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Margin Call Trailer. "You're selling something that you know has no value" ! Margin Call Movie Trailer.

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The Simpsons - pyramid scheme From S3 Ep 12.

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Steve Keen: Why Economics is Bunk, Analysis - BBC Radio 4

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Newsnight economics editor Paul Mason interviews the controversial economist Steve Keen.

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Swiss banking giant UBS has been hit hard for attempting to rig the inter-bank lending rate Libor.

It is the second major bank to fall foul of the regulators after Barclays was ordered to pay $450m to UK and US authorities in the summer, and others may well follow.

But what exactly is Libor, and why is it so important? Here we take a closer look at the issues involved:
Why do banks lend to each other in the first place?
Banks lend to each other on a short-term basis, either to make a profit or to cover any shortfalls in cash.

For example, a bank may find at the end of a certain day that more customers have made withdrawals than deposits, so it borrows from its rivals to cover the shortfall.

Conversely, banks with a cash surplus can make extra profits by lending funds to a rival. The average rate of interest paid by the banks in such interbank lending is called the London Interbank Offered Rate (Libor).
What exactly is Libor, and how is it calculated?
Libor measures the average rate that banks have to pay to borrow from their rivals for a specific period of time - be it a few weeks, months or up to a year.

It is calculated on a daily basis by the British Bankers' Association from estimates submitted by the major international banks based in London, and represents the interest rate they must pay in order to borrow cash from other banks.

The rate each bank has to pay is in part a reflection of its financial strength, as viewed by its rivals - effectively how much it is trusted.

Every day, 16 banks submit the interest rate that they are charged to borrow money. The four highest rates and the four lowest rates are ignored. The average of the eight remaining rates makes up the Libor rate.

A bank has to pay a higher interest rate to borrow funds if other lending banks have less confidence in it.

This means that the Libor rate gives an indication of the health of the wider banking sector. Libor has a European equivalent called Euribor, which plays the same role for banks based in the eurozone.
Why is Libor so important?
The Financial Services Authority (FSA) says Libor and Euribor are "benchmark reference rates fundamental to the operation of both UK and international financial markets".

The prices of trillions of pounds worth of financial transactions around the world are set according to Libor.

Among them, financial swap deals worth £225tn are indexed to Libor, as are loans totalling about £6.4tn, the British Bankers' Association says.

Libor, and the interest rate swap deals that are based on them, also provide an important indicator of the markets' expectations about the overnight interest rates likely to be set by the world's big central banks - the Bank of England, the US Federal Reserve, the European Central Bank - in the future.

Since the credit crunch first began in 2007, Libor has became an indicator of the financial stress that the major London-based banks found themselves in.

Ironically, the interbank lending market on which Libor is based has actually become far less important because the banks have been much less willing to lend each other money.
Does Libor affect my mortgage?
Some mortgages are directly linked to the Libor rate, although typically this is only the case for very big mortgage borrowers, such as corporations and property developers.

But even for those mortgages that aren't directly linked, Libor still influences the interest rate that banks charge their mortgage or loan customers.

That's because the Libor rate reflects the actual interest rate that the banks have to pay when they borrow money from the markets.
What happened at UBS?
The Swiss bank admitted its staff had rigged its Libor rate submissions for two main purposes.

First, traders manipulated submissions with the express purpose of boosting profits. In fact, according to the FSA, the bank gave traders themselves responsibility for submitting rates to the British Bankers' Association.

UBS also said its traders had colluded with counterparts at other banks, with the FSA saying the bank's Tokyo office had gone as far as paying intermediaries to help rig Libor.

Second, the bank accepted staff had deliberately lowered its submissions during the financial crisis to give the impression it was able to borrow money more cheaply than it actually could. This created the impression that other banks had more confidence in UBS than they did in reality.

The FSA said rigging Libor submissions at UBS was widespread and involved at least 45 people.
What happened at Barclays?
Staff at Barclays filed misleading figures for interbank borrowings they made.

First, between 2005 and 2008 - and sometimes working with traders at other banks - they tried to influence the Libor rate, so as to try to boost their profits.

Then between 2007 and 2009, at the peak of the global banking crisis, Barclays filed artificially low figures. This was to try and hide the level of financial stress under which Barclays was operating.

The bank's chief executive Bob Diamond was forced to resign from his job, along with Barclays chairman Marcus Agius and chief operating officer Jerry del Missier.
What investigations are now underway?
Investigations are continuing across the banking industry, so more evidence is likely to emerge.

The FSA and US regulators, along with counterparts is Canada, Japan in Switzerland, are continuing to look into Libor manipulation. There are at least a dozen other banks being investigated, including Citigroup and RBS.

The Serious Fraud Office is also considering bringing criminal prosecutions in the UK.

Meanwhile, lawsuits have been launched by US municipalities, pension funds and hedge funds.

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Swiss banking giant UBS has been hit hard for attempting to rig the inter-bank lending rate Libor. It is the second major bank to fall foul of the regulators after Barclays was ordered to pay $450m to UK and US authorities in the summer, and others may well follow.

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Tulip Mania: The First Bubble [Debt & Doubt - Animation 6] | RADAR (AVROTROS)

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This is a clip from Radar Extra: Debt & Doubt. Watch the full documentary here: http://www.radarextra.nl About Radar Extra: Debt & Doubt The financial market has become a mess. How did this happen? How did our debt become so big? And does the consumer take the rap?

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A tulip, known as "the Viceroy" (viseroij), displayed in the 1637 Dutch catalogue Verzameling van een Meenigte Tulipaanen. Its bulb was offered for sale for between 3,000 and 4,200 guilders (florins) depending on weight (gewooge). A skilled craftsworker at the time earned about 300 guilders a year.[1]

Tulip mania ( Dutch: tulpenmanie) was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The major acceleration started in 1634 and then dramatically collapsed in February 1637. It is generally considered to have been the first recorded speculative bubble or asset bubble in history. In many ways, the tulip mania was more of a then-unknown socio-economic phenomenon than a significant economic crisis. It had no critical influence on the prosperity of the Dutch Republic, which was one of the world's leading economic and financial powers in the 17th century, with the highest per capita income in the world from about 1600 to about 1720. The term tulip mania is now often used metaphorically to refer to any large economic bubble when asset prices deviate from intrinsic values.

