I'm forever blowing bubbles, Pretty bubbles in the air.
They fly so high,
Nearly reach the sky,
Then like my dreams,
They fade and die.
Fortune's always hiding,
I've looked everywhere,
I'm forever blowing bubbles, Pretty bubbles in the air.

From the song: I'm Forever Blowing Bubbles, Lyrics by: Jaan Kenbrovin

Unless you've been living in a metaphorical bubble, you can't help but be aware of the state of our economy.

Recently, the nation experienced a spectacular housing bubble; a speculative purchasing mania that ultimately resulted in a crash in housing prices, in some cases more than 50%. We're feeling the effects of that bubble today. And, if history is any indicator, we'll be feeling the effects for years to come.

About a decade ago we had the NASDAQ "tech bubble" crash. This speculative mania took prices on the NASDAQ stock exchange to extraordinary heights and then, voila, a crash, down 70%. We're in historic times, with two bubbles within a decade.

History has only recorded a handful of national-scale speculative bubbles in the last four hundred years. If history is any teacher, there seem to be certain patterns to these speculative manias, and lessons to be learned. Let's take a look.

A speculative bubble is (from www.yourdictionary.com): "A rapid but often short-lived run-up in prices that is caused by irrational exuberance, rather than the basic underlying fundamentals of the market. As the speculative bubble increases, more investors are likely to buy, until it appears that 'everyone' believes prices will rise further. When the bubble finally bursts, prices fall even faster than they rose, with everyone rushing to sell at the same time, which produces widespread and severe losses."

It's fair to say that if you've been following our recent manias and crashes, you've become somewhat of a bubble specialist, bubbleologist if you will. You're not alone. A Google search for "financial bubbles" produced 12 million hits. Bubbles have become party talk. Talk of the next bubble has replaced talk of our favorite tech stocks, or chatter about "house flipping," at social gatherings.

However, bubbles are not new to this century or even the last. They go waaaaay back. In fact, the first recorded bubble wasn't about houses or stocks, the first speculative bubble occurred more than four hundred years ago and involved flowers. That's right, flowers!

Holland's tulip mania in 1637 is considered to be the first recorded speculative bubble in history. Holland was entering its golden age, with artists like Rembrandt rising to prominence. The economy was booming, the world was being explored and the sciences were on the cutting edge. It's no wonder that when these new and exciting flowers with their vibrant colors were brought in from the middle east, they were a "must-have" item.

As demand grew, growers paid higher and higher prices for the bulbs; speculators entered the market, and the rest, as they say, is history. By the time the bubble collapsed, prices had - in the period of one year - risen about 2000% and collapsed down to their original price! To this day, the word "Tulipmania" is often used when describing a bubble or potential bubble.

In the early 1700s, two bubbles arose simultaneously - the South Sea Company (Britain) and John Law's Mississippi Company (France). In the case of the South Sea Company, a monopoly was established over trade with the Spanish colonies in South America.

Goods such as gold, jewelry and slaves were to be traded for wool and fleece clothing. Stock was issued, a speculative mania developed which eventually involved the British government's own debt level and, well, that was bubble number two.

Again, as in the tulip bubble, prices for shares in the South Sea company had risen to dramatic heights (1000%), and then almost overnight, collapsed. Fortunes were lost (including that of Sir Isaac Newton), and the British economy was decimated.

Bubble number three is the stuff that movies are made of. John Law was a convicted murderer from Scotland. He escaped and made his way to France. Over the years while living in France, he managed to worm his way into government finance. In fact, he wormed his way all the way up to a top finance position and was named Controller General of Finances.

Through some wheeling and dealing, the Mississippi Company was established, stock was issued and soon people were lining up to buy shares. Apparently - according to word on the street, there were riches to be found. All the trading company had to do was send a ship over to France's possession in what is now Louisiana, trade with the local friendly Indians in the area and bring back a ship full of bounty.

The reality was that nothing could be further from the truth. But fortunes were made through misinformation and wild speculation. This speculative frenzy came tumbling down in 1720, leading to an economic collapse in France. John Law died in poverty in 1729.

Move forward two hundred years and we have bubble number four; the one we all studied in school - the stock market crash of 1929. Fueled by easy money and a get-rich-quick mentality, the 20's were truly roaring. As in all bubbles, there was this desire on the part of the public to get in, to be part of the action; a classic herd mentality.

This bubble collapsed and created what is referred to today as the Great Depression, lasting a decade. Stock prices did not see their 1929 highs until 1954.

Bubble five brings us up to recent memory. The tech bubble was a repeat of the 1929 crash with easy money (low interest rates), a speculative fervor, mixed in with the herd mental-ity, all the ingredients of the classical bubble and collapse. A decade later the NASDAQ is still down 50% from its old highs.

This brings us to bubble number six, the housing bubble, the granddaddy of all bubbles. In 2005, the Economist magazine had described it as the "greatest bubble in history."

The ingredients to the recipe: easy money, speculative fervor, herd mentality, and "irrational exuberance," (to quote Fed Chairman - at the time - Alan Greenspan). What makes this bubble different from tulipmania, the South Sea company or John Law's schemes is that the housing crash is a world-wide event. If history is any guide, with bubble six, we can expect a significant long-term setback to the world economy, requiring perhaps a decade or so to repair the damage and recover. We should soon see home prices return to pre-bubble levels and stabilize for the foreseeable future.

The world is much more complex and interdependent than in the roaring twenties or when tulips were all the rage. When you have "the greatest bubble in history," expect the greatest economic fallout in history, too.

Are there any lessons to be learned from this? For me, I'm going to head to the local nursery and get some tulip bulbs, ones with dazzling colors, plant them and watch them grow. As the politicians explain day after day that all is well, they have a plan, that if we go into greater and greater debt, our problems will be solved, I'll glance at my tulips and say: yea, all is well ... the ol' tulips are lookin' good!

Robert Ross can be reached at: SanDiegoRoss@Yahoo.com

© 2010 by Robert Ross, all rights reserved