Hello and welcome to the Deep Dive. Glad to be
here. Yeah. So our mission today, well, today
we are unpacking a single incredibly potent phrase.
Just a two -word phrase. Right. A phrase that
basically redefine modern economic history, market
trends, and human psychology. The famous phrase.
Irrational exuberance. There it is. Yeah. We're
going to unpack the psychology and the actual
mechanics of financial bubbles. Right. And we
have a lot of ground to cover. We really do.
We're looking at the 17th century tulip mania,
the South Sea bubble, historical gold rushes.
The dot com crash. Oh, yeah. The dot com crash,
the 2008 housing bubble, right up to modern cryptocurrency
frenzies. It's a massive historical sweep. And
to do this, our primary source today is this
very comprehensive Wikipedia article detailing
the concept of irrational It has this amazing,
extensive historical taxonomy of market panics.
It does. It lists all of them. And we're going
to use it to discover how things like systemic
market optimism, speculative contagion, and this
linguistic labyrinth known as FedSpeak drive
the boom and bust cycles of capitalism. Which
is why this matters directly to you. the listener.
Exactly. Because whether you are looking at your
retirement portfolio in the stock market, or
trying to buy a house in a crazy housing market,
or just wondering why everyone around you is
suddenly obsessed with some new tech trend. Like
crypto or AI. Right. Understanding the mechanics
of unfounded market optimism. That is basically
your ultimate shortcut to making sense of financial
chaos. It's how you protect yourself. OK, let's
unpack this. We have to start with just the sheer
absurdity of the premise here. It is pre -wild.
How did a phrase that was reportedly thought
up in a bathtub by a famously boring central
banker manage to immediately crash global stock
markets? It's basically the ultimate butterfly
effect in finance. Right. December 5, 1996. Set
the scene for us. OK, so. Alan Greenspan, who
is the chairman of the Federal Reserve Board
at the time. The most powerful central banker
in the world. Exactly. He's giving a televised
speech at the American Enterprise Institute.
And we have to remember the context here. Yeah.
It's late 1996. The mid 90s dot com bubble is,
I mean, it's. just starting to inflate aggressively.
Tech stocks are going crazy. Capital is flooding
into the Internet. And Greenspan's speech is
titled, The Challenge of Central Banking in a
Democratic Society. Which sounds like a cure
for insomnia. Truly. Under normal circumstances,
nobody on a trading floor is paying attention
to that. But tucked into this super dry academic
speech about fiat currency and policy frameworks,
he drops this highly specific observation. And
he asks this rhetorical question. Right. Here
is the exact quote from the source. But how do
we know when irrational exuberance has unduly
escalated asset values, which then become subject
to unexpected and prolonged contractions as they
have in Japan over the past decade? What's fascinating
here is the market's instantaneous reaction to
that academics raising. They really did. Because
Greenspan wasn't announcing a policy change.
He wasn't saying, hey, we are raising interest
rates today. He was basically just expressing
a feeling, an abstract concern about systemic
overvaluation. But traders don't care about his
feelings. Right. Traders trade on probability.
And they heard the chief architect at the US
economy warning them that stocks were overvalued.
And because Tokyo is hours ahead of Washington,
the Nikkei 225 market was actually open and actively
trading while he was standing at the podium.
Oh, the timing is just incredible. Within minutes
of him just saying the words irrational exuberance,
the Tokyo market just drops. It eventually closed
down three percent. And then it spread. Yeah.
As the sun rose, global markets followed suit.
The contagion just ripped westward. And honestly,
the logic makes sense from a trader's perspective.
How so? Well, if the Fed chair thinks asset values
are unduly escalated, the logical next step is
that he's going to hike interest rates to cool
things down. Right. And higher rates mean stocks
go down. Exactly. So they were front running
the panic. They liquidated their positions immediately.
Which brings us to this incredible visual highlighted
in the sources. Greenspan actually admitted later
in his 2008 book. The Age of Turbulence, right?
Yeah. He admitted that this world -shaking, multi
-billion dollar phrase literally occurred to
him while he was sitting in the bathtub writing
the draft. Just a guy in a tub. Yeah. And he
accidentally triggers a global sell -off. It's
hilarious, but to really appreciate the irony
of this we have to talk about how Greenspan usually
communicated. Oh, this is crucial. Right. Because
this leads us to the whole concept of Fed speak,
or green speak, as they called it. He was the
absolute master of it. He was. The goal of Fed
speak was intentional obfuscation. He wanted
to be confusing. Exactly. He would use these
incredibly long, complex, labyrinthine sentences
with passive voice and obscure jargon. The goal
was to intentionally mute any strong market response.