Forward markets appeared in the Dutch Republic during the 17th century. Among the most notable was one centred on the tulip market. At the peak of tulip mania, in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled artisan. Research is difficult because of the limited economic data from the 1630s, much of which come from biased and speculative sources. Some modern economists have proposed rational explanations, rather than a speculative mania, for the rise and fall in prices. For example, other flowers, such as the hyacinth, also had high initial prices at the time of their introduction, which then fell as the plants were propagated. The high prices may also have been driven by expectations of a parliamentary decree that contracts could be voided for a small cost, thus lowering the risk to buyers.

The 1637 event gained popular attention in 1841 with the publication of the book Extraordinary Popular Delusions and the Madness of Crowds, written by Scottish journalist Charles Mackay, who wrote that at one point 5 hectares (12 acres) of land were offered for a Semper Augustus bulb. Mackay claimed that many investors were ruined by the fall in prices, and Dutch commerce suffered a severe shock. Although Mackay's book is a classic, his account is contested. Many modern scholars believe that the mania was not as destructive as he described.

A Satire of Tulip Mania by Jan Brueghel the Younger (c. 1640) depicts speculators as brainless monkeys in contemporary upper-class dress. In a commentary on the economic folly, one monkey urinates on the previously valuable plants, others appear in debtor's court and one is carried to the grave.

The introduction of the tulip to Europe is often questionably attributed to Ogier de Busbecq, the ambassador of Charles V, Holy Roman Emperor, to Sultan Suleiman the Magnificent, who sent the first tulip bulbs and seeds to Vienna in 1554 from the Ottoman Empire. Tulip bulbs, along with other new plant life like potatoes, peppers, tomatoes, and other vegetables, came to Europe in the 16th century. These bulbs were soon distributed from Vienna to Augsburg, Antwerp, and Amsterdam.

Their popularity and cultivation in the United Provinces (now the Netherlands) started in earnest around 1593 after the Southern Netherlandish botanist Carolus Clusius had taken up a post at the University of Leiden and established the hortus academicus. He planted his collection of tulip bulbs and found that they were able to tolerate the harsher conditions of the Low Countries. Shortly thereafter, the tulip grew in popularity.

The tulip was different from other flowers known to Europe at that time, because of its intense saturated petal colour. The appearance of the nonpareil tulip as a status symbol coincides with the rise of newly independent Holland's trade fortunes. No longer the Spanish Netherlands, its economic resources could now be channelled into commerce and Holland embarked on its Golden Age. Amsterdam merchants were at the centre of the lucrative East Indies trade, where one voyage could yield profits of 400%.

Anonymous 17th-century watercolour of the Semper Augustus, famous for being the most expensive tulip sold during the tulip mania.

As a result, tulips rapidly became a coveted luxury item, and a profusion of varieties followed. They were classified in groups: the single-hued tulips of red, yellow, or white were known as Couleren; the multicolored Rosen (white streaks on a red or pink background); Violetten (white streaks on a purple or lilac background); and the rarest of all, the Bizarden ('Bizarres'), (yellow or white streaks on a red, brown, or purple background). The multicolour effects of intricate lines and flame-like streaks on the petals were vivid and spectacular, making the bulbs that produced these even more exotic-looking plants highly sought-after. It is now known that this effect is due to the bulbs being infected with a type of tulip-specific mosaic virus, known as the " tulip breaking virus", so called because it "breaks" the one petal colour into two or more.

Growers named their new varieties with exalted titles. Many early forms were prefixed Admirael ('admiral'), often combined with the growers' names: Admirael van der Eijck was perhaps the most highly regarded of about fifty so named. Generael ('general') was another prefix used for around thirty varieties. Later varieties were given even more extravagant names, derived from Alexander the Great or Scipio, or even "Admiral of Admirals" and "General of Generals". Naming could be haphazard and varieties highly variable in quality. Most of these varieties have now died out.

Tulips grow from bulbs and can be propagated through both seeds and buds. Seeds from a tulip will form a flowering bulb after 7-12 years. When a bulb grows into the flower, the original bulb will disappear, but a clone bulb forms in its place, as do several buds. Properly cultivated, these buds will become flowering bulbs of their own, usually after a couple of years. The tulip breaking virus spreads only through buds, not seeds, and propagation is greatly slowed down by the virus.

In the Northern Hemisphere, tulips bloom in April and May for about one week. During the plant's dormant phase from June to September, bulbs can be uprooted and moved about, so actual purchases (in the spot market) occurred during these months.

During the rest of the year, florists, or tulip traders, signed forward contracts before a notary to buy tulips at the end of the season. Thus the Dutch, who developed many of the techniques of modern finance, created a market for tulip bulbs, which were durable goods. Short selling was banned by an edict of 1610, which was reiterated or strengthened in 1621 and 1630, and again in 1636. Short sellers were not prosecuted under these edicts, but forward contracts were deemed unenforceable, so traders could repudiate deals if faced with a loss.

Wagon of Fools by Hendrik Gerritsz Pot, 1637. Followed by Haarlem weavers who have abandoned their looms, blown by the wind and flying a flag emblazoned with tulips, Flora, goddess of flowers, her arms laden with tulips, rides to destruction in the sea with the vices Fraud, Gluttony and Avarice, Mrs. Mania, and Idle Hope/Fortuna.

