Definition Of Bubbles And The Reasons Why They Always Occurs (Coursework Sample)

Name:
Institution:
Course:
Date:
Marketing Bubbles
Questions
1 Definition of Bubbles and the reasons why they always occurs.
A marketing bubble or economic bubble refers to an investment scenario where investors put pressure on demand for goods and services in the economy leading to rising in the price of the goods beyond their shadow prices or rational reflection of their real worth. Marketing bubble dates back to a sixteenth century, and Economist has termed it as the most reoccurring monetary phenomenon. Economic bubbles keep occurring since investors place more hopes on the investment and have the notion that the bubble will never stop, however, the investment and money that was ventured soon vanish in thin away causing economic problems such as poverty, poor standards of living and loss of capital. A bubble crush is a response from the investment bubble when the average prices in the market significantly drop. Investors hurriedly try to leave the market at once by selling the shares or the goods at a loss to avoid being caught up in the bubble crash. For example, in 2008, the housing bubble lead to many losses in mortgage and capital when Americans house prices decreased rapidly and become cheap which caused losses to investors who had borrowed money from banks crippling both financial institutions and mortgage owners(Brunnermeier 80). Besides, the panic selling during an economic bubble is followed by a depression that affects the whole economy and other dependent nations.
Many investors never learn the lessons from past financial bubbles since all bubbles are similar and investors are motivated by readily available liquidity that causes bubbles. The availability of cash helps investors venture into the profitable market, and they don’t realize the high pressure on demand for goods and services until the prices are high and everyone is demanding the good in the market. The sweet deal makes investors forget about the financial crash, and they all concentrate in the venture leading to excess demand of the product which later falls leading to losses and economic problems. Investors failed to learn from the dot-com bubble crash in the 1990s when the commercial internet venture raised the demand for internet business leading to delusive commercial schemes. The need to take advantage of internet commerce such as online marketing resulted in many investors acquiring funds o venture in the firm putting pressure on the market. The main reason why bubble occurs is delusive financial schemes and the greed to make quick money from speculative investments.
2. Reasons why crashes and leads to financial crisis bubble
Economic bubbles are situations when a small mistake leads to prices come crashing down. In most cases, bubble crash due to investor’s ignorance on market demand and supply while concentrating on other works and overconfident to learn from experience. Bubbles crash due to excess demand for a product or service triggering the market on the downside and leading to falling in supply and financial crises. According to Holt (119), trading is not a pure science rather it is a social science, and anyone can affect the market leading to bubble crash. However, bubble alone is not enough to cause the financial crisis, rather the combination of investment bubbles and leverage leads to depression. Using the dot-com bubble as an example, the borrowing of funds from banks to venture in the commercial internet with the aim of earning a higher return at high risk causes the financial crisis.
Moreover, similar to the 2008 housing crisis and 1987 stock market crisis, the act of acquiring liquidity to venture into risky but profitable ventures leads to bubble crash and depression. Banks avails loans and funds quickly and charges higher interest, on the other hand, investors uses the credit to demand a profitable venture into the market and are overconfident that the profits will be high. However, a small prick causes the prices to crumble down and leads to economic crisis. Besides, fear is also significant compared to greed by investors, the fear of prices changes in the market leads to investors thinking irrational causing a disturbance in the market and create a bubble burst.
3. Housing Bubble and Financial Crisis of 2008
In the United States, the great moderation period conceded with the housing boom. Many Americans viewed their homes as piggy banks and use it to acquire loans and leverage for other ventures. The prices of houses in the west coast increased leading to a promising investment in the real estate. The aftermath of the financial crisis in the 2000s, the government enacted a policy that lowered the interest rates for an extended period (Brunnermeier 87). Therefore, many investors borrowed an enormous amount of money to venture on speculative projects that could lead to high returns at high risk. Investors and real estate brokers invested in mortgages and real estate started mushrooming all over the American states. This lead to increase in mortgage prices and high liquidity in the market. However, as many people demanded real estates, the fear of prices falling came and many people loss their money, banks went bankrupt, and the economy dipped into depression. Leverage was the primary cause of the 2008 housing bubble and the greed to earn high returns from the real estate market. In addition, investors failed to diversify their operations and placed all their money on one basket of real properties.
4. Reasons why traditional economist was unable to explain bubbles and financial crisis
After the housing crisis in 2008, many economists widespread share blames for failing to predict the impeding dangers of bubble burst and the resulting financial crisis. Many economists lamented on the biases of the free market economy where it’s hard to predict the demand and supply of goods and services in the economy. However, most traditional economists confesses to failure of foreseen the damages of the housing bubble on the economy. Besides, according to Kotz (310), classic banker’s biggest failures was a failure of predicting the recession and other significant events. The techniques and mathematical models employed by banks and monetary policies are simple and cannot predict any major events. Moreover, traditional economists argue that it is hard to predict economic events since it is based on ideology and not science. It&rs...