Bubbles on the South Sea - Essay Example

Bubbles on the South Sea In the history of the first great stock market crash in England in 1720, known as the South Sea Bubble, promises to help inform particularly most financial economists, and what is thought as modern financial analysis today and with popular interest in stock markets. When South Sea Financial Bubble occur? Financial bubbles refers to a market condition wherein investors put so much demand on a stock in anticipation of selling it to another speculator at a much higher price. Like an “actual bubble” , they eventually pop. The money that was invested into them dissipates into the wind. According to a website “The bubble is usually followed by a sudden drop in prices known as crash”. This is a significant drop in the total value of a market, almost undoubtedly to the popping of a bubble, creating a situation wherein the majority of investors are trying to flee the market at the same time and consequently incurring massive losses. And terribly affects everyone. The inevitable crash came and the strain proved to much to many joint stock companies. The immediate cause was the activities of the South Sea Company. It had been formed to engage in trading in the South Seas, but it also has engaged in the funding of the national debt in return for monopolistic privileges. The bad repute of this joint stock companies had led to the passage of the Bubble Act for the regulation of companies in the main attempt to prevent panic. Bubble Act declared that only companies formed by charter or by a private act of parliament were legal. The Financial Scandal of South Sea Bubble The South Sea Company was reasonably successful. It was chartered by the government for trade in South America and South Sea. The relationship between the government and the company created confidence and high expectations. In the history, they were given the monopoly of trading in the Pacific Ocean and along the coast of South America, made an offer to the government to pay off the whole National Debt and to buy up the irredeemable annuities, according to Melville amounting of “₤800,000 a year, provided the different public securities were consolidated into one fund in their hands and the government gave the company certain exclusive commercial privileges”. In spite of the limited privileges conceded to it in the Asiento by Spain, been highly successful in the slave trade. This means according to (Colliers Encyclopedia) “that they have the right for 30 years to supply Spanish-America colonies with 4,800 slaves annually and to send to Porto Bello and Vera Cruz a trading ship of 500 tons a year”. A negotiation being settled with the South Sea Company. This right was handed over the company which underwrote the English national debt, on a promise of 5% from the government. The most question was whether the fund-holders would convert their stock for shares in the company, for they could not compelled to do so. According to (Caleb W.)” The brilliant prospects held out by the directors of the gold and silver lands awaiting exploitation in South America, crowded into the rush for shares.” Its shares immediately rose to 10x their value from ₤110 rose to ₤1000, speculation ran wild and all sorts of joint stock companies, fraudulent or merely optimistic were formed. Its price soared within a few weeks, people realized that it was greatly overpriced and prices fell. Thousands were financially ruined. The South Sea Prosecution of some of those concern served to open the eyes of the public to the recklessness of its own scheme, and its shares dropped with the result that few sold out enormous profits, the majority of those who hold on were ruined and result of financial disaster. The Bubble had burst, ruining thousands of families. The disaster happened in South Sea Bubble almost wealthy persons in the kingdom had become members of the government to involved in manipulating of the company. Robert Walpole un his time did much to restore national credit. According to (Caleb, W) “ he makes arrangement and assign ₤9 million which the government had received.” With this the proprietor and subscriber got about 1/3 of ruin money. Investigation revealed bribery involving high officials and fraud in the company’s bookkeeping In this episode discouraged government participation in business venture. Economic Bubble in Japan In 1967 and 1968 the economy of Japan rose up to 10% which exceeds the economy of most popular has growth economy like France, Britain and Germany. The Japans economy experienced a boost due to many reasons such as massive adaptation, industrial facilities, automobile industry, high exchange rate which stimulate housing activities and stock investment which created a bubble economy. This started a period of rapid growth. During this period almost the entire country was involve in land speculation or other speculate activities. Likewise, in South Sea Bubble it also shows the boost growth in economy and also involvement in many speculations. According to a website “Residential land prices in Japan, especially in big cities, are so high as to be beyond comparison with those of other nations, making mortgage or rent payments a great burden on the average citizen.” Corporate investment rose sharply. New equity issues rose in value as a result of higher stock prices, making them an important source of financing for corporations. Banks sought for funds in the outlet of real estate development.  In turn, corporations used their real estate holding as collateral for stock market speculation.  A direct result of this was the doubling of land value prices. In May 1989, the government tightened its monetary policies to suppress the rise in value of assets, such as land.  However, higher interest rates sent stock prices on a steady spiral down.  The Tokyo stock market had fallen, thus effectively wiping out 2.07 trillion dollars in value.  Steeply dropping land prices burdened financial institutions with bad debts and some of them even went bankrupt.  Others attempted to improve internal finances and managed to stay afloat by limiting the supply of capital to private businesses by being cautious in granting loans.  Japanese government is presently taking structural measures to deal with problems from the bursting of the economic bubble and the need for changes to accommodate industrial globalization. The government is working to stabilize the nations financial system and revitalize the countrys economy. Several prominent financial institutions declared bankruptcy. The same result with Japan economy bubble and South Sea experiencing a boost in economy receiving a good and wealthy economy but then as time comes this bubble burst and result of financial disaster. In reality, people create most of the risk in the market place by inflating stock prices beyond the value of the underlying company. When stocks are flying through the stratosphere like rockets, it is usually a sign of a bubble. This leap should be justified by the prospects of the underlying companies, not just by a mass of investors following each other. The unreasonable belief in the possibility of getting rich quick is the primary reason people get burned by market crashes. If you put your money into investments that have a high potential for returns, you must also be willing to bear a high chance of losing it all your investments. References: South Sea Bubble. New Standard Encyclopedia ( Vol. 16 p. 18), New York: Encyclopedia The Encyclopedia Americana 1st Edition Grolier Inc. Caleb W. Davis (1994) Colliers Encyclopedia 1994, New York The Union of England and Scotland 1994 http://www.asianinfo.org/asianinfo/japan/economy.htm www.dailyreckoning.com/Issues/2003/101403.html Read More