It came to him in the bathtub, though the phrase was coined by a professor at Yale. One doesn’t necessarily like to imagine someone like the chair of the Federal Reserve in the bathtub, but we all get ideas in the bath or shower, so there you are. The phrase itself was uttered in a speech to the American Enterprise Institute twenty years ago this coming December. The phrase was “irrational exuberance,†and the speaker was Alan Greenspan. He was referring to what he believed were the unrealistic valuations of dot-com companies. It was, he believed, a speculative bubble. Irrationality seems inherent in financial speculation, an exuberant feedback loop if ever there was one, in which the gap between prices and value widens until there is crisis and crash.
Humans behaved this way even before the shell game of our current financial system was invented, attaching insane values to real world objects. The first documented speculative bubble was Tulip Mania, which peaked in 1637. Though we think of tulips as a very Dutch thing, they were actually new to Europe at the time, imported from the Turkish realm of Suleiman the Magnificent. According to Charles Mackay’s contested 1841 account, at one point during the Dutch frenzy, a single bulb was traded for twelve acres of land, or the amount a skilled craftsman would earn in ten years. Then, the bubble burst, wrecking the Dutch economy. Continue reading “Exuberant Reconciliation”