The Summary of Economic Bubbles - Essay Example

Summary of Article “Economic Bubbles” Economic bubble is a term used to define the trade of products and assets at highly inflated prices that are considerably beyond the assets intrinsic value. Economic bubbles are formed as a result of speculation by the investors who feel very optimistic about the future increase in the asset’s price. These investors realize the fact that a drastic increase in price of a product will encourage its owners to sell it, and at the same time its aggregate supply in the market will increase, both of these result in decline of prices and eventually this boom becomes a crash or a burst.

Economic bubbles are formed because the investors respond positive to the increasing price, i.e., they buy more with the increasing prices. This may be due to greed or a desire to become rich by selling those assets at an even higher price in the near future. In other words, buyers tend to assume that they will be able to find another buyer (sometimes referred to as “a greater fool”) who will pay them even more than they paid for the asset. These bubbles cause a little or no economic damage because usually the “greater fools” get wiser by learning from their failure and the sellers get a lot richer.

However, its effects can be felt if owners of inflated assets assume themselves as rich and start spending unwisely by getting more bank loans against their overpriced assets as securities. So when the prices of the overpriced assets fall, both the loan recipient and the bank could bankrupt and suffer huge losses. On a macro level several banks may fail and lesser money is available for investments to recover the economy. Similarly when this happens due to speculation of the share prices of the company, the stock markets may eventually crash.