Transcript
[Sound of bubbles]
NARRATOR
So what exactly is the definition of a bubble?
DAVID LLEWELLYN (Loughborough University)
People buy simply because they believe that everybody else is going to buy. You get what is called a bandwagon effect and from time to time you then get a situation where prices go far too high and that is really what we call a bubble.
NARRATOR
Bubbles are characterized by volatility with shares swinging from wildly over to wildly under priced often in a matter of minutes.
MARIANA MAZZUCATO (The Open University)
Robert Shiller from Yale University talked about bubbles arising from irrational exuberance and what he’s done to actually measure bubbles is he’s defined excess volatility to mean the degree to which stock prices are much more volatile than the underline fundamentals, which in theory they are tracking.
NARRATOR
There are also more specific types of bubble.
JAMES MONTIER (Author, Behavioural Investing)
The first form of bubbles are what we call bubbles of belief or fads. These are bubbles that are really driven by hype.
NARRATOR
The tulip bubble in seventeenth century Holland was a good example of this. Flowers were traded for up the ten times the annual wage of a skilled craftsman or in exchange for a six bedroomed house. One bulb sold for six thousand Dutch florins at a time when a ton of butter was just one hundred. In 1637 prices collapsed meaning they were no more valuable than onions. Britain’s South Sea bubble of 1720 was another bubble of belief. Set up to trade in South America, the South Sea companies’ promise of huge growth lead to fevered speculation.
MARTIN WOLF (Chief Economic Commentator, Financial Times)
Sir Isaac Newton who bought shares in the South Sea bubble, made an enormous amount of money, sold the shares. He was fine and then he saw it going on up and he bought again and he lost it all.
NARRATOR
After losing twenty thousand pounds he observed that he could, ‘Calculate the movement of the stars but not the madness of men’. James Montier calls the next type of bubble an intrinsic bubble.
JAMES MONTIER
These are bubble in fundamentals rather than actually bubbles in prices. So behavior of the financial sector in the last seven or eight years might be regarded as an intrinsic bubble because they geared up - so it looked like they were actually profitable but in fact it was all just leverage.
[CRASH]
NARRATOR
Another type is known as an informational bubble
JAMES MONTIER
Certain parties in the market will know things that other parties don’t and they may not transact on that information. So not all information is properly reflected in prices. They tend to be very stock specific rather than market level events.
NARRATOR
On a wider market level, the price increases in the U.K. housing from the mid 1990s until 2007 are seen by many economists as a classic bubble.
JOHN CALVERLEY (Standard Chartered Bank)
In my view the big rise in house prices in the U.K. and some other countries in the last ten years is a bubble. Some people argue that with the low interest rate environment we’ve had in the last several years, with the lack of housing supply and so on that the high prices of houses are justified. I don’t think that’s right. I think that what’s happened is we’ve seen people convinced that house prices would forever raise and they’ve been buying bigger houses and more expensive houses that they otherwise would need. And so we’ve had an excess demand created by the view that house prices would always go up. I think, for me, that justified calling it a bubble.
[Bubble sounds]