Right. Because if he was clear, the market would
react and the Fed hates volatility. But this
era of him trying to be as boring and confusing
as possible, it collided with a massive change
in the media. The rise of financial TV. Yes.
The 1990s saw the explosion of channels like
CNBC. 247 financial media. Right. So this raises
an important question about how the medium changes
the message. Right. You have the Fed chair. actively
trying to give zero useful information to the
market. And on the other hand, you have live
television and thousands of traders dissecting
every single syllable he utters in real time.
They were desperate for any edge. So when he
drops a phrase like irrational exuberance into
that hyper scrutinized environment, it just completely
bypassed all his usual linguistic defenses. It
was emotional language. It wasn't clinical. He
accused the market of acting like gamblers. I
mean, think about the pressure of that, having
your every complex sentence scrutinized by millions
of people just looking for an excuse to buy or
sell? It's a profound burden. But here's where
it gets really interesting. Greenspan might not
have actually invented this phrase entirely on
his own. The plot thickens. Right. Our source
points to a very specific connection with Robert
J. Schiller. The Yale professor and Nobel laureate.
Yeah. So Schiller was reportedly Greenspan's
source. There's this story about a lunch they
had together. Right, before the 1996 speech.
Yeah. And apparently during this lunch, Schiller
was the one who contributed the word irrational
to describe the market. And Greenspan had already
been using the word exuberant to describe the
economic expansion. So Greenspan actually coined
the exact pairing of the two words, but it was
a collaborative effort. And Schiller really ran
with it. He published a seminal book in the year
2000, literally titled Irrational Exuberance.
Great timing, right at the peak of the dot com
bubble. The best timing imaginable. And in that
book, he provides the actual academic definition
for a speculative bubble. Let's hear it. He defines
it as a situation in which news of price increases
spurs investor enthusiasm, which spreads by psychological
contagion from person to person. Psychological
contagion. Yes. So if you are listening to this
right now, the easiest way to translate that
academic jargon is one simple acronym, FOMO.
Fear of missing out. Exactly. It's the ultimate
academic definition of FOMO. And Schiller breaks
down the components so well. First, you have
the initial news of a price jump. Someone gets
rich quick. Right. Then that news spreads person
to person. And it amplifies stories that are
used to justify the crazy prices. People start
saying, oh, it's a new paradigm. The old rules
don't apply anymore. Exactly. And that draws
in new investors who maybe even doubt the real
value of the asset. But they are pulled in any
way by what Schiller calls envy of other successes.
And the gambler's excitement. Right. It operates
exactly like an epidemiological virus. And Schiller
is famous for building mathematical models to
track this very human irrationality. Yes, the
Cape -E ratio. The cyclically adjusted price
-to -earnings ratio. He also co -created the
Case -Schiller Home Price Index. You wanted to
quantify the madness. Yeah. So what does this
all mean? If we have this solid definition of
psychological contagion and FOMO, how often does
humanity actually fall for this? According to
the source taxonomy. Yeah. Constantly. It's honestly
mind blowing. The source provides this massive
list of economic bubbles spanning centuries.
It's the rhythm of history. Let's walk through
this historical taxonomy, because the phrase
is linked to any financial asset bubble or social
frenzy going all the way back to the 17th century.
The Dutch tulip mania. Right. 1634 to 1637. People
always think of it as just trading physical flowers,
but it was so much more than that. It was early
derivatives, forward contracts on tulip bulbs
that hadn't even been pulled out of the dirt
yet. They called it the wind trade because no
physical asset changed hands, just paper and
leverage. And the amplifying story there was
the rarity of specific petal patterns, which
were actually just caused by a plant virus. But
the contagion drove the price of a single bulb
to the cost of a mansion in Amsterdam. And then
pop. The buyers refused to honor the contracts
and the whole thing collapsed. If we connect
this to the bigger picture, it shows that humans
have been experiencing irrational exuberance
long before the internet or CNBC ever existed.
