Financial Bubble

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  • Topic: Dot-com bubble, Stock market bubble, Economic bubble
  • Pages : 5 (1920 words )
  • Download(s) : 219
  • Published : April 4, 2013
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1. What is financial bubble?

Financial bubble is also known as economic bubble which means the price of goods, services, stocks increases dramatically to an unreasonable or unstable price level. Specifically, this issue usually happens in stock market, real estate and other business fields (Fraine 2010). There are many kinds of bubbles which occurred in countries in the world such as Tulip Bubble in Netherlands (1634 - 1637), South Sea bubble (1711 - 1720), and Dot Com bubble in America (1995 - 2000) which is predicted that it is appearing at the moment, etc (Vivaldi 2011). (See appendix 8.1) When talking about bubble, everyone will think about something which is easy to get big and fragile. Thus, the situation also appears when investors always expect the price is too high in order to get more profit and after that, the price decreases suddenly (Vivaldi 2011). It makes the bubble they are creating broken easily. Therefore, financial bubble market is considered as an economic cycle that has three periods including recession, recovery, and development (‘Economic Bubbles: Understanding the role of bubbles in an economy’ 2008). The economy is developing in the short period and quickly goes down.

2. Why and how do financial bubbles happen?

There are so many reasons that economists dispute to explain the cause of this phenomenon. According to the article on www.moneyunder30.com website (Stan 2010), some people say that when the economy develops, the company will have high turnover and the individuals will be given a lot of salaries. Instead of sending money to the banks and get the interest, people tend to buy an expensive house which is beyond their capacities, and they think that the price is appreciated; they can sell it and get high profit. Another opinion claims that as financial systems offer a loan with low interest rate, the investors will take the advantage of this opportunity. They will borrow a lot of money from banks and invest in real estate or buy shares. The event that many people invest in an asset, the price will be rose very fast. Moreover, it makes other individuals and corporations willing to join in the market with the thought that they can acquire a lot of benefits, the bubble will be created. For an example, the price of stock is overvalued, the investors will buy more because they don’t know when the others will sell it and if they skip this time, they may loss a big profitable chance in the future even if they know the market is overrated and appreciated, no one is willing to be the first give up a good opportunity (Krueger 2005). The actions of investors contribute to inflate the financial bubble.

3. Why and how do financial bubbles end?

The event that bubble is getting bigger makes everyone in business world feel interested. Absolutely, they hope that this feeling exists forever. However, the bubble is easy to burst because of the pressure inside and outside it and we can not know exact time that the bubble will be broken. Similarly, in the economy, the price of stocks, bonds, real estate, etc will suddenly go down while it is reaching to the high point. The cause of this issue is the buyers will not be available when the value of assets is too high and it leads to the interest rate of those things declines (Lissa 2012). When the price of commodities goes down sharply in the market, everyone wants to sell their own shares which are decreasing every minute. However, no one wants to buy those assets or shares at that period because they are not willing to take risk, and own the devalued assets. The result for selling madly is the market comes down so fast and it effects to economic growth. From then on the economic recession begins to appear (Vivaldi 2011). The example in Japan shows clearly the declination after broken bubble situation, at the height of bubble in 1989, the land in Tokyo was sold with $139000 per meter square. After the bubble burst, the estate fell 80% its...
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