Wed, Sep 16, 2009 - Page 9 News List

The same old story: This bubble is different

Bubbles are episodes of collective human madness over something that is clearly unsustainable

By Catherine Rampell  /  NY TIMES NEWS SERVICE , NEW YORK

This time is different.

That’s what people say each time a new bubble inflates, and what they think every time they are chastened by its popping. But century after century, decade after decade and year after year, human beings irrationally exuberate all over again.

Not long ago, the housing bubble burst and brought the global economy to a standstill. Now economists, recognizing that bubbles tend to come in bunches, are on the lookout for the next market to fizzle. They say that governments, central banks and international bodies should scrutinize a few markets that look likely to froth over in the next few years, like capital markets in China, commodities like gold and oil, and government bonds in heavily indebted countries like the US.

“Globally, a lot of money is now seeking higher returns once again,” said Rachel Ziemba, senior analyst at RGE Monitor.

The steadying of the economy, liquidity injections by governments and big returns reaped early this year by investment banks are encouraging traders to dip their toes back in the water in search of the next big thing.

“As long as compensation and bonuses are based on short-term performance in the market,” she said, “that’s going to encourage risk-seeking behavior.”

Bubbles are episodes of collective human madness — euphoria over investments whose skyrocketing values are unsustainable.

They tend to arise from perceptions of pending shortages (as happened last year, with the oil bubble); from glamorized new technologies or investment frontiers (like the dot-com bubble of the 1990s, the radio bubble of the 1920s or the multiple railroad bubbles of the 19th century); or from faddish cultural obsessions (like the Dutch tulip bubble of the 17th century, or the more recent Beanie Babies bubble).

BEYOND REASON

Often they are based on legitimate expectations of high growth that are “extrapolated into the stratosphere,” as the economist Daniel Yergin, chairman of IHS-Cambridge Energy Research Associates, put it.

Such is the fear over investment in emerging markets like China.

“I’m a long-term bull on Asia, but right now it’s premature to be celebrating the ‘Asian Century,’ like some investors seem to be doing,” said Stephen Roach, chairman of Morgan Stanley Asia.

The Shanghai Stock Exchange Composite Index, for example, nearly doubled from November to July before pulling back last month.

“People seem to believe the baton of global economic leadership is being seamlessly passed from the West to the East. That’s going to happen, but not for another five to 10 years at least,” Roach said.

Similarly premature excitement inflated what became known as the South Sea bubble, a 17th century mania over British trade with emerging Latin American markets.

Even physicist Isaac Newton lost a lot in that bubble — which is somewhat ironic given his famous recognition that what goes up must come down.

Economists also worry that commodity bubbles, which tend to be more cyclical, may strike again. Oil and gold prices are rising, and though both of those commodities have boomed and busted many times in the last century, investors may bet on unrealistically high growth once more. Gold prices, for example, have risen more than 30 percent from a year ago.

“With every commodity bubble, you see a whole new set of rationalizations,” Yergin said. “People find ways to shut out the reality of economic processes. If oil prices shoot up, investors are always surprised to see demand go down again.”

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