Paul Sheeran - The International Political Economy of Investment Bubbles

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THE INTERNATIONAL POLITICAL ECONOMY OF INVESTMENT BUBBLES

good business is the best art... Andy Warhol

The International Political Economy of Investment Bubbles

Paul Sheeran
King Alfreds University College, Winchester

Amber Spain
Goldenberg Hehmeyer and Company

First published 2004 by Ashgate Publishing

Reissued 2018 by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
711 Third Avenue, New York, NY 10017, USA

Routledge is an imprint of the Taylor & Francis Group, an informa business

Paul Sheeran and Amber Spain 2004

Paul Sheeran and Amber Spain have asserted their right under the Copyright, Designs and Patents Act, 1988, to be identified as the authors of this work.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers.

A Library of Congress record exists under LC control number: 2003025120

Notice:
Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe.

Publishers Note
The publisher has gone to great lengths to ensure the quality of this reprint but points out that some imperfections in the original copies may be apparent.

Disclaimer
The publisher has made every effort to trace copyright holders and welcomes correspondence from those they have been unable to contact.

ISBN 13: 978-0-815-39788-5 (hbk)
ISBN 13: 978-1-351-14636-4 (ebk)

Contents

Guide

The pages that follow are concerned with fear and greed and the everyday struggle associated with the rapid acquisition of money. Faith, hope, trust, deception and stupidity are referred to, not in judgement, but as factors that influence the possibilities of speculation. Opportunism and chance are part of the investment process, but they do not form the exclusive pillars that determine success or failure. The phenomenon of speculation and its profitable outcome is influenced by a variety of factors, which multiply with animated activity.

The overriding need in this book is to understand the development and collapse of bubbles within the context of international political economy. The knowledge related to recognising why bubbles intensify nearing the peak (why do they pick up force and collapse suddenly?) is important to financial, economic and political policy through the nature of the damage it causes. The need to have forecasts to assess the potential instability of a bubble is therefore relevant to politicians, economists, investors and regulators.

The International Political Economy of Investment Bubbles includes an historical analysis to assess the growth and collapse of financial bubbles. The wider political, economic and social consequences arising from the emergence and collapse of bubble investments is introduced to explore the international ramifications of speculative financial acts.

A complementary but no less substantial concern is to analyse the formulation and application of legislation that may follow huge losses and gains. The connections between investment, politics and economics, both within and between states, will be linked and examined.

The content of the book fulfils several related aims. It assesses the growth, maturity and demise of investment bubbles. The analysis makes clear the collapse of investment bubbles, which invariably results in political and economic instability of some kind. It is suggested at the outset that the positive and negative direction of investment bubbles is influenced by the presence and intervention of power and authority. The point of reference is shaped around the debate on market volatility. Are spectacular booms and busts related to crowd behaviour or are bubbles driven, manipulated and deflated by cunning (the power exercised by key investors and institutions)?

The book seeks to identify the patterns and trends in speculation vis--vis the operation of power. The nature of power, its relevance to investment bubbles and its limitations in manipulating the markets, will be, in the pages that follow, considered in-depth.

Speculative Investment

Spectacular booms and busts have been studied elsewhere. Charles Kindleberger's well-known text, Manias, Panics and Crashes, written in the late 1970s looks incisively back on a range of investment adventures and events. This book differs significantly from Kindleberger. As well as presenting a study of the role of power in investment bubbles, it adds original value through an analysis of:

1. the fundamentals that underpin financial decisions and activity in relation to investment bubbles
2. the rationale of domestic and international regulation introduced as a measure to limit financial turbulence throughout the markets
3. the relationship between the dotcom bubble and the telecoms industry
4. the models that contribute to the understanding of financial movements and theoretical approaches that unravel bubble activity
5. the response to financial irregularities such as fraud and malfeasance
6. the political, economic, social, technological, legal and cultural factors that impact on the markets and shape possibilities
7. the degree of transparency in corporate balance sheets
8. the risks that prevail in speculative advantage
9. the role of experts and related financial advice
10. the relevance of ethics in business

Investment bubbles are notoriously difficult to define, but a surge in or fatigue of speculative activity is observable in a range of historical markets. In this context, finance is incorporated in economics via investment. It should be kept in mind that the basic fundamentals of all asset prices are expectations about the discounted value of future cash flow from investment. Bubbles could be interpreted through the examination of poor decision forecasting, but other factors need to be considered. An historical approach to previous 'bubbles' will be introduced to compare and contrast, and refute the appearance of speculative bubbles. It is intended that the subsequent analysis will provide a platform from which to assess the vagaries of speculative advantage. The actions that underpin a rapid escalation in investment or a flight from it need to be made clear because they severely affect both institutions and private investors and often lead to financial regulation in some form. Pettinger provides a useful definition of investment:

Investment is anything on which a return of any sort is anticipated. Thus people invest time, energy, resources, and also personal interest and commitment in ventures, as well as money.

The bubble phenomenon may indicate animation in speculative activity as it accelerates and reaches widely through an economy, a wave that creates a vacuum motored by speculation and enthusiasm. For example, the Dutch tulip mania in 1634 and the French Mississippi Bubble in 1717 demonstrate the infectious nature of speculation and the destructiveness associated with the fever. In seeking to understand the role and operation of power within speculative acceleration, the activity of social identity a person's sense of who he or she is in relation to groups and crowds, is an important component in the study of investment bubbles. In light of the spectacular gains and losses of the dotcom bubble, it would appear that few lessons have been learned from the bubbles of the seventeenth and eighteenth centuries.

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