A standardized price index for tulip bulb contracts, created by Earl Thompson. Thompson had no price data between February 9 and May 1, thus the shape of the decline is unknown. The tulip market is known to have collapsed abruptly in February.[31]

As the flowers grew in popularity, professional growers paid higher and higher prices for bulbs with the virus, and prices rose steadily. By 1634, in part as a result of demand from the French, speculators began to enter the market. The contract price of rare bulbs continued to rise throughout 1636. By November, the price of common, "unbroken" bulbs also began to increase, so that soon any tulip bulb could fetch hundreds of guilders. Forward contracts were used to buy bulbs at the end of the season.

Traders met in "colleges" at taverns and buyers were required to pay a 2.5% "wine money" fee, up to a maximum of three guilders per trade. Neither party paid an initial margin, nor a mark-to-market margin, and all contracts were with the individual counter-parties rather than with the Exchange. The Dutch described tulip contract trading as windhandel (literally 'wind trade'), because no bulbs were actually changing hands. The entire business was accomplished on the margins of Dutch economic life, not in the Exchange itself.

The Tulip Folly, by Jean-Léon Gérôme, 1882

Tulip mania reached its peak during the winter of 1636-37, when some contracts were changing hands five times. No deliveries were ever made to fulfill these contracts, because in February 1637, tulip bulb contract prices collapsed abruptly and the trade of tulips ground to a halt. A contemporary satire suggests that the crisis started to unravel at 3 February in Haarlem, where an auctioneer failed to find willing buyers, despite lowering the asking price several times. The actual circumstances of the crash are unknown. The collapse seems to have occurred by the end of the first week of February 1637, which caused a number of disputes over the extant contracts. At the 7 February tulip growers scrambled in Utrecht to elect representatives for a national assembly in Amsterdam. Their situation had become uncertain as the buyers no longer had any interest in honoring the contracts, and there was no legal basis for enforcing them.

By the end of February the representatives gathered in Amsterdam for deliberations. They decided on a compromise where all contracts entered before December 1636 would be binding, but later contracts could be cancelled by paying a fee amounting to 10% of the price. The matter was brought before the Court of Holland, which declined to rule one way or the other and referred the question back to the city councils. The legislature of Holland decided to cancel all contracts to allow fresh deals to be struck during the summer. In Haarlem the issue dragged on, since the government left it to the parties to solve their issues by arbitration or other means. In May the city ruled that buyers could cancel any extant contracts at a fee of 3.5% of the price. The Dutch court system remained busy with a number of tulip disputes throughout 1639. In the end most contracts were simply never honored.

The lack of consistently recorded price data from the 1630s makes the extent of the tulip mania difficult to discern. The bulk of available data comes from an anonymous satire, Dialogues between Waermondt and Gaergoedt, written just after the bubble. Economist Peter M. Garber collected data on the sales of 161 bulbs of 39 varieties between 1633 and 1637, with 53 being recorded in the Dialogues.

98 sales were recorded for the last date of the bubble, February 5, 1637, at wildly varying prices. The sales were made using several market mechanisms: forward trading at the colleges, spot sales by growers, notarized forward sales by growers, and estate sales. "To a great extent, the available price data are a blend of apples and oranges", according to Garber.

Mackay's Madness of Crowds

The modern discussion of tulip mania began with the book Extraordinary Popular Delusions and the Madness of Crowds, published in 1841 by the Scottish journalist Charles Mackay. He proposed that crowds of people often behave irrationally, and tulip mania was, along with the South Sea Bubble and the Mississippi Company scheme, one of his primary examples. His account was largely sourced from a 1797 work by Johann Beckmann titled A History of Inventions, Discoveries, and Origins. Beckmann in turn used several available sources, but all of them drew heavily from the satirical Dialogues that were written to mock the speculators. Mackay's vivid book was popular among generations of economists and stock market participants. His popular but flawed description of tulip mania as a speculative bubble remains prominent, even though since the 1980s economists have debunked many aspects of his account.

According to Mackay, the growing popularity of tulips in the early 17th century caught the attention of the entire nation; "the population, even to its lowest dregs, embarked in the tulip trade". By 1635, a sale of 40 bulbs for 100,000 florins (also known as Dutch guilders) was recorded. By way of comparison, a "tun" (930 kg or 2,050 lb) of butter cost around 100 florins, a skilled laborer might earn 150-350 florins a year, and "eight fat swine" cost 240 florins.

By 1636, tulips were traded on the exchanges of numerous Dutch towns and cities. This encouraged trade by all members of society. Mackay recounted people selling possessions in order to speculate on the tulip market, such as an offer of 5 hectares (12 acres) of land for one of two existing Semper Augustus bulbs, or a single bulb of the Viceroy that, he said, was purchased in exchange for a basket of goods (shown in table) worth 2,500 florins.

Many individuals suddenly became rich. A golden bait hung temptingly out before the people, and, one after the other, they rushed to the tulip marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them. The riches of Europe would be concentrated on the shores of the Zuyder Zee, and poverty banished from the favoured clime of Holland. Nobles, citizens, farmers, mechanics, seamen, footmen, maidservants, even chimney sweeps and old clotheswomen, dabbled in tulips.

Pamphlet from the Dutch tulipomania, printed in 1637

The increasing mania generated several amusing, if unlikely, anecdotes that Mackay recounted, such as a sailor who mistook the valuable tulip bulb of a merchant for an onion and grabbed it to eat. According to Mackay, the merchant and his family hunted down the sailor to find him "eating a breakfast whose cost might have regaled a whole ship's crew for a twelvemonth"; the sailor was supposedly jailed for eating the bulb. However, tulips are poisonous if prepared incorrectly, taste bad, and are considered to be only marginally edible even during famines. This directly contradicts Mackay's claim that the tulip bulb had been "quite delicious".

