Contrast Mackays Tulip Bulb story with the US housing market of the past 45 years - Essay Example

of the of the Concerned 22 November 2008 Mackay's Tulip Bulb Story and the US Housing Market Considering the current state of the world economy, when the financial markets are deemed to be unexceptionally rational and digitized, the possibility of large scale market fluctuations driven by mass euphoria and idiosyncrasies seems to be utterly anachronistic. Still, the truth is always stranger then fiction. Media reports and the editorials in the popular publications, time and again point towards the fact that bubbles are a cardinal aspect of the contemporary economies, and people do get swayed by enticing perceptions and doubtable possibilities of free lunches.

The recent credit crunch bothering the US economy in particular and the world economies in general, unleashed by subprime mortgages amply reveals the susceptibility of markets to speculative fads and misinformed human avarice and greed. In the given context, Mackay's 'Tulip Bulb' story published in his book 'Extraordinary Popular Delusions and the Madness of Crowds' seems to be highly relevant. Infact the given narrative is a crystal clear example of a debilitating dichotomy between the prices of a coveted asset and the market fundamentals (Garber 14).

The story is based in the year 1559, when the tulip bulbs became a priced commodity in Holland. Infact tulip bulbs were widely traded in the local market exchanges and the people went to the extent of stretching their speculative propensities far beyond their means and started investing in the tulips bulbs that sometimes fetched a price as high as 2,000 guilders. This obsessive herd mentality was totally oblivious of the pragmatic market realities and was solely driven by mass instinct (Peers 29).

Eventually, in February 1637, the tulip bubble busted and brought the Dutch economy down to its knees. The story being discussed certainly draws one's attention to the housing and real state bubble that dominated the US economy in the last five years. Owning one's own home, which was considered to be an undeniable part of the American Dream, soon became an obsession with the masses. People, driven by the long term profitable prospects of the housing market, started purchasing houses even at the cost of borrowing money from the banks.

The whole banking and financial system started revolving around this novel mass fetish. Banks and mortgage firms went to the extent of extending loans to the people with unsound or dubious credit standing. The investors blindly invested in the bonds and hedge funds that were primarily used to make investments in the mortgage purchases in the US. Sadly, the housing market crashed in the mid of 2007. The subprime housing loans which constituted a manageable 5 percent of the total housing loans in 1994 rose to a scary figure of 20 percent in the year 2005 (Economy Watch).

Such massive losses shook the investors' confidence in the financial markets and pushed the world economy in a precarious situation. There is no denying the fact that people seldom learn from history, and such financial blunders will continue to occur, despite the existence of a plethora of examples pertaining to the busting of such misdirected economic bubbles. Works CitedGarber, Peter M. "Digging for the Roots of Tulipmania". Wall Street Journal 188 (1988): p.

14Peers, Alexandra. "Investors' Worries in Turn Heighten Volatility of Market". Wall Street Journal (Oct. 23, 1987): p.29 "US Subprime Mortgage Crisis 2008". Economy Watch. 22 Nov. 2008