Are markets always glorified Ponzi schemes?.
When the market collapsed for Dutch tulips on this day in 1637, prices for a single bulb could reach 10 times the annual income of a skilled craftsman. The beautiful flowers had become all the rage, particularly since a lull in the carnage of the Thirty Years War got folks thinking happier thoughts, so grower competition for the finite supply of bulbs went from interested to intense and, once speculators got into the market, it went to insane. Traders met in “colleges” at taverns and cut deals for future delivery with no margin requirements (they invented the “futures contracts” that are used today to hedge everything from crops to oil and foreign currencies), so lots of regular folks got in on the game. Contracts repeatedly changed hands, always for evermore higher prices.
Ultimately, however, traders couldn’t find “the next guy” to buy the pricey contracts and the floor fell out. Prices crashed and people found themselves holding worthless pieces of paper. Scottish journalist Charles Mackay used this experience as the driver of his thesis and 1841 book entitled Extraordinary Popular Delusions and the Madness of Crowds, finding in it peoples’ recurring willingness to chase imaginary things (in this case, profits) detached from reality (the intrinsic value of tulip bulbs, whatever that might be). Economic theorists today still argue that markets are efficient, and that the price rise and drop were the product of accurate and open exchange of information, albeit abruptly accomplished.
Seems like its always going to be easy to sell folks expensive flowers.