People were purchasing bulbs at higher and higher prices, intending to re-sell them for a profit. Such a scheme could not last unless someone was ultimately willing to pay such high prices and take possession of the bulbs. In February 1637, tulip traders could no longer find new buyers willing to pay increasingly inflated prices for their bulbs. As this realization set in, the demand for tulips collapsed, and prices plummeted-the speculative bubble burst. Some were left holding contracts to purchase tulips at prices now ten times greater than those on the open market, while others found themselves in possession of bulbs now worth a fraction of the price they had paid. Mackay says the Dutch devolved into distressed accusations and recriminations against others in the trade.

In Mackay's account, the panicked tulip speculators sought help from the government of the Netherlands, which responded by declaring that anyone who had bought contracts to purchase bulbs in the future could void their contract by payment of a 10 percent fee. Attempts were made to resolve the situation to the satisfaction of all parties, but these were unsuccessful. The mania finally ended, Mackay says, with individuals stuck with the bulbs they held at the end of the crash-no court would enforce payment of a contract, since judges regarded the debts as contracted through gambling, and thus not enforceable by law.

According to Mackay, lesser tulip manias also occurred in other parts of Europe, although matters never reached the state they had in the Netherlands. He also thought that the aftermath of the tulip price deflation led to a widespread economic chill throughout the Netherlands for many years afterwards.

Mackay's account of inexplicable mania was unchallenged, and mostly unexamined, until the 1980s. Research into tulip mania since then, especially by proponents of the efficient-market hypothesis, suggests that his story was incomplete and inaccurate. In her 2007 scholarly analysis Tulipmania, Anne Goldgar states that the phenomenon was limited to "a fairly small group", and that most accounts from the period "are based on one or two contemporary pieces of propaganda and a prodigious amount of plagiarism". Peter Garber argues that the trade in common bulbs "was no more than a meaningless winter drinking game, played by a plague-ridden population that made use of the vibrant tulip market."

While Mackay's account held that a wide array of society was involved in the tulip trade, Goldgar's study of archived contracts found that even at its peak the trade in tulips was conducted almost exclusively by merchants and skilled craftsmen who were wealthy, but not members of the nobility. Any economic fallout from the bubble was very limited. Goldgar, who identified many prominent buyers and sellers in the market, found fewer than half a dozen who experienced financial troubles in the time period, and even of these cases it is not clear that tulips were to blame. This is not altogether surprising. Although prices had risen, money had not changed hands between buyers and sellers. Thus profits were never realised for sellers; unless sellers had made other purchases on credit in expectation of the profits, the collapse in prices did not cause anyone to lose money.

Still Life with Flowers (1639), by Hans Bollongier (1623-1672), showcases the prized Semper Augustus tulip.

It is well established that prices for tulip bulb contracts rose and then fell between 1636 and 1637; however, such dramatic curves do not necessarily imply that an economic or speculative bubble developed and then burst. For the then tulip market to qualify as an economic bubble, the price of bulbs would need to have been mutually agreed and surpassed the intrinsic value of the bulbs. Modern economists have advanced several possible reasons for why the rise and fall in prices may not have constituted a bubble, even though a Viceroy Tulip was worth upwards of five times the cost of an average house at the time.

The increases of the 1630s corresponded with a lull in the Thirty Years' War. In 1634-1635 the German and Swedish armies lost ground in the South of Germany; then Cardinal-Infante Ferdinand of Austria moved north. After the Peace of Prague the French and the Dutch decided to support the Swedish and German Protestants with money and arms against the Habsburg empire, and to occupy the Spanish Netherlands in 1636. Hence market prices, at least initially, were responding rationally to a rise in demand. The fall in prices was faster and more dramatic than the rise. Data on sales largely disappeared after the February 1637 collapse in prices, but a few other data points on bulb prices after tulip mania show that bulbs continued to lose value for decades thereafter.[citation needed ]

Garber compared the available price data on tulips to hyacinth prices at the beginning of the 19th century when the hyacinth replaced the tulip as the fashionable flower and found a similar pattern. When hyacinths were introduced florists strove with one another to grow beautiful hyacinth flowers, as demand was strong. As people became more accustomed to hyacinths the prices began to fall. The most expensive bulbs fell to 1 to 2 percent of their peak value within 30 years.

Garber notes that, "a small quantity of prototype lily bulbs recently was sold for 1 million guilders ($US480,000 at 1987 exchange rates)", demonstrating that even in the modern world, flowers can command extremely high prices. Because the rise in prices occurred after bulbs were planted for the year, growers would not have had an opportunity to increase production in response to price.

Other economists believe that these elements cannot completely explain the dramatic rise and fall in tulip prices. Garber's theory has also been challenged for failing to explain a similar dramatic rise and fall in prices for regular tulip bulb contracts. Some economists also point to other factors associated with speculative bubbles, such as a growth in the supply of money, demonstrated by an increase in deposits at the Bank of Amsterdam during that period.

Admirael van der Eijck from the 1637 catalog of P.Cos., sold for 1045 guilders on February 5, 1637

Earl Thompson argued in a 2007 paper that Garber's explanation cannot account for the extremely swift drop in tulip bulb contract prices. The annualised rate of price decline was 99.999%, instead of the average 40% for other flowers. He provided another explanation for Dutch tulip mania. Since late 1636, the Dutch parliament had been considering a decree (originally sponsored by Dutch tulip investors who had lost money because of a German setback in the Thirty Years' War) that changed the way tulip contracts functioned:

On February 24, 1637, the self-regulating guild of Dutch florists, in a decision that was later ratified by the Dutch Parliament, announced that all futures contracts written after November 30, 1636, and before the re-opening of the cash market in the early Spring, were to be interpreted as option contracts. They did this by simply relieving the futures buyers of the obligation to buy the future tulips, forcing them merely to compensate the sellers with a small fixed percentage of the contract price.

