Speculation and bubbles are eternal, only the object varies

A bubble will always follow its own rhythm, fundamentally unchanged in character throughout the centuries, from speculation in tulip buds in Holland in the seventeenth century, to today’s speculation in US, British, Irish and Spanish house prices. The first phase is usually engineered by an exogenous event which enables speculation in higher future prices. Financial bubbles have most often followed deregulations, which create new possibilities but also new risks, of which the financial actors have not always been aware. The thrift crisis in the USA in the 1980s, the Japanese, Asian and Nordic crises of the 1990s, and today’s crisis all bear traits of this type. We will return to their history in . Many want to see the changed legislation of 1999, which repealed the separation between commercial banking, investment banking and insurance (the Glass-Steagall Act of 1933), as one of the main drivers behind the subprime crisis.

As pointed out earlier, the move from organized and regulated credit markets in banks and investment banks to the “shadow banking system,” with the ensuing loss of supervision, may also be characterized as an act of deregulation, albeit unintended. Some important financial units escaped supervision altogether, such as the London-based financial products division of the US insurance company AIG.