Financial Bubbles - Assignment Example

Financial Bubbles Analysis & Discussion By 02 May 02 May Financial Bubbles Analysis & Discussion The success of any phenomenon needs to be under control, if a positive over grows in size it becomes an abnormality. A financial bubble is a financial abnormality; a situation that has over grown the advantage of its positivity and is become a burden for the market producing negative vibes and consequences is referred to as financial bubble. “There is no simple definition of financial bubble but one dynamic is clear: they become a financial black hole that attracts huge amounts of investment money.

An investor who recognizes a bubble and its cause can make a lifetime of profit in a short time.” (Augen 258) Let us discuss some of the important bubbles in the financial history: Tulip Bubble (Dutch Tulip bubble) In the late 15th century tulips were introduced in the Dutch market from turkey. The increase in demand pushed the price of this flower to the sky, leading to market maneuvers of artificial scarcity and artificial price hike. As they say, a bubble bursts when the investors start minting money out of it.

Soon when people realized this situation they started selling their stocks and the large contractor started dishonoring their contracts thus resulting in the crash of the bulb market and the bubble burst/ Tech Bubble – 1999 This bubble is also known as the Dot.Com bubble. It happened when the technology market boomed and the internet business was thought to be the star of future profit. NASDAQ soared and so did these internet companies. But then in the late 1999 and the beginning of 2000 saw a crash of this internet bubble when the companies themselves could not take the over burden of these demands and showed losses that very high and pushed the index to a shocking low level, thus resulting in a bubble burst.

US Housing Bubble Housing prices in the US started increasing in the later part of the 1990 decade and the bubble busted at the end of 2006 and the start of 2007. The people were investing in the housing business and new houses in the US were selling like hot cakes. The mortgage financing was also in a boom with more and more people availing this profit making opportunity. But as the supply saturated the demand and no buyers were found for the new houses this bubble also busted like the other financial bubbles.

This financial upset not only affected the housing sector but did a huge damage to the banks that were extending the mortgage contracts. Dubai Housing Bubble Dubai – the connection between the East and the west, experienced major construction boom in the early 2000. The foreign investors took the dreamland Dubai as an opportunity to invest and huge amounts of investments started following in with high rises seen being built everywhere in Dubai. People were ready to pay tons for that accommodation and companies borrowed more and more to supple people with lavish accommodation.

Until 2008, when the supple clustered the demand and the decrease in demand and rising loans led to the burst of this major financial bubble. This downfall caused Dubai to call for help with Abu Dhabi pitching in to save its member state. China Tech Bubble This bubble is yet to take its toll on the financial market. It is the repeat of the Dot.Com bubble and analysts fear it will be bigger in terms of losses as compared to the US dotcom bubble. The Chinese technology sector is taking the NYSE by storm.

Due to the Chinese regulation of the ban of facebook, twitter and other similar sites, the Chinese alternatives to these names are doubling their prices on the New York Stock Exchange currently. Analysts foresee this as a crash while other investors argue this to be a technological upsurge for Chinese market. Whether this bubble will burst or not only time will tell. However, our discussion above and the financial market history have shown that such remarkable rise in price is followed by an upsetting figure of decline and losses.

Reference Cited Augen, Jeff. Trading Realities: The Truth, the lies & the Hype in-Between. New Jersey: Pearson Education, Inc., 2001. 258. Print.