Before this parliamentary decree, the purchaser of a tulip contract-known in modern finance as a forward contract-was legally obliged to buy the bulbs. The decree changed the nature of these contracts, so that if the current market price fell, the purchaser could opt to pay a penalty and forgo receipt of the bulb, rather than pay the full contracted price. This change in law meant that, in modern terminology, the forward contracts had been transformed into options contracts-contracts which were extremely favourable to the buyers.[citation needed ]

Thompson argues that the "bubble" in the price of tulip bulb forward prior to the February 1637 decree was due primarily to buyers' awareness of what was coming. Although the final 3.5% strike price was not actually settled until February 24, Thompson writes, "as information[...] entered the market in late November, contract prices soared to reflect the expectation that the contract price was now a call-option exercise, or strike, price rather than a price committed to be paid."

Thompson concludes that "the real victims of the contractual conversion" were the investors who had bought forward contracts prior to November 30, 1636, on the incorrect assumption that their contracts would benefit from the February 1637 decree. In other words, many investors were making an "additional gamble with respect to the prices the buyers would eventually have to pay for their options"-a factor unrelated to the intrinsic value of the tulip bulbs themselves.

Using data about the specific payoffs present in the forward and options contracts, Thompson argued that tulip bulb contract prices hewed closely to what a rational economic model would dictate: "Tulip contract prices before, during, and after the 'tulipmania' appear to provide a remarkable illustration of efficient market prices."

A modern-day field of tulips in the Netherlands; the flower remains a popular symbol of the Netherlands.

19th century painting depicting Tulip Mania, by Johannes Hinderikus Egenberger

The popularity of Mackay's tale has continued to this day, with new editions of Extraordinary Popular Delusions appearing regularly, with introductions by writers such as financier Bernard Baruch (1932), financial writer Andrew Tobias (1980), psychologist David J. Schneider (1993), and journalist Michael Lewis (2008).[citation needed ]

Goldgar argues that although tulip mania may not have constituted an economic or speculative bubble, it was nonetheless traumatic to the Dutch for other reasons: "Even though the financial crisis affected very few, the shock of tulipmania was considerable. A whole network of values was thrown into doubt." The bubble in 1634 shows how people can get caught up in a financial craze even when something doesn't have real value. This is an example of the phenomenon called collective illusions. Here, the Dutch elite thought that having their own special tulip bulbs was a must, and this made the prices go up, even though tulips themselves weren't worth much. In the 17th century, it was unimaginable to most people that something as common as a flower could be worth so much more money than most people earned in a year. The idea that the prices of flowers that grow only in the summer could fluctuate so wildly in the winter, threw into chaos the very understanding of "value".

Many of the sources telling of the woes of tulip mania, such as the anti-speculative pamphlets that were later reported by Beckmann and Mackay, have been cited as evidence of the extent of the economic damage. These pamphlets were not written by victims of a bubble, but were primarily religiously motivated. The upheaval was viewed as a perversion of the moral order-proof that "concentration on the earthly, rather than the heavenly flower could have dire consequences".

Nearly a century later, during the crash of the Mississippi Company and the South Sea Company in about 1720, tulip mania appeared in satires of these manias. When Beckmann first described tulip mania in the 1780s, he compared it to the failing lotteries of the time. In Goldgar's view, even many modern popular works about financial markets, such as Burton Malkiel's A Random Walk Down Wall Street (1973) and John Kenneth Galbraith's A Short History of Financial Euphoria (1990; written soon after the crash of 1987), used the tulip mania as a lesson in morality.

Tulip mania became a popular reference during the dot-com bubble of 1995-2001, and the subprime mortgage crisis of 2007-2010. In 2013, Nout Wellink, former president of the Dutch Central Bank, described Bitcoin as "worse than the tulip mania", adding, "At least then you got a tulip, now you get nothing." Despite the mania's enduring popularity, Daniel Gross has said of economists offering efficient-market explanations for the mania, "If they're correct[...] then business writers will have to delete Tulipmania from their handy-pack of bubble analogies."

1. ^ Kaletsky, Anatole: Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis. (PublicAffairs, 2010), pp. 109-10. Anatole Kaletsky: "The bursting of the tulip bubble in 1637 did not end Dutch economic hegemony. Far from it. Tulipmania was followed by a century of Dutch leadership in almost every branch of global commerce, finance, and manufacturing."

2. Gieseking, Jen Jack; Mangold, William; et al.: ^ The People, Place, and Space Reader. (Routledge, 2014, ISBN 978-0-415-66497-4), p. 151. As Witold Rybczynski (1987) notes, the 17th-century Dutch Republic "had few natural resources-no mines, no forests-and what little land there was needed constant protection from the sea. But this "low" country surprisingly quickly established itself as a major power. In a short time it became the most advanced shipbuilding nation in the world and developed large naval, fishing, and merchant fleets.

3. ^ Fowler, Mark; Felton, Bruce (August 1, 2004). The Best, Worst, & Most Unusual: Noteworthy Achievements, Events, Feats & Blunders of Every Conceivable Kind. Galahad. ISBN 978-0-88365-861-1.

4. ^ Pavaskar, Madhoo (2016). Commodity Derivatives Trading: Theory and Regulation. Notion Press. ISBN 978-1-945926-22-8.

5. Kuper, Simon (May 12, 2007). "Petal Power". Financial Times. Archived from the original on April 27, 2022. (Review of Goldgar 2007)

6. ^ A pamphlet about the Dutch tulipomania Archived May 27, 2012, at archive.today Wageningen Digital Library, July 14, 2006. Retrieved on August 13, 2008.

7. ^ "The Tulipomania", Chapter 3, in Mackay 1841

8. ^ Goldgar, Anne (February 12, 2018), "Tulip mania: the classic story of a Dutch financial bubble is mostly wrong", The Conversation, Boston, MA, archived from the original on February 7, 2021

9. ^ Panic, Prosperity, and Progress- Timothy Knight, p.1

10. ^ Harford, Tim (March 4, 2020). "Are we wrong about what happened with Tulip Mania?". BBC News. Archived from the original on March 4, 2020.

