The man who exchanged his house for a tulip II: Tulips fever
Tuesday, August 18, 2009 @ 7:28 PM
Trias de Bes explains in his “El hombre que cambió su casa por un tulipán” ( The man who traded his home for a tulip, Ediciones Temas de Hoy 2009) that in Holland during the seventeenth century, there were bourgeois who pledged his house, his one year´s salary for ... a tulip bulb who was suppossed to flourish after a few months.
The business worked fine for several years........
[A simple mechanism:
Mr. Van A gave 10 for the option to buy a tulip ( a bulb actually) with the commitment to pay the rest of the price (100) at the flourishing of it.
Mr. Van A sold the bulb to Mr Van B for 20 and this committed to give 200 to Mr Van A at the flourishing of it
And successively...]
till, no one knows exactly way, even several hipothesis being in place, the speculative market fell down to a real market where the tulip was worth ..... “a tulip”.
It should be noted that the tulips were at that time a symbol of social and economic distinction between the Dutch bourgeoisie.
Sounds familiar?
As "lessons" of the tulip bubble Trias de Bes exposes:
- Deferred payments encourage the increasing of prices as it enables to buy and resell goods or assets in exchange of minor disbursements.
- It is dangerous to speculate from intermediaries at prices that no one pays on the final market yet.
-Bubbles fatten in objects of desire that people surround with glamor
- The unsustainability of the price is not questioned. It is just assumed that prices will continue its meteoric rise: it can be offered a home for a tulip if you think the tulip is going to rise in price.
- In a speculative market professionals come from other industries, leaving their usual occupations.
( to be continued with the Bubble of South Seas)
Tulips in Madrid by chrisbastian44 at flickr.com