Oh, absolutely. Moving from the commercial era
to the first industrial revolution, the source
lists the Mississippi bubble and the South Sea
bubble. both peaking around 1720. Those involved
actual sovereign debt and royal decrees. Yeah,
John Law in France basically printing paper money
backed by fake stories of gold in Louisiana.
Even Isaac Newton lost a fortune in the South
Sea bubble. Wait, really? The gravity guy? Yes.
He famously said he could calculate the motions
of heavenly bodies, but not the madness of crowds.
That perfectly sums up Schiller's point. Intelligence
doesn't protect you from psychological contagion.
Not at all. And then we move into infrastructure.
The 1790s canal mania. And the 1840s railway
mania in the UK. People buying railway shares
on margin, completely over capitalizing the industry.
And I just marvel at the sheer volume of rushes
and booms listed in this source. I mean, the
gold and silver rushes. There are so many. The
California Gold Rush, the Colorado Gold Rush,
the Klondike. It paints this picture of humanity
as a species that is just constantly running
full speed toward the next shiny object. Literally
shiny, in the case of gold. Right. And then moving
into the Second Industrial Revolution and the
interwar period, you've got the Indiana gas boom,
the Texas oil boom. And a fascinating one. the
1920s Florida land boom. Oh, the swamp land.
Yes. People were using what they called binders,
putting down a 10 % deposit on a piece of land,
just planning to flip the contract before the
rest of the money was due. Total leverage. And
driven entirely by the story that everyone was
going to move to Florida. until the buyers dried
up and a hurricane hit. It's all the exact same
contagion Schiller described. The only thing
that changes is the speed of information. That's
a great point. In the 1800s, contagion moved
at the speed of sailing ships and early telegraphs.
Today, it's instantaneous. Which brings us perfectly
to the modern era of bubbles where Greenspan's
phrase actually became a defining historical
marker. The dot com crash. The dot com bubble
from 1995 to 2000. The exact phenomenon he was
trying to warn about in that 1996 speech. The
source lists this massive graveyard of companies.
You've got your famous ones like Pets .com and
Webvan. Companies that had basically zero revenue
but astronomical market caps. Because they measured
success in eyeballs and clicks instead of actual
cash flow. And then some wilder names mentioned
in the source too, like Flooz .com. No. Cosmo
.com. Cyber Rebate. They are like monuments to
that specific era's gambler's excitement. And
we also have to mention the severe corporate
governance failures tied to this exuberance.
Enron and Worldcom. Right. The exuberance masked
systemic accounting fraud. So the NASDQ implodes.
Trillions of dollars in wealth just vaporized.
But then, according to the taxonomy, the losses
from the tech crash were quickly recouped. by
capital shifting into two new areas in the mid
to late 2000s. The commodities boom. And the
United States housing bubble from 2002 to 2006.
Right. Investors got burned by intangible tech
stocks. So they poured all their money into something
physical. Houses. Which leads to the 2007 recession
that wiped out all those gains. The Great Recession.
And that crash is what brought the phrase irrational
exuberance sharply back into the public eye.
It became the defining label for the excesses
of that whole era. It had a huge cultural footprint,
too. I mean, Jon Stewart's final episode of The
Daily Show before Greenspan stepped down in 2006
was literally titled An Irrationally Exuberant
Tribute to Alan Greenspan. That really shows
how deeply an academic economic concept permeated
pop culture. But it also brought a lot of criticism
onto Greenspan. Spann himself. Yes. And we need
to be very careful here to stick strictly to
our sources and remain impartial. Absolutely.
We are not taking sides on whether Greenspan
was a hero or a villain. We're just reporting
with the taxonomy and the historical debate highlight.
Right. So the debate essentially centers on whether
he did enough to contain those two major bubbles,
the dot com bubble and the housing bubble. Because
he was the chairman during the inflation of both
of them. Exactly. Critics argue that his policies,
specifically keeping interest rates very low
and pushing deregulation, created a moral hazard.
They say he created the very conditions that
allowed the irrational exuberance to run wild.
On the other hand, defenders argue he was dealing
with unprecedented global shifts like the internet
boom and that it's not the Fed's job to pop bubbles
only to clean up the mess afterward. And the
source points out that this ties into a much
broader ongoing argument about capitalism itself.
Are free markets actually rational and self -correcting?