11. Brunt, Alan; Walsh, John, "'Broken' tulips and Tulip breaking virus", ^ Microbiology Today, May 2005, p. 68.

12. ^ Ricklefs, M. C. (1991). A History of Modern Indonesia Since c. 1300, 2nd Edition. London: MacMillan. p. 27

13. Phillips, S. "^ Tulip breaking potyvirus Archived February 20, 2009, at the Wayback Machine", in Brunt, A. A., Crabtree, K., Dallwitz, M. J., Gibbs, A. J., Watson, L. and Zurcher, E. J. (eds.) (1996 onwards). Plant Viruses Online: Descriptions and Lists from the VIDE Database. Version: August 20, 1996. Retrieved on August 15, 2008.

14. This basket of goods was actually exchanged for a bulb according to Chapter 3 of Mackay (1841) and also Schama (1997), but Krelage (1942) and Garber (2000), pp. 81-83 dispute this interpretation of the original source, an anonymous pamphlet, saying that the commodity bundle was clearly given only to demonstrate the value of the florin at the time.

15. Introduction by Andrew Tobias to ^ Extraordinary Popular Delusions and the Madness of Crowds (New York: Harmony Press, 1980) available at Andrew Tobias: Money and Other Subjects Archived September 18, 2008, at the Wayback Machine. Retrieved on August 12, 2008

16. "^ Bubble and Bust; As the subprime mortgage market tanks, policymakers must keep their nerve Archived May 14, 2011, at the Wayback Machine", The Washington Post, August 11, 2007. Retrieved on July 17, 2008.

17. Horton, Scott. "^ The Bubble Bursts", , January 27, 2008. Retrieved on July 17, 2008. Archived June 16, 2008, at the Wayback Machine

18. "^ Bitcoin hype worse than 'tulip mania', says Dutch central banker Archived March 20, 2017, at the Wayback Machine", The Guardian, December 4, 2013.

19. ^ Gross, Daniel. "Bulb Bubble Trouble; That Dutch tulip bubble wasn't so crazy after all Archived July 5, 2013, at the Wayback Machine", , July 16, 2004. Retrieved on November 4, 2011.

Dash, Mike (2011). Tulipomania: The Story of the World's Most Coveted Flower and the Extraordinary Passions It Aroused. New York: Three Rivers Press. ISBN 978-0-307-56082-7.

De Vries, Jan (1976). The Economy of Europe in an Age of Crisis, 1600-1750. Cambridge: Cambridge University Press. ISBN 978-0-521-29050-0.

French, Doug (2006). "The Dutch Monetary Environment during Tulipmania". The Quarterly Journal of Austrian Economics. Auburn, Alabama: Ludwig von Mises Institute. 9 (1): 3-14. doi:10.1007/s12113-006-1000-6. ISSN 1098-3708. S2CID 153904651.

Galbraith, John Kenneth (1994) [1990]. A Short History of Financial Euphoria (2nd ed.). New York: Penguin Books. ISBN 978-0-670-85028-0.

Garber, Peter M. (1989). "Tulipmania". Journal of Political Economy. Chicago: The University of Chicago Press. 97 (3): 535-560. doi:10.1086/261615. ISSN 0022-3808. JSTOR 1830454. S2CID 222435339 - via JSTOR.

Garber, Peter M. (1990), "Famous First Bubbles", The Journal of Economic Perspectives, 4 (2): 35-54, doi:10.1257/jep.4.2.35, JSTOR 1942889, S2CID 154443701

Garber, Peter M. (2000), Famous First Bubbles: The Fundamentals of Early Manias, Cambridge: MIT Press, ISBN 978-0-262-07204-5

Goldgar, Anne (2007). Tulipmania: Money, Honor, and Knowledge in the Dutch Golden Age. Chicago: University of Chicago Press. ISBN 978-0-226-30125-9.

Krelage, E. H. (1942), Bloemenspeculatie in Nederland, Amsterdam: P. N. van Kampen & Zoon

Kindleberger, Charles P.; Aliber, Robert (2005), Manias, Panics, and Crashes: A History of Financial Crises (5th ed.), Hoboken: Wiley, ISBN 978-0-471-46714-4

Mackay, Charles (1841), Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, London: Richard Bentley

Malkiel, Burton G. (2007), A Random Walk Down Wall Street (9th ed.), New York: W. W. Norton, ISBN 978-0-393-06245-8

Nusteling, Hubert (1985). Welvaart en Werkgelegenheid in Amsterdam 1540-1860. Amsterdam: De Bataafsche Leeuw. ISBN 978-90670-7-082-9.

Pavord, Anna (2014), The Tulip: The Story of a Flower That Has Made Men Mad, London: Bloomsbury Publishing, ISBN 978-1-4088-5903-2

Schama, Simon (1997) [1987], The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age, New York: Alfred Knopf, ISBN 978-0-394-51075-0

Shiller, Robert J. (2005), Irrational Exuberance (2nd ed.), Princeton: Princeton University Press, ISBN 978-0-691-12335-6

Thompson, Earl A. (2007). "The Tulipmania: Fact or Artifact?" (PDF). Public Choice. 130 (1-2): 99-114. doi:10.1007/s11127-006-9074-4. S2CID 154546566.

Boissoneault, Lorraine (September 18, 2017). "There Never Was a Real Tulip Fever". Smithsonian. Washington, D.C. Archived from the original on December 19, 2022.

Cos, Pieter (1637), Verzameling van een meenigte tulipaanen, naar het leven geteekend met hunne naamen, en swaarte der bollen, zoo als die publicq verkogt zijn, te Haarlem in den jaare A. 1637, door P. Cos, bloemist te Haarlem (in Dutch), Haarlem: [s.n.], 75 pl, archived from the original on April 4, 2005

Hooper, William R. (April 1876). "The Tulip Mania". Harper's New Monthly Magazine. Vol. 52, no. 340. New York. pp. 743-746. ISSN 0017-789X.

