The term bubble was first used in reference to a stock price in December of 1720 just after the South Sea Company took a nosedive. Ever since April of 2000 when technology stocks began their long and painful decline we've all become much too familiar with its meaning.
Alan Krueger, professor of economics at Princeton discusses how bubbles happen in the New York Times today.
One theory posits that smart investors, like mutual funds and hedge funds, are reluctant to bet against overpriced stocks because they would lose clients if they did not go along with others and the price continued (for a time) to rise.Today there are remarkable similarities between the housing market and tech stocks of the late 90's. So how do I sell my house short?
Another says that investors who recognize that a stock is overvalued still pour money into it because they cannot tell when others will sell the stock short, and they would forgo profitable opportunities if they pulled out too soon.
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