The Bubble for ‘Bubble’ Knows No End

August 24, 2013

The Bubble for ‘Bubble’ Knows No End
Wall Street Journal, Aug. 24, 2013 (PDF)

President Obama has gone on an anti-bubble offensive. In a series of speeches earlier this month, Obama warned of duplicating policies that led to the housing bubble and its inevitable burst. He said he wants a Fed chairman who “makes sure that we’re not seeing artificial bubbles in place,” and the next day he spoke of the need to “turn the page on the bubble-and-bust mentality.”

Jeremiads against financial “bubbles”—speculative schemes that inflate equity prices before a sudden selloff—have been commonplace for nearly three centuries. The “bubble” metaphor is often attributed to Jonathan Swift, who wrote a poem in December 1720 about the South Sea Bubble, which ruined British investors in the South Sea Company: “The nation then too late will find,/ Computing all their cost and trouble,/ Directors’ promises but wind,/ South Sea at best a mighty bubble.”

A stroll through historical newspaper databases, however, reveals that complaints about “bubbles” filled London journals for a year before Swift penned his verse. The South Sea Company, which had been granted a monopoly on commerce with Spain’s South American colonies, wasn’t the only source of bubble-bursting. Months earlier, the French economy had been thrown into chaos by the Mississippi Scheme of Scottish economist John Law, who had become France’s controller-general of finances.

On Dec. 12, 1719, Nathaniel Mist’s Weekly Journal published a letter from a correspondent calling himself “Anti Bubble.” After satirizing financial intrigues as “new and old bubble,” and even “hubble bubble,” he inquires, “Now, good Mr. Journalist, tell us, since Bubbles are so much in Fashion, what Bubble will come upon the Stage next? And how must an honest Man do among them all, that he may not be bubbled out of his Money?”

Who was the mysterious “Anti Bubble”? All signs point to Swift’s literary colleague Daniel Defoe, who wrote for Mist’s newspaper under various pen names. Ross B. Emmett, a professor of political economy at Michigan State University and compiler of the three-volume work, “Great Bubbles,” told me that Defoe’s weekly contributions were “full of concocted stories” about entrepreneurs manipulating the stock market based on false pretenses. But soon Defoe’s “bubble” talk came to be applied to the real-life schemes of the Mississippi and South Sea trading companies.

It helped that “bubble” was in use as a verb meaning “to cheat.” For investors bamboozled by promises of great wealth, the noun “bubble” was a perfect fit. As Charles Mackay wrote in his 1841 classic, “Extraordinary Popular Delusions and the Madness of Crowds,” the “bubble” nickname was “the most appropriate that imagination could devise.” And we can evidently thank Defoe’s imagination for devising it.

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