Introduction
Hardly there is a person nowadays who had not at least heard about stock markets, shares, and bonds. In the financial sphere, the desire to gain enormous profits often outweighs common sense and moral values. In the chapter “Blowing Bubbles,” Niall Fergusson traces back the history of stock markets, focusing on frauds and the most outrageous financial bubbles in the Western world.
Fergusson notes that the joint-stock limited liability companies made possible the emergence of modern stock markets and respective financial schemes. In spite of being under the formal control of shareholders, the joint-stock company is strongly influenced by the stock exchange operations. The author states that “stock markets are mirrors of the human psyche” (Ferguson, 2008, p. 121), they are characterized by dramatic fluctuations. The bubble comes out when the investors seek easy profits while swindlers become eager to cheat them. When it turns out that the expected benefits do not correspond with the declared price for shares, the crafty insiders begin to sell the shares away. After share prices start to plummet, the outsiders try to quit, and the bubble bursts. Among other key features that make for the bubbles, Fergusson defines asymmetric information, cross-border capital flows, and easy credit creation (2008, p. 122).
Chapter analysis
Exploring the history of the greatest stock market bubbles, the author tells the extensive story of John Law of Edinburgh. Fergusson characterizes him as “an ambitious Scot, a convicted murderer, a compulsive gambler and a flawed financial genius” (2008, p. 126). Driving the conclusions from the XVII century limited liability Dutch United East India Company (VOC) and his unsuccessful experience in England, Law travelled to France and thanks to his cunning and shrewdness became one of the most prominent financial gamblers in European history. The French governors accepted Law’s idea of a private bank issuing paper money. It was later transformed into the Royal Bank of France, and Law used it to sell assets not secured by the state gold. Eventually, Law’s machinations ended in enormous inflation; the shares depreciated, the massive monetary bubble burst and the notorious bank, as well as subordinate Mississippi Company, was closed. In England, there was a similar crash of the South Sea Company, but this crash was much smaller because of the strong regulation of the monetary system by the government.
The XX century was the richest one for stock market crashes. Among those crashes, the author defines the crash after World War I and the Great Depression. A big number of prerequisites of the crises can be named with the Federal Reserve System’s restrictive regulation among the decisive ones. Fergusson concludes that the primary lesson history gives us is that “inept or inflexible monetary policy in the wake of a sharp decline in asset prices can turn a correction into a recession and a recession into a depression” (2008, p. 163). However, even with the most solid knowledge, it is impossible to predict stock market crashes.
The author finishes the chapter with the story of the Enron company crash. Its founder and head Ken Lay was very much the same as John Law. Lay wanted to “make gold out of gas” (Fergusson, 2008, p. 169) by creating the so-called Energy Bank, an intermediary structure between gas producers and consumers. Enron bought out assets all over the world and sold them at higher prices and masterly concealed its debts. When 2001 the bubble burst, it turned out that the company’s debt was $38 billion dollars and not $13 billion as declared.
Conclusion
Overall, it can be said that both joint-stock limited liabilities companies and stock markets are a significant achievement of the world economy. The issue of the crashes and financial crises can be explained mainly by the dishonesty and greed of particular company owners, as well as by the state’s ill-considered monetary policy.
References
Ferguson, N. (2008). The ascent of money: A financial history of the world. New York, NY: The Penguin Press.