Bursting Bubbles

One of the most dangerous phenomena (in an economic sense) is an asset price “bubble.” Asset prices are bid up to unreasonable levels based largely on an optimistic view that the rise will continue. The world has seen the effects of stock market bubbles, real-estate bubbles, and commodity bubbles. The problem with asset price bubbles is that when they burst it can be devastating for an economy as we are now experiencing. Consumers and businesses make financial decisions based on the position of their balance sheet (actual or implicit). An over-inflated asset side of the balance sheet can result in the taking on of an excessive level of debt. When the bubble bursts many households and businesses become technically insolvent. Those that do not must cease much purchasing activity until their balance sheets can be repaired. Consequently, the effects of a bubble burst are most often devastating to the well-being of an economy. Indeed, the most recent asset bubble devastated the economy from which the recovery has been painful and slow. I am referring to the burst of the housing market bubble that began here in 2009 and also caused another asset bubble—Stock Markets—to loose large amounts of value. Carefully reread the first page of Chapter 10. Described is one of the best-known bubble bursts in U.S. economic history: the stock market crash of 1929. Several interesting additional bits of trivia are excluded, however. The first is that the participation rate in the stock market had peaked prior to the burst. I believe it was Joe Kennedy that removed his family’s fortune from the market when he overheard shoe shiners discussing their investments. He believed that such high participation indicated an irrational valuation of the market. History has proven him correct, and the Kennedy fortune survived. Another bit of historical trivia is that many analysts of the time were predicting that mass production has changed the fundamentals of the market. The old measures of proper market valuation were obsolete, and the market had the potential to climb to even greater heights in this “new economy.” Please consider the role of the business cycle and Chapter 10 to address the following questions: Is any entity (government or private) responsible for the last downturn the U.S. macroeconomy experienced? If so, who and detail what you believe was the cause of the last downturn. Is there currently another bubble forming or in the process of bursting? If so, what is the cause of this bubble? Discussion posts are supposed to be substantive and meaningful. The initial post for each of the weekly discussion questions should be a minimum of 400 words in length. Also, each student should respond to the initial posts of at least two other posts each week. The responses should also be substantive, with a minimum of 175 words in length. Responses that do not meet these minimum requirements will earn a reduced number of points (see the course syllabus for complete details).