The dot.com bubbleWhat are economic bubbles?NarratorBubbles in modern Western capitalism, speculation, expectation and ignorance often collideto create a perfect storm of irrational financial exuberance – an economic ‘bubble’.David Llewellyn A bubble is simply where prices continue to rise beyond the true value ofwhat it is that we are talking about.People buy simply because they believe that everybody else is going to buy.Mariana‘During bubbles we know that you have these mechanisms of herd behaviour where I value afirm, not really because I know its underlying profits and earnings, but I think that you’revaluing it highly and I don’t wanna lose out by not getting involved in the game.’NarratorThe economist John Maynard Keynes recognised that all finance involved a gamble on thefuture.David Llewellyn‘The one thing that we know about the future is that we don’t know what the future’s going tobe like, and therefore we have to base our decisions on an expectation.’NarratorKeynes believed that because we can’t know the future, we are guided instead by our ‘animalspirits’.James Montier‘The herd mentality drives a lot of the bubble-like behaviour that we see. That unwillingness tostand alone from the crowd is undoubtedly the major extender of all bubbles.’City UncoveredDavid Gross, Historian of Financial Bubbles‘I liken it to a group of dogs that I saw at a circus once, these big sheepdogs. And they’reslobbering and jumping all over each other and they all run in one direction until they pile upin the corner, then they’d get up and start going in another direction full speed until they crashinto that. And I think there’s a degree to which markets work like that.’NarratorOne of the biggest bubbles of the past century was the late ’90’s dot-com boom.Mark Goodson‘It was an insane market. You didn’t have to know anything, you didn’t have to do anyresearch. You just bought what everyone else was buying and it went up. It was ridiculous. Alllogic went out the window.’John Coates‘The adjectives we usually use to describe bubbles are manic – there is an element of insanity– delusional, euphoric, over-confident, and that’s what people look like when they’re caughtup in bubbles.’
Michael Jackson‘We all thought, God we’re going to be rich and we bloody well would have been rich, but itwas a completely unsustainable business model. It was just totally mad. It was a blood bath.’NarratorBubbles are sometimes compared to fads – meaning they don’t last forever, but when aneconomic bubble bursts, the consequences can be catastrophic.Greg Hadfield‘I think the knock-on effect of bubbles does impact on ordinary people. It’s the ordinary peoplewho suffer from the petrol prices and the unemployment and the lack of investment in publicservices.’NarratorIf they can cause such damage, is there a way to regulate against bubbles or must we leavemarkets to find their own level?Either way, it’s clear that in a fast-moving economy, what seemed to be a one-way bet – aguaranteed winning hand – can quickly become a busted flush.