A Comparative View Of Current Crisis

A COMPARATIVE VIEW OF ECONOMIC CRISIS

There have been many economic crisis along history. The causes and consequences vary among time and space. Nowadays we are living a global crisis phenomena,the worst since the Great Depression of the 20th century.

It is important to understand the past in order to have a better sense of the current situation and hopefully avoid the same mistakes inthe future. However, people tend to think, as we have seen in the text by Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly that each situation isdifferent and therefore enter once and again the same mistakes.

In this paper we will compare the current crisis in the U.S.A with the Tulip-Mania occurred in the Netherlands, as we will seethere are great similarities.

The Tulip crisis occurred in 1637. The tulips were introduced by the Ottoman empire in the 16th century, and all of a sudden there was a huge increase on its demand bydutch citizens. This was so because it was seen as a luxury product. This occasion was profited by speculators, and the prices started increasing forming a bubble, where the intrinsic value of thebulbs had no relation with the market price. Whatsmore, this transactions were payed in the form of debt, not in cash. Let's see how this worked:

X would buy a tulip for 10 florins
Y wouldbuy this tulip from X for 20, paying 2 in advance and the other 18 when the bulb were sold
Z would buy this same bulb from Y for 30 florins, paying 5 in advance and the other 25 once the bulb weresold
This process went on until the price was abruptly high that nobody would believe they could sell it for more. In some cases the price of a bulb would be higher that the price of a house.Eventually, prices collapsed and the whole system went down. It is considered the first recorded financial bubble.

In the U.S.A, from the begginning of the 21st century, the country experiencied a...