"Tulip Mania"



I just finished watching a movie "Wall Street: Money Never Sleep". In the movie, a character mentioned on "Tulip Mania", which he described as a classic example of economic bubble/ burst. I did some exploration, and here is my finding:

• Tulip Mania : a period in the Dutch Golden Age, whereby contract prices for bulbs of the recently introduced tulip reached extraordinarily high levels,and suddenly collapsed.
• Generally considered as the first recorded speculative/ economic bubble (despite the record was not that complete).
• At the peak of tulip mania (around Feb. 1637), the price of a single tulip bulbs could reach as high as an annual income of a skilled craftsman.
• Some researcher claims that at one point a 12 acres (5 ha) of land was offered for a Semper Augustus bulb.
• What exactly happened before and when Tulip Mania started?
• Tulip was beleived to be introduced to Europe from Ottoman Empire in the mid of 16h century.
• It rapidly became a luxury item and a status symbol. There were various types, but the multicolored became the most sought-after. 
• During its high popularity period, traders would sign contracts before a notary to purchase tulips at the end of the season (effectively futures contracts)
• The Dutch created a market for durable tulip bulbs. Short selling was banned by an edict - Short sellers' contracts were deemed unenforceable
• As its popularity grew, professional growers paid higher and higher prices for bulbs.
• By 1634, speculators began to enter market as a result of demand from French.
• In 1636, the Dutch  created a type of formal futures markets where contracts to buy bulbs at end of season were bought and sold. Traders met at taverns and buyers were required to pay a 2.5% "wine money" fee up to a maximum of three florins per trade. Neither party paid an initial margin nor a mark-to-market margin, and all contracts were with individual counterparties rather than with exchange.
• Contract price of rare bulbs continued to rise throughout 1636
• February 1637, tulip bulb contract prices suddenly collapsed and trade of tulips fall to the ground.
• No deliveries were ever made to fulfill these contracts due to the market collapsed.
• What had caused the bubble burst?....many theories were established in the modern era. The followings can be referred:
• Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by Charles Mackay
• Tulipmania, by Anne Goldgar (2007)

Property bubble -> Subprime Mortgage Crisis -> 2007-2010 Financial Crisis



Before the 2007–2010 financial crisis, a major event that happened was the US subprime mortgage crisis. Subprime mortgage delinquencies and foreclosures rose, resulting decline of securities backing mortgages.

Interesting source of references:

Home values history, plotted by a Yale economist.

Theories on factors contributing to housing bubble (CC-BY-SA-3.0, released under the GNU Free Documentation License)

The domino effect when housing prices declined:

President Bush in his address to the Nation (September 24, 2008) on the riple/ domino effect:

• Housing Market: as the housing bubble burst in late 2006 and prices declined, mortgage holders counting on home price appreciation found themselves unable to pay their mortgages. Rates on adjustable-rate mortgages increased. Mortgage payment delinquency rates and foreclosures increased. With an oversupply of homes, housing construction declined. Housing value declines meant consumers had less money available for consumption. This placed downward pressure on economic growth, increasing the risk of recession.
• Financial Market: Mortgage-backed securities (MBS) derive their value from housing prices and mortgage cash flows. As these cash flows declined or became uncertain, financial institutions and investors holding MBS faced large losses. In certain cases, they had to sell these assets to pay off margin calls. Bank capital available for lending declined due to these losses. Several major banks and dozens of mortgage companies went out of business. Loans became more expensive (higher interest rates) or unavailable to those without stronger credit. Compared to the boom period, credit became considerably less available, placing downward pressure on both consumption and business investment.
• Government responses: Central banks have lowered interest rates to stimulate economies and make it more profitable for banks to loan. Tax rebates (stimulus package) were provided to U.S. taxpayers. Homeowners received assistance with re-financing their mortgages. Individual firms received bailouts and in September-October 2008 a comprehensive, global solution to "recapitalize" banks (e.g., to provide taxpayer funds in exchange for periodic dividend payments) was implemented. It is important to note that government actions took place throughout the 2007-2008 period, not just after the financial market impacts indicated. For example, the Federal Reserve lowered interest rates several times during various stages of the crisis.