The Ascent of Money: A Financial History of the World

by Niall Ferguson

Stock market bubbles have three other recurrent features. The first is the role of what is sometimes referred to as asymmetric information. Insiders – those concerned with the management of bubble companies – know much more than the outsiders, whom the insiders want to part from their money. Such asymmetries always exist in business, of course, but in a bubble the insiders exploit them fraudulently.4 The second theme is the role of cross-border capital flows. Bubbles are more likely to occur when capital flows freely from country to country. The seasoned speculator, based in a major financial centre, may lack the inside knowledge of the true insider. But he is much more likely to get his timing right – buying early and selling before the bubble bursts – than the naive first-time investor. In a bubble, in other words, not everyone is irrational; or, at least, some of the exuberant are less irrational than others. Finally, and most importantly, without easy credit creation a true bubble cannot occur. That is why so many bubbles have their origins in the sins of omission or commission of central banks.