Speculative Manias

The word ‘mania’ suggests a loss of a connection with rationality, perhaps mass hysteria. The loss of connection with rationality reflects that the investors, lenders, borrowers, and the bank and financial regulators fail to recognize that a crash always is the end game for the mania. Economic history is replete with manias that involved the construction of canals, railroads, and homes and commercial properties as well as manias that involved stock prices. Economic theory assumes that men and women are rational — and hence manias would not develop. The rationality assumption is disconnected from the observation that manias occur episodically. This chapter focuses on the increases in the investor demand for a particular type of security or asset and the next chapter is centered on increases in the supply of credit.