In recent time, there has been a grave financial problem due to financial bubble. There are specific reasons for financial bubble. Eugene mentions, “the demand for credit to buy stock pulled funds into the market, forcing a major reallocation of credit in the money and capital markets.” (Eugene, p. 76) A similar pattern developed during the 1920s before the stock market crash.
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The decade leading up to the stock market crash of 1929 and the following Great Depression is typically remembered as one of great prosperity; everybody, it seemed, was getting wealthier. While the rich added to their riches, even the working class was beginning to earn a little bit of money to put away. The middle class was inching closer to luxury with the money it had made in investment markets. All signs were pointing up. It was precisely this shared spirit of unbridled optimism, however, that led to the crash and the subsequent depression; the Thirties were particularly horrific specifically because few, in their boom-era delirium, had foreseen that the wave, so long cresting, must eventually break. When, on that Black Monday, the stock market did actually crash, and when bankruptcies and layoffs followed on its heels, the country was unprepared—due to ideology as well as limited governmental infrastructure—to deal with the economic repercussions. All signs pointed to a booming American economy in the 1920s.
According to Robert Shiller, “The misinterpretation by the public of excess demand is a factor in the transmission process of price increases.” (Robert, p. 60) In that regard, it is hard to say there is much that could have been done to prevent the catastrophe. The American populace tends to correct itself, however; the conscience of the country shifted after 1929, and consequently they elected a Roosevelt to the presidency at their next opportunity. To be sure, also, they learned from their mistake, and have since been more skeptical of rampant economic optimism, well aware of the tragedy and unprepared ness it can provoke.
Thus, it can well be stated that the stock market boom in the US of the 1920s was a financial bubble. In the context of recent times it can stated, “One of the strongest investor tendencies documented in both experimental and survey evidence is the tendency to extrapolate or to chase the trend” (Andrei, p. 28) In the conclusion it could be stated that the link between the pre-Depression atmospheres of optimism is clear, but perhaps it was also unavoidable. The same conservative ideals that led to such ineffective disaster-response efforts after the stock market crash were the same conservative ideals that had bolstered the economy and led to the boom in the first place.
- Eugene N. White, “The Stock Market Boom and Crash of 1929 Revisited,” Journal of Economic Perspectives, 4, 2, 1990, pp. 67-83. ONLINE JOURNALS. Web.
- Robert J. Shiller, “Speculative Prices and Popular Models” Journal of Economic Perspectives, 4, 2, 1990, pp. 55-65. ONLINE JOURNALS’. Web.
- Andrei Shleifer and Lawrence H. Summers, “The Noise Trader Approach to Finance” Journal of Economic Perspectives, 4, 2, 1990, pp. 19-33. ONLINE JOURNALS. Web.