Mackay, Charles (1869). Memoirs of Extraordinary Popular Delusions and the Madness of Crowds. Vol. 1. London; New York: G. Routledge. OCLC 1157140147. (volume 1; volume 2)

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Tulip mania ( Dutch: tulpenmanie) was a period during the Dutch Golden Age when contract prices for some bulbs of the recently introduced and fashionable tulip reached extraordinarily high levels. The major acceleration started in 1634 and then dramatically collapsed in February 1637.

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Speculation and Manipulation of Food and Commodities

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House Natural Resources Committee Democrats

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A scene from Trading Places explaining the basics of commodities.

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Equity and Debt Finance for Businesses Notes

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​This short revision video looks at the core functions of commercial banks in the UK. Commercial banks provide retail banking services to household and business customers They are licensed deposit-takers - providing a range of savings accounts for households and businesses They are licensed to lend money (and thereby "create" money e.g.

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A commercial bank makes its profit by paying interest to people who keep money there and charging a higher rate of interest to borrowers who borrow money from the bank . This short video looks at the data on bank profits and in particular, the spread on interest rates between savings deposits and bank loans.

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​In this revision video we work through some numerical examples of the inverse relationship between the market price of fixed-interest government bonds and the yields on those bonds. ​Government bonds are fixed interest securities. This means that a bond pays a fixed annual interest - this is known as the coupon The coupon (paid in £s, $s, Euros etc.)

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Bond Price calulations

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Essay Plan

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1. Austrian Business Cycle Theory and the financial crisis

The global financial crisis is, without doubt, the most important economic event of our time. Its depth, extent and duration have led many people to put into question the free market and capitalism. This, of course, has resulted in a very heated debate about its causes (and possible solutions). On one side are those who call for more regulations, institutional improvement and implementation of Keynesian policies and, on the other side, those who argue that the current crisis is the fault of governments and Central Banks because they, and not the market, created the "financial bubble" that eventually had to burst. In the view of this group, the crisis is not sample of the failure of neoliberal capitalism but rather of the interventionist paradigm, the unregulated free market is still the perfect way to organize the economy and if there are problems is not because the market doesn't work but because the State has not allowed it work. Among those who advocate this position are obviously the Austrian economists. In fact, this view is at present strongly promoted by prominent Austrians such as Ron Paul and Peter Schiff, who claims to have predicted the crisis.

The theoretical basis of these economists to support their position is on the Austrian Business Cycle Theory. According to this theory, originally proposed by Ludwig von Mises and Friedrich von Hayek, crises are the result of "distorting action" generated by the State to intervene in the market. So, as the coordination capacity of the market is destroyed, is necessary a painful process of "adjustment" to restore the "spontaneous order" and, consequently, the crisis comes.

This is in a very general and abstract level. However, the most interesting formulation of the Austrian Business Cycle Theory is about the crises caused by "credit bubbles". Here the "spontaneous order" is the correspondence between actual savings and investments of private agents. In this context, the State, through the Central Bank intervenes in the market to "stimulate" the economy by relaxing credit conditions. To do this is applied a monetary policy that determines a rate of interest below the "natural rate of interest", that is, the one that would be configured under conditions of absolute free market. In this new "artificial economy", consumers have access to more loans and entrepreneurs make more investments with respect to what would occur merely on the basis of actual savings and then the bubble begins to emerge. At some point, as already said, this bubble has to burst and the economy will have to "adjust" itself, and the crisis occurs. All this does not happen through the fault of free market but rather through the fault of the State intervention.

Like most economists, Austrians developed their analysis of the mechanism of causation of the crisis taking as main reference the U.S. economy. Specifically, they argue that the financial crisis was caused in 2001 when, precisely in the context of economic depression and loss of confidence after the attack on the Twin Towers, the U.S. Federal Reserve, to "stimulate" the economy, reduced the interest rates from 6.5% to 1.75% and then to a minimum of 1% in 2003. Also in June 2002 the U.S. government announced would guarantee to the companies Fannie Mae and Freddie Mac to help create liquidity in a secondary market for mortgages so that the vast majority of families can access the "American dream" of own home. This, argue the Austrians, was what created the credit bubble which would trigger the financial crisis in 2008.

This is the Austrian view of the crisis. The liberal Spanish economist Jesus Huerta de Soto, the most famous representative of the Austrian School in Spanish-speaking countries, puts it this way: "Economic depression is not a crisis caused by the market economy. This is something we have to remove of our mind definitively. The crisis is not a crisis of the market, it is a crisis of state intervention, state intervention which produced the current banking system and credit expansion, which has deceived entrepreneurs, which has distorted the production structure (...). Therefore, in a free market economy does not have to exist economic depressions". (1)

The implicit assertion that "the market is always and necessarily perfect, and the State always and necessarily is at fault" is too radical and deserves to be examined. And this is the subject of this article: make a critical analysis of the Austrian Business Cycle Theory in the context of the current financial crisis.
To be continued...
References:

1) Jesús Huerta de Soto, "Una interpretación liberal de la crisis económica", Estudios de Economía Política , Unión Editorial Press, Madrid, 2004 , p. 157.

You can contact the author of this article in: "Dante Abelardo Urbina Padilla" (Facebook) and dante.urbina1@gmail.com (email)

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AUSTRIAN ECONOMISTS PREDICTED THE FINANCIAL CRISIS?: CRITIQUE OF THE AUSTRIAN BUSINESS CYCLE THEORY (Part I)

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1. Austrian Business Cycle Theory and the financial crisis The global financial crisis is, without doubt, the most important economic event of our time. Its depth, extent and duration have led many people to put into question the free market and capitalism. This, of course, has resulted in a very heated debate about its causes (and possible solutions).

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Economy - Office for National Statistics

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UK economic activity covering production, distribution, consumption and trade of goods and services. Individuals, businesses, organisations and governments all affect the development of the economy.

