Bubbles Are Not The Problem

1.) In the realm of public policy, some individuals argue that “bubbles” are not the problem, but they are the solution. I must firmly disagree with that belief. Before I state why I disagree, let me first define what a bubble is in this context. The bubbles we are talking about are not the ones you have in a bubble bath or the ones that form when you blow into your toy you had as a child. Bubbles, in an economic sense, are an economic cycle characterized by rapid expansion followed by a contraction (Investopedia). The most recent example of a bubble would be the United States Housing Bubble that occurred during 2007-2009. A quick summary of what happened was housing prices rapidly rose the years prior to the crisis, and fell as fast as they went up.

Now to why I believe bubbles are not the solution. If bubbles are the solution, then there should have …show more content…
The bubble I am talking about is the Dutch Tulip Bubble that occurred from November 1636-Feburary 1637. What happened during the Dutch Tulip Bubble was tulip prices increased twenty fold then eventually decreased more than that in three months (Xiong). If bubbles are the solution, then governments should have learned from this historic lesson and recognize rising bubbles before they burst. Bubbles do not appear out of thin air.

Bubbles have stages that can be used as an early warning signal for governments to act. The stages are: displacement, euphoria, mania, distress, and disaster (In Class Notes). Displacement is the initial movement in prices. Usually, this stage shouldn’t be too much concern because if there is a