THE MAGAZINE FOR THE FUTURE BY TÜV SÜD

WHAT DO TULIPS AND REAL ESTATE HAVE IN COMMON?

TEXT THOMAS SCHMELZER
PHOTO GETTYIMAGES/KARL HENDON

—— Sybille Lehmann-Hasemeyer, explains the serious consequences that speculative bubbles can have.

Professor Lehmann-Hasemeyer, what do tulips, real estate and cryptocurrencies such as bitcoin have in common?
———— They are all objects of speculation that have triggered bubbles. Sometimes with very serious consequences, such as the global economic crisis that began in 2007.
What exactly is a speculative or economic bubble?
———— Such bubbles can occur with goods, stocks, real estate, currencies and almost anything else. Often the price of a good becomes very far removed from the actual value of the product. Although the material value of art, for instance, is also often not equal to the value of a painting, this is not called a bubble. In contrast to art, objects of speculation that trigger bubbles often represent something “new” or mysterious that promises large profit margins.
Just like tulips once did.
———— Yes. They arrived in Amsterdam in the seventeenth century and were completely different than other flowers. They were more colorful and the colors were unpredictable due to a virus. Cryptocurrencies also have something mysterious and unknown about them, which makes them interesting. They are also scarce. Tulips can also only be grown very slowly, and real estate is in short supply, especially in metropolitan areas. Whenever there’s a large demand facing a small supply, prices shoot up.
This is classic market economics. When does it become a bubble?
———— That’s difficult to predict. Even if you know all the warning signs and the price is obviously out of proportion to the product, that is when what is known as “riding the bubble” begins. Speculators get into the game to get a piece of the pie, hoping to get out before the bubble bursts. It’s a risky game. The South Sea Bubble in England in the eighteenth century even cost such brilliant minds as Newton a lot of money. At the time, a stock market frenzy sprung up around the South Sea Company, which was trying to finance the British government’s debts by issuing its own shares at even higher prices.
Are speculative bubbles always dangerous?
———— How dangerous they are depends on how the bubble is financed: with debt or with equity.
Do we never learn, or else why have we been speculating for centuries?
———— It’s not always easy to recognize a bubble. They often occur at times when there is a lot of money in circulation and the economy is growing—which encourages risk-taking. The hope of being among those who will earn a lot of money is contagious—and leads to herd speculation.
Then how can we protect ourselves from bubbles?
———— By monitoring the markets and taking minor countermeasures early on. For instance, by raising interest rates. Real estate bubbles could be contained with government housing construction or price controls. What’s important is that speculative objects are only financed by debt to a limited extent.

MORE ARTICLES