2 A BRIEF HISTORY OF BUBBLES
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price bubble collapsed. Temin and Voth (2004) argue that some investors, in special Hoare’s Bank, were aware of the existence of the bubble and they could profit from it. In other words, the bank rode the bubble until it knew that were no more fools willing to enter into the market. Other investors did not fare that well and lost a lot of money in the South Sea Bubble. One famous investor was Isaac Newton, who purchased shares of the South Sea Company close to the top and lost 20.000 pounds (see, Kindleberger and Aliber 2005). To have a sense of the magnitude of the South Sea bubble, Temin and Voth (2004) docu ment that the (log) decline in the stock of the South Sea Company was 2.12. They compared this fall with the decline in the stock price of Cisco during the Dot-Com Bubble. Cisco is a poster child of the DotCom Bubble episode and it experienced a (log) fall in the stock price of 1.49. Note that this decline represents only about the 70% of the collapse in the stock price of the South Sea Company. To summarize, the South Sea Bubble started with a financial innovation that attracted new and inexperienced investors into the market and ended up when enough investors understood that the profits of the company were based on a Ponzi scheme. Our review of famous asset price bubbles concludes with the DotCom Bubble. In this case, the bubble was attached to technological companies. It is not clear when it started (the general consensus is around 1996) but we are certain of when it burst (March 2000). We can use the Nasdaq index to quantify the size of the bubble. The (log) decline in the index between the peak (March 2000) and the bottom (September 2001) was 1.11.2 Kindleberger and Aliber (2005) explain how, during this episode, technological firms had seemingly unlimited funding from venture capitalists before the companies went public (i.e., before their initial public offering, IPO). Since, in most cases, after the end of the first trading date, the price of the stock was higher than the IPO, venture capitalists were happy to borrow to lend money to the start-up Dot-Com firms. This funding activity would be positive for the overall economy if only productive firms received these funds. However, it can be negative if firms receive funds only because they are labeled as technological and promise big returns in the future. An illustrative example of this second type of firm is the (short) history of Pets.com. 2 Data on the Nasdaq index is obtained from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/NASDAQCOM.
