Bubbles_Notes - The adoption and implementation of...

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The adoption and implementation of commercial practices which lead to economic situations which become subject to rapid correction or reversal are often referred to as “bubbles”. They are different from the larger economic cycles of GDP expansion, stagnation or contraction which affect most economies, yet may play roles in the initiation of broader economic surges (when bubbles are forming) and downturns (after bubbles burst). Bubbles are usually industry or sector specific. A few examples over the past 25 years include: o o “The Tech Bubble” o “The Telecom Bubble” o “The SubPrime Debt Crisis” Any bubbles which also happen to directly and sharply impact upon the housing market precipitate what becomes known as the latest “Real Estate Bubble”. Circumstances giving rise to the extraordinary rise of certain commercial practices or market prices, to be followed by sharp reversals of the perception of market prices and risks have always existed. This not something new to our century, unique to our economy, or new in America. In addressing the questions of why bubbles form and later burst , you have to begin with the context of the environment in which they occur. If we take the modern day US economy as an example, that context would include: o Relatively free and open markets operating on a global scale o Modest regulation, most of which was formed in reaction to economic and market issues recognized as a result of past problems or crisis (e.g. little regulation is proactive or forward-looking). o The root causes: Insufficiently regulated Fear and Greed . Fear and greed make capitalism work (or not work, depending upon your perspective). They
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are highly interconnected and extremely powerful. Market participants are fearful of losing what wealth they have, and are fearful of not participating in the gains others may be enjoying. Greed is the basis for capitalism, and the less citizens can rely upon the economic support of their fellow citizens or government, the more they must rely upon the successful deployment of their own greed to meet their needs. The fundamental connection of greed to capitalism was perhaps most sharply enshrined in the modern American culture by the character Gordon Gekko in the 1987 film “Wall Street”, when he proclaimed “Greed is good….greed works”.
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This note was uploaded on 02/20/2009 for the course ILRIC 3330 taught by Professor Turner during the Spring '08 term at Cornell University (Engineering School).

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Bubbles_Notes - The adoption and implementation of...

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