The South Sea Bubble - Essay Example

This is the predicament that the South Sea Company in England in the 18th century experienced. Considered as one of the worst financial disasters in a capitalistic society, the South Sea Bubble is proof that avarice can lead a single person, firm, or even an entire nation’s economy to collapse.

In those days, the British Empire reigned over the entire world. It was a time of affluence and prosperity for British people enabling them to invest. The exuberance of investors to gain more out of the company’s monopoly of the South Seas compelled the company to issue more stocks that were also sold out by greedy investors. The lavish and generously enamored company office ostentatiously displayed the opulence and success of Britain on its industrial revolution. With the notion spread by speculators that this company  “could never fail,” its share price skyrocketed tenfold from its original value, making its investors rich overnight. It was at this point that the reality set in, bursting the bubble of the company’s overpriced share prices.

South Sea Company’s heyday ended when its management realized that they failed to manage and operate the company properly. They realized that the company was not generating profit at all. The funds came basically from selling stocks and not from actual commerce. News that the company was profitlessly instigated panic stocks selling.  Useless stocks were sold frantically leading to a stock market crash. Many British people lost their fortune because of this. From 950 pounds per 100-pound par value, it slid down to 290 pounds in less than 4 months.

The South Sea Bubble is only a sample of numerous financial bubbles that happened in the capitalist society. Another example of this financial catastrophe is the Nasdaq bubble of the late 1990s.

The invention of the personal computer ushered myriads of technological innovations and business opportunities. Upon discovering the increased use of computers by installing various programs in it US technology companies focused more on developing software. Coinciding with this was the emergence of the World Wide Web and the Internet, making communication and information exchange possible at a very cheap cost. These innovations enticed investors to fund software manufacturers and website developers to further enhance the power of the personal computer.

Anticipating a more very lucrative future for technology companies, investors impulsively put their money on software website developers. By investing in a low-cost, yet high-margin product instantly became a very hot commodity for voracious investors. Thanks to the investors’ irrational exuberance, the stock prices of software companies increased dramatically, making fledgling developers become instant millionaires. From 1996 to 2000 Nasdaq went from 600 to 5000 pts.

Once again reality popped the Nasdaq bubble when investors realized that the dot com mania was merely a dream. Most dot-com businesses failed to deliver expected profits. Some even closed their operations because of a lack of management skills. From a height of almost 5050, it fell to 1115 ushering the US economy into a recession (“Crashes: The Dotcom Crash,” 2007).

Driven by their desire to amass money in just a period investors in both bubbles irrationally put their money on companies without first studying their sines condition. They ignored the fact that managers of South Sea Company and most companies involved in the Nasdaq bubble were inexperienced in operating business. They immediately grabbed the opportunity without carefully thinking about the future of their ventures. Because of their madness and impulse to profit instantly out of their investments, they neglected to research business financial condition and stability.   

Another striking similarity of both bubbles started from massive buying of stocks by investors because of speculations of an impending infallible success of their investments.  The investors in both bubbles, upon hearing unfounded rumors of speculators, believe that the business operations of the company they are investing at could never fail.  In the case of the South Sea Company, the emergence of the industrial age provided an optimistic view of the future of the British Empire. The advent of the Information Age likewise engendered a misconception that business had already reached a point that it is no longer subjected to “traditional commercial and economic laws.” Because of their voracious appetite to get rich quickly, investors failed to see reality.  They envisioned a worry-free future because of the present affluence that the emergence of a “paradigm shift” in economic and social lifestyle brings.  They undermined the consistency of natural laws under which reality is subjected.

            The two financial bubbles that we have encountered both conveyed the social responsibility of investors in making up their decisions. They should base their decisions on proven data and facts not on mere speculations. Their responsible and wise investments will have an extensive effect not only on their benefit but also that of the economy of the entire nation. They must see to it that the stocks of the firm that they will invest on will operate and perform excellently. Otherwise, they will consequentially endanger not only their fortune but also their country’s economy.