Customer Reviews

Famous First Bubbles: The Fundamentals of Early Manias

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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 from getAbstract recommend this to iconoclasts who enjoy debunking historical legends and to bubble watchers everywhere.

Peter Garber's short book pokes holes in the view that markets today can exhibit "irrational exuberance" simply because it is "well known" that they did so in the cases of the Dutch Tulipmania and Mississippi and South Sea Bubbles. He says a bubble can only happen where there is no fundamental economic rationale for the rise and subsequent fall in prices. He states that these early events may not have been bubbles. He provides coherent explanations for these events based on economic fundamentals, and he supports his argument by analyzing the available price data in historical, economic, and political context.

I picked up this book with high expectations as the topic is very timely, the author has a good reputaiton, and given the size of the volume thought it would efficientyl get to the point.

While the arguements made are important they are lost in a difficult ot read academic writing style. Hence while I did get the point, I didn't enjoy the process. The three events discussed, "Tulipmania", the "Missiissippi" and "South Sea Companies" are well know within financial circles. Each carries a lore and mythology which is what perpetuates them today. Humanizing the narrative would have been a more effective way to make the points that each had logical explnations other than manias that distorted asset prices.

Finally, particularly as the author is works in contemporary finance, the book really should have a chapter on the lessons applied to today.

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.

Episodes as the Tulip Mania, The South See Bubble, the Crash of 1929 are going to leave a permanent trace in financial science. So they deserve close investigation. The Author has achieved to make really a very interesting and vivid one. His ideas are very controversial, but exactly they make the book amusing. However, I haven't seen anywhere in the book a formula, integral, etc. Perhaps the purpose was to give more informal treatment of the bubbles phenomena, but it will be very interesting a formal one to be made in future by fitting concrete rational expectations models in the historical data.
Vilimir Yordanov, Bulgaria

Peter Garber makes a powerful argument that economic bubbles are not the manifestations of "irrational exuberance" that some claim. Gloom-and-doom prophets should read this book in order to check their own certainty that we are in the midst of such a bubble. However, Garber does not convince us that the current levels of the stock market, even if "rational", may not collapse just as the rational tulip bulb market, etc. did. So, yes, it's an interesting and thoughtful book, but pessimists may hold on to the substance of their beliefs even after reading it.

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.

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.