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Why Minsky Matters, Analysis - BBC Radio 4

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Do the theories of Hyman Minsky provide a radical challenge to mainstream economics?

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Monetary policy is the process by which the Bank of England sets the interest rate - and sometimes carries out other measures - in order to reach a target rate of inflation.

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The Sterling Monetary Framework | Bank of England

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The framework for how the Bank of England operates in the sterling money markets is called the Sterling Monetary Framework.

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Money in the modern economy: an introduction - Quarterly Bulletin article

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Money creation in the modern economy - Quarterly Bulletin article

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The Bank of England (BoE) is the UK's central bank. Our mission is to deliver monetary and financial stability for the people of the United Kingdom.

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Teacher's guide: financial markets and monetary policy

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Students should also understand reasons why financial markets are susceptible to periodic crises and be able to assess some of the measures that the authorities might take to regulate and control such markets. In addition, students should appreciate the role of monetary policy in managing the economy.

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Search the world's information, including webpages, images, videos and more. Google has many special features to help you find exactly what you're looking for.

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Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply.

Narrow Money e.g. M0 = This is the level of notes and coins in circulation + banks operational balances at the Bank of England.

Broad money e.g. M4 money supply is defined as a measure of notes and coins in circulation (M0) + bank accounts. It is a broader definition because it includes bank accounts and not just notes and coins in circulation.

(The technical definition of M4 includes private-sector retail bank and building society deposits + Private-sector wholesale bank and building society deposits and Certificate of Deposit. [ link])

Monetarist theory of Inflation

According to the Monetarist theory of inflation, there is a direct link between the money supply (M) and the inflation rate.
MV=PY
Monetarists believe velocity of circulation (V) is fairly stable. and Y (real output determined by supply-side factors)

Therefore, if we have a situation where the money supply rises faster than real output, it will cause inflation.

Milton Friedman was an important advocate of monetarist theory, pointing out many situations where government decisions to increase the money supply led to inflation. For example

Confederacy printing money in Civil War causing inflation

Growth in money supply in the 1970s causing higher than anticipated inflation.

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

Friedman (1970) The Counter-Revolution in Monetary Theory.

Link between money supply and inflation in practice

However, although a rise in the money supply can cause inflation, in practice, the link is not clear-cut - inflation can be determined by several factors other than inflation.

Still, M4 money supply growth can give a guide to underlying inflation and economic activity. For example, in 2011, 2012, the UK experienced cost-push inflation. But, the Bank of England didn't increase interest rates, they felt the economy was still weak. Later CPI inflation fell, and in late 2014 is 1.5% - below the government's target.

A resurgence in M4 will be a key factor in ending quantitative easing and increasing interest rates.
M4 Money Supply
click to enlarge - Source: Money databases LPMVQJU at Bank of England | see also ( HM Treasury databank)

M4 is a key statistic because it can illustrate the underlying strength of economic activity. When the economy went into recession, we see a sharp fall in M4 growth from 15% a year to negative growth in mid-2008.

The negative M4 growth during 2011 and 2012 was a sign that economic activity was falling and unsurprisingly the economy went into a double-dip recession.

The past governor of the Bank of England, Mervyn King has said that M4 remains an important variable for influencing monetary policy. Negative M4 growth is a key factor in the justification for more quantitative easing, keeping interest rates low and attempts to bolster bank lending.
Quantitative easing
Quantitative easing involves the creation of electronic money by the Bank of England to purchase gilts from the financial sector. In theory, this should increase the money supply.

See also: Quantitative easing and inflation

At the start of quantitative easing, M.King said:

"the unprecedented actions of the Monetary Policy Committee to inject £200bn directly into the economy...have averted a potentially disastrous monetary squeeze" Bank of England pdf)

Therefore, without quantitative easing, we may have seen a bigger fall in the money supply and a deeper recession.

However, the relatively weak money supply growth figures also suggest that quantitative easing was limited in its ability to stimulate bank lending and get money to the real economy.
Money Supply M3 and M4

Different measures of M3, M4 show strong growth (over 10%) until 2009, where growth rates fall. In 2012, we see a fall in M4 lending and M4 liabilities. Even during the economic recovery of 2013, 2014, money supply growth is weak and has become negative in late 2014

UK Inflation

Inflation has often been above target during this period of negative broad money supply growth.
Why can inflation be high and yet money supply growth negative?

Inflation is still affected by cost-push factors, higher imported prices, raw material prices, taxes.

The fall in money supply reflects the depressed nature of the economy and fall in investment.

In 2007, the household savings rate was 2.3%. In March 2012, this has increased to 7.7%.

Consumer confidence shows little sign of recovery, and the banking sector was still very weak.

The relationship between money supply and inflation has always been weak. Money supply can vary due to changes in way of managing bank accounts and money

Why is broad money supply growth negative - despite economic recovery?
UK economic growth has been positive since 2013, yet the broad money supply growth has not matched the economic recovery.

I'm not entirely sure why this is. But, it reflects the fact bank lending is still weak. Also, level of savings is not increasing as people spend their disposable income. It suggests the economic recovery may still be quite tentative.
Historical Broad Money supply growth
UK Broad money supply. Source: Bank of England

M0 notes and coins

This is a 'narrow' definition of money, it includes just notes and coins in circulation

Narrow money growth has been less affected by the recession and has remained constant. However, M0 is a relatively small percentage of the total money supply.
Related

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Definition: The money supply measures the total amount of money in the economy at a particular time. It includes actual notes and coins and also any deposits which can be quickly converted into cash. There are different measures of the money supply. Narrow Money e.g.

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Financial economics is given a greater weighting in the new economics specifications and this new Bank of England video from their Quarterly Bulletin will help to explain how the different parts of the system fit together in balance sheet terms.

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Finance & Capital Markets | Khan Academy

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Finance & Capital Markets | Khan Academy

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Inverse relationship between bond prices and interest rates

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