Boom and Bust: A Global History of Financial Bubbles. 2020. William Quinn and John D. Turner. Cambridge University Press.
Identifying the asset bubble is a common investment topic for news pundits, market analysts and policy makers. Analysts hope to predict the next market crash, but bubbles are poorly defined. So many apply former Supreme Court Justice Stewart Potter’s definition of pornography to bubbles: “I know it when I see it.”
Leaving this important phenomenon in the eye of the beholder is unsatisfactory. Although there are many technical papers on bubbles and books on specific bubbles and crashes, there has not been a broad and detailed historical narrative based on a well-defined framework. Boom and Bust: A Global History of Financial Bubblesby economic historians William Quinn and John Turner, provides this missing piece.
The book is successful not only for its historical detail, but also for providing a unifying framework that can be applied to any future bubble event. The great work of Charles Kindleberger, Manias, panics and shocks, is in a class by itself as an expansive treatise on the economic history of market extremes, but Quinn and Turner have produced an important book on the structural details underlying many major market bubbles over the past 300 years. This work will stand the test of time and may prove more insightful to finance readers than Charles Mackay’s oft-cited classic, The extraordinary popular delusions and madness of crowds.
Boom and Bust, a work of literary economics, is not just a collection of stories from the extremes of the market but a deeply researched and thoroughly documented review. It’s a good example of using historical observation to support a framework that can help describe future bubbles. Quinn and Turner’s scholarship does not uncover new facts, but instead filters information through a model of common features of the bubble. His analysis exemplifies Kindleberger’s insightful observation: “Economics needs history more than history needs economics.”
The context and narrative lead to an appreciation of the dynamics of the bubble that is often missing from mathematical approaches to the subject. At one extreme, the mathematical approach to bubble analysis can be seen in the work of the ETH Zurich Financial Crisis Observatory, which has developed models to measure asset bubbles in real time. Although this analytical work is useful, it provides no framework or narrative to explain why the bubbles identified. Given the infrequent nature of extreme events, context is a prerequisite for understanding.
The authors’ framework begins with a metaphor of bubbles as fires that grow from a classic triangular combination of oxygen, fuel, and heat. With enough of each ingredient, a spark can spark a long-lasting market inferno.
Quinn and Turner’s analog to oxygen is marketability, the ease of buying or selling an asset. Commercialization includes divisibility, transferability, and the ability to find buyers and sellers at low cost. Assets that are not marketable will never see the broad demand needed to create a bubble. Commercialization is increased thanks to improvements in market structure, low-cost currency trading and the introduction of derivatives.
The fuel of a bubble is easy money and credit. Without cheap and abundant funds for investment, there is no opportunity for asset prices to be pushed up. Excessively low interest rates create demand for risky assets as investors seek yield.
The final side of the triangle is the heat generated by speculation. It is defined as the purchase of an asset without regard to its current quality or valuation, only in the belief that it can be sold in the future at a higher price.
For Quinn and Turner’s metaphor to work, the market ignites, it must require a catalyst: the proverbial match. History shows that bubbles do not occur spontaneously. Rather, there is invariably some cause that creates a strong belief in the prospect of abnormal profits. In many cases, the catalyst is technological change. Government policies and policies, however, often create a new environment that fosters the belief in the existence of unusually high return opportunities. The authors also discuss how the media can serve as an important driver of the investment narrative and opinion that can fan the flames of a speculative fire. The financial press is not always a voice of reason; sometimes, it’s an accelerator.
The authors apply their framework to 12 cases, selected according to two main criteria: (a) 100% price gain with a 50% collapse in less than three years and (b) substantial macro impact. They don’t try to explain every big market move, financial crisis or bank run. Each case history follows a similar descriptive format that includes causes and consequences. This approach reinforces the authors’ argument that from a spark comes a bubble fueled by commercialization, cheap money and speculation.
Quinn and Turner’s 12 bubble cases begin with the classic Mississippi and South Sea bubbles and then continue with the windhandel the stock extremes in the Netherlands, the emerging markets bubble in Latin America, the rail craze in the UK, the Australian land boom, the bicycle craze in the 1890s, the Roaring Twenties and the subsequent stock crash, the Japanese housing bubble, the dot-com bubble, the subprime debacle and the Chinese bubbles. Although these extreme market bubbles burst, not all of them turned into financial crises.
This work is a variation of the financial instability hypothesis developed by Hyman Minsky, who described market extremes in terms of three stages of lending: hedging, speculative, and Ponzi. Minsky emphasized the instability arising from stability that causes bankers to undertake risky and excessive lending. Quinn and Turner focus on technology and government policies, along with the triangle of fire, as conditions for financial market instability. His framework and catalyst model move the discussion away from rationality versus irrationality to changes in structure that change the demand and supply of assets.
The fire triangle metaphor is an excellent device for clarifying the common factors of the bubble, and the authors do a good job of focusing readers’ attention through their historical reviews. However, researchers who have been wrestling with bubbles for decades may have a nagging sense that they are missing key details that describe how speculation becomes excessive. Markets have gone through periods of varying degrees of structural change, strong commercialization and cheap credit that did not culminate in excessive speculation. Still at the heart of bubble research is the mystery of how so many people form abnormal return expectations. Attributing it to irrationality does not answer the question, why this time and not others? Without clarifying the causes of the speculative heat, macroprudential policy will continue to be a forceful instrument.
The book’s final chapter addresses the current environment, policy issues, and the lesson that investors need to be fire safety inspectors focusing on the bubble triangle, catalysts, and incentives that drive behavior. The current evolution of cryptocurrencies shows all the characteristics of the triangle of fire: marketability, easy credit and speculation, along with the catalysts of new technology, lax regulation and a buzz-making press. As usual, however, vital questions remain unanswered: why now, why so extreme, and what will trigger a rejection? Will the crypto craze only be certified as a bubble after the crash and create huge spillover effects into the real economy? Answering these questions is beyond Boom and Bustthe scope of , but the book represents an important addition to any discussion of bubbles through its meticulous narrative of past market extremes.
can read Boom and Bust help the reader profitably predict where the next bubble will occur or when it will pop? Unlikely, but the book may enable investors to recognize the conditions necessary for a bubble and know where to look.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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