Saturday, December 26, 2009

Past Financial Bubbles- an Explanation.

One of the oldest recorded financial bubble is Tulip mania in Netherlands. Tulip was brought to Netherlands by the ottoman empire. Initially, it was introduced there in 1590. Slowly cultivation of tulips was started and it soon attracted the attention of the whole Netherlands. Rich people got it in their households these tulips as a status symbol. Soon a craze for Tulips started in the country. Normally, it will take 6 to 7 years to get a tulip bulbs from the plant. So, as the demand picked, new varieties of Tulips were being cultivated, many people joined the bandwagon and almost all in Netherlands was directly or indirectly growing or trading or investing in Tulips.
As the prices of this tulips have gone astronomically, everybody is investing their savings and other money in Tulips. This mania continued for 40 since it started. By the time of its peak, a Tulip is trading more than 10 times the salary of an ordinary worker of that Country.
This Tulip mania has gripped Netherlands and the prices were going up, going up only. Every household in Netherlands is holding Tulip bulbs according to their financial capacity. One fine morning, around the 1737, the prices of Tulips started coming down. The prices were dropping on every passing day. The investors in the tulips are getting wary and they hoped that the situation would soon improve. But it moved otherwise.
So soon everybody started selling it pulling the prices further down, creating further panic among the population. Then only the people realized that they had grown, traded and invested a asset which is worthless to the money that was given. But before they realized the damage was already done. The whole of Netherlands were in financial ruins. The tulips were trading at rock bottom price. There were no buyers and soon tulips of any variety turned worthless within in one or two years.
The rich had become paupers at that time and the poor had become beggars at that time. The whole of Netherlands suffered for more than 2 or 3 decades because the crash in the prices of Tulips.
A worthless Tulip flower was inflated in price simply by the people’s greediness to dizzy height only to come down to few pennies due to the fear of losing the money. This type of process is financial Bubble. Financial Bubble will always burst.
Don’t be a part of a Bubble.