Flower Power: The Lessons
The crash came on the first Tuesday of February, 1637. For no apparent reason, all of a sudden there were no buyers for the bulbs: "The market for tulips simply ceased to exist." Since prices had been rising thanks to simple speculation, they went into a free fall. As Dash puts it, the rout "was far more rapid and complete than history's most notorious financial disaster, the Wall Street Crash of 1929 and the Great Depression that followed it." However, there were few links between the tulip market and the real economy, which was hardly based on mass consumption: No generalized crisis followed the collapse of flower prices.
Tulipomania concludes with a few non sequiturs about horticultural history; Dash stubbornly refuses to say anything substantive about finance. (His other implicit analogies don't hold up. Most stock ownership is concentrated in the wealthiest 10 percent of the population. Novice investors and day traders aren't creating the boom; rather, they are riding on its coattails.) But other historians who aren't so allergic to generalization think the episode tells us something important about how financial markets work. For the great economic historian Charles Kindleberger, the tulip bubble serves as a prime example of speculation. Markets, he argues, though generally rational, are not immune to manias, which are by definition irrational. In a bubble, buyers purchase goods simply because they believe their prices will increase. This stokes demand for the goods, hence becoming, at least in the short term, a self-fulfilling prophecy.
However, the moment buyers decide they can no longer risk bidding prices up, they collapse immediately--since the product was only valued as long as people believed its price would rise. Kindleberger believed that an expansion of credit could feed such a speculative frenzy (and thus magnify the effects of a crash)--a useful reminder in times like these, when debt held by financial institutions, corporate debt and good old-fashioned credit-card debt are on the rise, making it seem likely that rising interest rates will call a halt to the party over time.
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So how about the trillion-dollar-plus question: Is today's market a bubble? Despite reading stories like NetJ.com's in the paper nearly every week, and the fabulously high valuations of other tech companies that seem to show little prospect of ever turning a profit, it's not so clear. For one thing, thanks to massive stock buybacks--and mergers and acquisitions--corporations are actually returning much more cash to shareholders than they have in the past, over 90 percent of after-tax profits over the 1990s, according to Left Business Observer editor Doug Henwood (about double the rate during the Golden Age of the fifties and sixties, when economic growth was distributed far more equally than it is today). It may make sense for investors to value their shares more highly. One might ask whether giving so much money back to shareholders is viable over the long term; as my friend who peruses the Flow of Funds like baseball box scores has noted, corporations are supporting this massive transfer of cash to shareholders through heavy borrowing. This can't endure indefinitely.
On a deeper level, the end of the Soviet Union, social democracy in Western Europe and anticolonial movements in the Third World have left capitalism with no political or ideological opposition to speak of. And what the stock market clearly does tell us about is the balance of power between labor and capital underlying the economy as a whole. From the standpoint of the very rich, there's plenty to celebrate. After all, the American labor movement was hacked down over the 1980s; the massive skewing upward of income distribution has kept moguls fat and happy. What better cause could there be for euphoria? For this very reason, a few good strikes or a couple months of rising wages may well prove the most effective antidote to market fever. If the balance of power between workers and owners shifts in the real economy, Wall Street will start to seem more dangerous. When the market falls this time--unlike the tulipmania--it's likely to be because of changes in the economy and politics that go well beyond the Dow Jones.