Question

What was the conclusion after the south sea bubble crisis? point out at least 3-4

answer has to be in at least 100 words

Answer 1

Conclusion of South Sea Bubble:

• Events surrounding the rise and fall of the share price of South Sea Company are to a large extent easily explained on the basis of fundamentals. The South Sea Company collapsed due to an unexpected adverse shock (Bubble Act) and a weak financial environment (leveraged positions, caused by installment payments and loans on the security of South Sea shares). There is no reason or evidence to suggest that share prices were simply irrational speculation and merely a reflection of fraudulent stock market manipulation.

• Contrary to popular practice, I have not emphasized the many instances of dubious share trading that accompanied the South Sea Company experience of 1720.

• The fact that many people in high places (directors, politicians and royalty) attempted to benefit from the circumstances does not shed any light on the ex ante rationality of investing in South Sea Company stock. Equally, the fact that many people bought stock with borrowed money (i.e. margin buying) does not shed any light on the existence or non-existence of a bubble. For a large part, the perception of fraud and stock market manipulation is probably due to the usual ex post "blame game" being played after markets crash, when there is enormous pressure on the government to act and compensate investors for their losses.

• With respect to presumed fraudulent behavior of the South Sea Company directors it has been noted that it is particularly strange that they apparently invested large parts of their wealth in easily confiscated real estate, rather than keeping their profits in liquid assets to facilitate their escape in case of failure of the supposed scheme and to go overseas in order to avoid confiscation. It is perhaps also important to note that at the time of their dealings, the directors probably did nothing illegal as far as the laws of the time were concerned. They were later punished for their failings using new laws that were imposed retrospectively.