Reply #28: Tulip bulbs did have an inherent value too.

[1932]

Robert J. Shiller, author of Irrational Exhuberance says it isn't really inherent value that causes bubbles to inflate and pop. He said that the tulip bulbs that were most valuable had a fungus that caused the unique colors, so they were rare and hard to reproduce without owning a bulb that was effected.

He argues that the thing that makes a bubble is mostly popular sentiment -- everyone agrees that one thing is really desirable and then the bubble pops when people collectively change their minds about the good's value.

Shiller says that it's no coincidence that the rise of mass media/the printing press coincided with the tulip bubble. It helped fuel the fire of mass collective desire and then it was the same instrument that fueled the drive to sell tulips.

Shiller says another thing that causes bubbles is that there aren't enough other good investments available. When one thing shows the promise for big returns, and when there aren't many other places to make your money work for you, people put their money in that one things. Doesn't that sound familiar? Doesn't that describe America over the last couple years?

I think there really aren't many places to put money that aren't susceptible to the bubble. Not even real estate. Say job markets were so unstable that people couldn't reasonably expect to live one place for more than three or four years, much less have the same job for three or four years. That would be a way to create a nation of renters. That could depress real estate values even more.