Bubble Episode – Souk Al Mankh (Essay Sample)

ICM302 Behavioral Finance Bubble Episode – Souk Al Mankh Name Course Institution Instructor Date Bubble Episode – Souk Al Mankh Introduction In world history, there have been many financial bubbles which have occurred posing serious and significant risks to the world economies. Any sector in an economy can experience financial bubbles when prices of different assets increase rapidly and above their fair values which then leads to unsustainable and more importantly irrational skyrocketing of prices. Financial bubbles are majorly caused by speculations among investors, herd behaviour and greed influencing many investors to largely overlook any possible risks which are associated with any of their investments in an economy. The occurrence of bubbles makes many investors more confident and ready to pay exorbitant prices for different assets which then leads to a significant boom in that economy. Notably, the problem sets in the moment the bubble bursts leading to near collapse or full collapse in an economy thereby leading to widespread bankruptcies, defaults and panic among the investors. In recent years, many sectors have shown the potentiality of generating financial bubbles in economies for example the real estate sector among other sectors of the economy. The bursting of financial bubbles can result in a loss of confidence among investors in the economy's financial system leading to a significant decline in investments, economic growth slowdown and low consumer spending. This essay will explore the Souk Al Manakh bubble which is a financial bubble that occurred in Kuwait in the late 1970s and in the early 1980s. Souk Al Mankh Bubble Summary of the Bubble Episode The Souk Al Manakh bubble took place in Kuwait in the Souk Al Manakh market. Souk Al Manakh was a trading market whereby different investors bought and sold securities which were unlisted by the use of checks which were post-dated as payments (Colombo, 2006; Smith, 2022). Many investors with diverse financial strengths were drawn into the financial market since there were high returns from the investments in the market promised. Notably, since many investors were drawn by greed they heavily invested in the securities without undertaking due diligence before buying those securities. Many investors invested huge sums of money without having enough information that could have helped them make informed decisions before investing. This resulted in huge capital investments in companies which were financially unstable. The Souk Al Manakh bubble was largely caused by a combination of different factors, which included the crash of the global oil market and the strict tightening of the credit sector by the Kuwaiti banks (Wilson & Kireyev, 1997). Many different investors were to a large extent unable to fully honour their checks which were largely post-dated and this cause significant chain reactions of defaults among the investors and bankruptcies which then led to the Souk Al Manakh market collapsing. The Souk Al Manakh bubble was to a large extent driven by speculation among the investors, greed, and above all herd behaviour exhibited by the investors, making them overlook the different risks associated with their different investments in the market. The collapse of the Souk Al Manakh bubble made people and investors lose confidence in the country’s financial system, thereby causing a huge decline in the level of consumer spending as well as the decline in the economic growth of the country. The Type of Souk Al Manakh Bubble Souk Al Manakh Bubble was largely a speculative bubble as well as a financial bubble. Speculative bubbles normally take place when the prices of different assets increase more rapidly than expected as a result of the speculation and hype among the investors, leading to an instance whereby the prices of the different assets exceed by a bigger margin intrinsic value. For example, in the case of the Souk Al Manakh bubble, investors of different financial strengths were engaged in the buying of unlisted securities by the use of post-dated checks to make all the payments and in turn, selling them, and this led to situations where the values of these unlisted securities were largely driven basically by speculation as well as hype rather than their actual value, market value or intrinsic value. Moreover, the Souk Al Manakh bubble can be said to be a financial bubble since it involved using post-dated checks to make payments among the parties involved who were large investors who were buying and selling unlisted securities. This means of payment which was used during the period of the bubble largely enabled various investors to make investments in the unlisted securities with significantly smaller upfront costs that they incurred and this made it much easier for the investors to decide on entering the market and hence participating in the Souk Al Manakh bubble. Moreover, this made the market much more susceptible to different systemic risks since the failure of any investors to honour their various post-dated checks drawn by them may have led to other defaults among the investors and bankruptcies, thereby leading to the whole collapse of the Souk Al Manakh market. How and Why the Souk Al Manakh Formed The Souk Al Manakh market served largely as a platform for trading whereby different investors bought and sold securities which were unlisted securities by the use of checks which were post-dated as a means of settling payments amongst themselves, the investors. The Souk Al Manakh market later experienced a rapid increase in the value of the unlisted securities, which consequently led to the formation of a Souk Al Manakh bubble. The formation of the Souk Al Manakh bubble was primarily caused by the high level of speculation among the investors in the market and a high hype amongst the investors The various investors who bought securities which were unlisted in the Souk Al Manakh market were largely drawn into the market to buy such unlisted securities since they had information that there was huge high returns of investing in the market. This sudden increase in the appetite for investing in the securities in the Souk Al Manakh market among investors largely led to the creation of the Souk Al Manakh bubble. In the market, many investors were driven largely by speculation without taking their time to undertake due diligence before investing in the market. Moreover, the use of checks which were post-dated to settle payments made it much easier for the different investors to buy the unlisted securities in the Souk Al Manakh market, leading to the influx of many investors and this further increased the value of the unlisted securities. Moreover, the decision made by the government of Kuwaiti to peg the dinar, Kuwait's currency on the US dollar in 1975 coupled with the subsequent rise in the prices of oil prices in the world by then fueled a boom in Kuwait’s economy (Peg et al., 2008). This led to a significant increase in credit availability in Kuwait's economy. The availability of credit made it possible for the investors to have sufficient money that they used to make investments in the Souk Al Manakh market. Credit availability in Kuwait’s economy and the promise of huge returns in the Souk Al Manakh led to the formation of the Souk Al Manakh bubble. Moreover, the lack of strict as well as proper regulation of the Souk Al Manakh market largely contributed towards the formation of the Souk Al Manakh bubble. The Souk Al Manakh market was unregulated to a large extent since the market was involved in the exchange of securities which were unlisted. This allowed many investors to engage in speculative practices without having in place regulations that could have helped in the monitoring of the activities in the Souk Al Manakh market and proper oversight. The lack of proper and strict regulations enabled companies which were financially unsound to attract more investments, further exacerbating the Souk Al Manakh bubble. The Souk Al Manakh bubble was equally driven by herd behaviour among different investors, with investors following the actions of their fellow investors without making any effort to undertake proper due diligence before deciding on buying the unlisted securities. Many of the investors in the Souk Al Manakh market were largely unaware of the different risks which were associated with their investments in the Souk Al Manakh market since they largely depended on the advice and information which were provided by the other investors who had already invested in the market and had received some huge returns on their investments rather than conducting their due diligence before investing. This to a large extent led to the creation of a situation whereby the different investors invested in companies which were not healthy financially without fully understanding the different inherent and systemic risks which were waiting for their investments in such companies. Moreover, the market was to a large extent highly leveraged, since many investors were trading securities by the use of the checks which were post-dated, which largely allowed the investors to buy unlisted securities with a smaller fee. This led to a situation whereby the Souk Al Manakh market was highly susceptible to different systemic risks since any slight failure of any one of the investors who had bought securities in the market to honour their checks which were post-dated could cause a chain reaction of bankruptcies and defaults among the different the investors, ultimately causing the collapse of the Souk Al Manakh market. What Triggerred the Collapse of the Souk Al Manakh Bubble The bursting of the Souk Al Manakh bubble was triggered by an amalgamation of many factors which include a decline in global oil prices, tightening of the credit regulations by the Kuwaiti banks, and failure of various investors to fully honour post-dated checks written b...