Or are they structurally prone to these devastating
irrational panics? It's a debate that remains
completely unresolved. We are just presenting
the fact that the man who coined the warning
is now deeply scrutinized for the events that
followed. It's quite the paradox, but we've looked
at the past. What about the bubbles we might
be sitting inside right now? The information
age. Yeah, let's look at the modern era taxonomy.
In 2017, Robert Schiller, the FOMO expert himself,
called Bitcoin the best current example of a
speculative bubble. And the source taxonomy backs
that up with a whole list of modern potential
bubbles. We have the cryptocurrency bubble starting
in 2011. The everything bubble of 2020 and 2021.
The AI bubble starting in 2022. Plus the unicorn
bubble, the carbon bubble, the green mobile.
The social media stock bubble and even the U
.S. higher education bubble. If you synthesize
this list, a really striking pattern emerges
about where we are today. What's the pattern?
We are living in an era where the underlying
asset of the bubble doesn't even have to be physical
anymore. Like real estate or gold. Exactly. And
it doesn't even have to be a traditional company
like the dotcoms were. Right. It can just be
an algorithm. Or a decentralized cryptocurrency
ledger. or totally abstract concepts like unicorns,
which are just private startups valued over a
billion dollars based on nothing but venture
capital hype. Or social media clout. It's the
total abstraction of value. And if you, the listener,
want to maintain a level head, in an information
age that is literally engineered to induce this
exuberance, you have to recognize these patterns.
You have to see the envy. You have to see the
contagion. And the media amplification. Right,
because if you don't, you will get swept up in
it. I also want to mention some of the academic
terms, the source lists under the business and
credit cycle topics, because they describe the
ugly end of these modern bubbles. Hit me. They
talk about the Minsky moment. Which is what?
It's the sudden. catastrophic collapse of asset
prices when debt and leverage finally overwhelm
the system. It's the exact moment when systemic
greed turns into systemic panic. And the source
also mentions the paradox of thrift, right? Yes.
That's the deflationary aftermath. When the panic
hits, everyone individually does the rational
thing. Yeah. They stop spending and start saving
to protect themselves. But if everyone stops
spending at the exact same time, the whole economy
grinds to a halt. The rational individual choice
creates a destructive macroeconomic outcome.
A liquidity crisis. Exactly. But what's crucial
to remember is that no matter how clinical or
academic these economic terms get, Minsky moment,
liquidity trap, whatever. They are all just masks
for human emotion. Pure human psychology. Fear
and greed. Wow. OK, we have covered a massive
amount of ground today on this deep dive. We
really went from the 1600s to tomorrow. Yeah,
we summarized the journey of a single phrase
from Greenspan's bathtub epiphany to a global
market crash. We explored Schiller's psychological
contagion and the TPE ratio. We tracked centuries
of historical manias. Tulips, gold, railways,
real estate, dot coms. And finally, the modern
AI and crypto frenzies of the everything bubble.
But before we side off, I know you had a final
provocative thought you wanted to leave the listener
with to mull over. Something that builds on these
sources but looks ahead. I do. And it ties directly
to the suggested AI bubble currently on the taxonomy
list. OK, let's hear it. We have spent this entire
international looking at a vast history of human
panics, rushes, and booms. And all of them. Every
single one was driven by human psychological
contagion. Envy, fear, fed -speak, gambler's
excitement. Right. Human flaws. But looking ahead,
what happens when artificial intelligence becomes
the primary driver of market trends? We are talking
about entities entirely devoid of human emotion.
They don't feel envy. They don't get the gambler's
excitement. They just process data. Right. There
are cold calculators. So the question is, will
AI finally cure the market of irrational exuberance
because it strictly adheres to the math? That
would be the optimistic view. But here is the
darker possibility. What if AI algorithms simply
learn to mimic and exploit our human contagions
at lightning speed? What if the AI realizes that
human FOMO is the most predictable data set on
Earth? and it engineers the ultimate automated
bubble just to extract capital from our irrationality.
So instead of curing the disease, it weaponizes
it. Exactly. It's something to seriously consider
as these technologies take over our financial
systems. That is a terrifying and fascinating
thought to end on. Thank you to everyone listening
for joining us on this deep dive. It's been a
great conversation. As always, keep questioning
the world around you, keep an eye out for that
psychological contagion, and we will catch you
next time.