Financial speculation

In his 1990 book named A Short History of Financial Euphoria, economist John Kenneth Galbraith outlines what he sees as the patterns in speculation since the Tulipomania of 1636-1637. A nice little review is here.

Specifically:

  1. Individuals and institutions are captured by the wondrous satisfaction from gaining wealth.
  2. People believe (wrongly) that those associated with large amounts of money are intelligent.
  3. This upward lift creates a speculative bidding up (bubble) in land, securities, or art which reinforces itself until…
  4. …the inevitable mass disillusion and the crash.

This cycle is very evident in franchise systems and those investment schemes that rely on franchising as a means of marketing.

The current Blue Chip situation in New Zealand is instructive. A recent article from the New Zealand Herald indicates:

Blue Chip Financial Solutions advanced “substantial” deposits from investors to a company owned by the property scheme’s co-founder Mark Bryers, a 2005 independent report says.

The PricewaterhouseCoopers appraisal report, written for Blue Chip as it considered buying several companies from Bryers, said as at June 2005 the “vast majority” of these deposits were advanced on an unsecured basis to Bryers’ property development company Ingot Holdings. Blue Chip raised eyebrows in 2005

Total losses? A newly revised minimum of $84-million for 3,000 Mom-and-Pop real estate investors.

BTW: All perfectly legal, I assure you. Only the finest NZ and AU legal and accounting minds were used in baking this cake. Everything is legal unless a specific law exists to make it illegal. And then you’ve got to investigate, charge and prosecute the law breakers.

Oh well, so it goes.

Dr. Galbraith taught at Harvard University for many years, won the U.S. Presidential Medal of Freedom (twice) and was born on a farm in southwestern Ontario, Canada.

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