic thesis that is not that well known by the economics establishment. He is a global strategist at Global Markets Research at Deutsche Bank and Professor of Economics at Brown University.The Internet bubble has often been compared to the three investment bubbles mentioned above. Sadly enough, internet stock investors were by far the most foolish among investors of these four different investment bubbles. This is because at the onset the fundamentals behind internet stocks were far weaker and speculative than the ones associated with the investments associated with any of the three other bubbles.
During the collapse of the so-called Internet bubble, the legendary Dutch fiscal intoxication with tulips, called tulipmania, was widely cited as a lesson from history. The financial press hyped stories of deluded Dutch farmers who mortgaged all their worldly possessions to purchase a single prize tulip bulb, only to meet financial ruin when the bubble inevitably burst. Economist Peter M. Garber dug into history, and found that most of the common wisdom about the tulipmania was false. So, if you ever wondered how Dutch investors could have been so foolish, there is a simple answer: they weren't. Famous First Bubbles clearly evolved from a series of academic papers but, nonetheless, the book is entertaining. The primary focus on the tulip bubble makes the sections on the Mississippi and South Sea Bubbles seem like afterthoughts. We recommend this to iconoclasts who enjoy debunking historical legends and to bubble watchers everywhere.
The author's failed analysis of the definition of the word " speculation " on pp.7-8 (he interprets the word " speculation ", not as the attempt to forecast the short run psychology of the stock markets ,but to mean that one does not know how events will play out over time for the entrepreneur over the long run)means that he assumes away the existence of any uncertainty.There is only risk.This risk can be analyzed and calculated using the Normal(Log Normal ) probability distribution.This basically leads him to his implicit acceptance of the Efficient Market Hypothesis(EMH).EMH claims that stock market prices are always an accurate reflection of the current value of a stock. All the information about prices at any given time is reflected in the price of the stock.This leads to the claim that the normal distribution correctly models the time series data of changing prices and that all changes in prices are an accurate reflection of where the market should be.There can NEVER be ANY financial bubbles .The problem with this argument is that there is not a shred of historical,empirical or statistical data to support it.Keynes had already pointed out to Tinbergen in 1939-40 in the Economic Journal that the time series data would have to be uniform,homogeneous and stable over time in order to correctly assume that the error terms (residuals) were normally distributed.Mandelbrot and Taleb have demonstrated ,since 1963 and 1995 ,respectively ,that the data is not close to being even remotely normally distributed over time.The distribution that correctly models the financial markets is the Cauchy distribution.The author is completely ignorant of this fact.Instead of considering whether markets are subjected to the " wild " risk of the Cauchy,he just assumes " a can operner",i.e., that the pricing data is normally distributed.There is also no reference to Adam Smith's learned and scholarly evaluation of the Mississippi and South Sea Bubbles.This book is not worth buying or reading.The author starts and ends with the claim that stock and financial market price changes can be modeled as being normally distributed.I can't recommend this book for purchase except if a reader wants to know how anti scientific a believer in the EMH can be.Garber's argument is identical to those of Bernanke in the 2006-2008 period -there were no bubbles in the housing or stock markets.Greenspan knew otherwise.Unfortunately,he did not have the courage of his convictions.He went along for the ride with the Garber's, etc.
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