Holland is well known as the home of the tulip.

In 17th century Holland, the normally stable burghers went a bit wild.

In a communal delusion, they established a market in black tulip bulbs. At the time, these were the exotic of the exotic. In no time at all, bulbs were changing hands for extraordinary sums of money.

At the height of the market in February 1637, tulip contracts were worth twenty times the annual income of a skilled craftsman.

This is the classic example of mania in the markets.

Normally sensible people are seized with the desire to own certain items and the subsequent buying frenzy drives the price way, way beyond the real value.

Couldn't happen in today's world with modern communications technology?

Think dot com.

Think 2007 British property market.

Before that we had the junk bond fiasco and the Savings and Loan Crisis.

This mania seems to be a fundamental part of human nature. I'll leave the reasons to others better qualified to comment.

I would suggest that the market trading in derivatives is an example of a market mania. Derivatives are being bought and sold and nobody has any idea of their true value.

At its peak, the black tulip market dominated the Dutch economy just as the dot com market dominated the US economy in 2000.

There was no government plan to buy black tulips in 17th century Holland just as there was no government plan to buy dot com shares in 2000.

After the crash, black tulips bulbs were worth pennies just as dot com shares weren't worth the paper they were printed on.

In the midst of the great derivative crash of 2008 there is a US government plan to buy $700 billion worth of the toxic debt to "restore confidence in the credit markets".

Does Hank Paulson really believe that the US public will buy his plan to reward his rich Wall Street friends for their failure?

Does he think we are stupid?

Is this a sensible plan?

©  John Black 2008.