Why Bubbles and Busts Happen

January 16, 2026

Doug Leyendecker

Welcome to This Week’s Leyendecker View

I think in terms of the day’s resolutions, not the years’.
–Henry Moore

FAVORITE READS OF THE WEEK

John Hopkins appears to go all in on meritocracy
Take note, Ivies!

Who actually owns Greenland?
There’s no simple answer.

FAVORITE WATCH OF THE WEEK

All-In’s Chamath Palihapitiya interviews Secretary of Commerce Lutnick
The Trump team’s economic strategy.

THINKING OUT LOUD

Why Bubbles and Busts Happen
It’s human nature

The earliest known investment bubble happened in Holland in the 1630s. People went crazy bidding up the value of tulips, a flower that had become a status symbol but was of zero economic need. In 1637, the tulip bubble burst, leaving many fortunes lost.

After the tulip rush came the South Sea Bubble of 1720, an investment frenzy into anything and everything Britain’s South Sea Company touched. The bubble burst in September of that year, leading to a dramatic market crash, widespread bankruptcies, and significant financial ruin, serving as an early cautionary tale about speculative investing.

Not that anyone learned anything. In fact, we were just getting started. In the 1800s, we had numerous investment bubbles.

Speculative land sales in the western US caused the Panic of 1819, a banking crisis that led to an economic depression. The first emerging market debt bubble created the Panic of 1825 and a banking crisis in the UK. The Panic of 1837 was created by real estate speculation, again in the western US and also in Maine. It led to another banking crisis and another economic depression. The first half of the 1800s were pretty tough.

The California gold rush of the mid 1800s brought around 300,000 people into California, all of whom needed transportation, tools, shelter, food, clothing, and more. All this demand growth helped lift the country out of the early-1800s speculative bubble busts.

Still, no lessons had been learned. Next up, railway mania led to the over-building of railroads in the US. The 1873 failure of the banking house Jay Cooke & Co., which was heavily invested in the Northern Pacific Railroad, triggered the nationwide Panic of 1873 and the subsequent Long Depression. Then a massive innovation period in the late 1800s led to the Gilded Age, which ended in the 1929 stock market crash and the Great Depression.

In the 1970s and 1980s, we had an oil and gas bubble and the savings and loan and real estate bubble. Both busted in the latter part of the 1980s, leading to bankruptcies, bank failures, and a recession. Around the same time, Japan experienced a real estate and stock market bubble. Its bust led to thirty years of economic stagnation in Japan.

In the 1990s, we had the dot.com bubble that crashed the stock market. Then in the 2010s, we had the housing bubble that led to the Global Financial Crisis. Then another oil and gas bubble burst in 2020. Now we’re experiencing an AI bubble.

It should seem obvious that the AI bubble is eventually going to burst, but we don’t know when or what the catalyst will be. We should hope, though, that this AI bubble will stimulate the economy to overcome previous bubble busts that have left us with massive debt.

What is obvious is that humans have had FOMO (fear of missing out) long before anyone heard the acronym. Why can’t we stop ourselves from rushing into the latest get-rich-quick scheme? FOMO for sure, but all bubbles follow a similar pattern, which points us to the reason for bubbles and busts.

Anyone already invested in assets that for some reason turn into a bubble enjoys significant investment returns. These people are in the right place at the right time. The investors who join early in the frenzy also grab great investment returns.

These early returns are so above normal market returns that they naturally attract more capital. Word spreads, more capital floods in, and we have the making of a bubble. In due time, more capital floods in than the market needs, driving up the value of legacy assets beyond their potential future value.

Eventually, the bubble bursts. When is never foreseen. Every bubble, different from the last in some or many ways, finds its own bursting point.

Bubbles and busts have happened for centuries. They will continue to happen.

The behavior that feeds and busts bubbles is just human nature. Once we evolved out of nomadic tribes and into civilizations, we became herd animals. We run with the crowd because that’s what makes us feel comfortable, safe, and accepted. We run with the crowd because to not do so is to miss out and, evolutionarily speaking, feel alone, vulnerable, and threatened.

Outside of investing in tulips to impress your neighbors, most economic booms have legitimate beginnings. It’s the frantic FOMO that eventually tips the boom into an investment frenzy, where capital is wasted. And the more densely we live together—geographically and now online—the more susceptible we all are to FOMO contagion. As the old maritime saying goes, disease travels fast in closed quarters.

THE RANDOMS

The EU and South America just signed a free trade agreement…after over 25 years of negotiations.

When the “news” tells us how bad it will be for any federal agency to lose funding and force layoffs (220K so far, or is it 330K, since Trump’s return to office), bear in /mind that according to AI an average of 22 million people are laid-off annually, almost 100% of them in the private sector. Lots of people are forced to adapt. Government workers can do so, too, just as private industry workers do.

One of the interesting and inspiring things about life is that within every 24 hours we get time to decompress, put aside, and even reflect on the day’s effort. We call it sleep. Upon waking, we have the opportunity to approach the world with new ideas and effort that can make things better. So every 24 hours, we get a chance to reboot our mind.

All economic activity begins with natural resources. If a country fails to unlock their natural resource potential, then they will fail as an economy.

Given how little Minnesota seems to align with our Constitution and values these days, should the state just secede from the US? Perhaps then they could finally be happy.

When will the force field be invented?

ECONOMIC NEWS

Economy

Inflation remains steady
US productivity surges
Is 5% GDP growth around the corner?
Wall Street sees US boom coming
The middle class is disappearing…up

Labor

15,000 nurses go on strike in NYC
Job market enters the slow lane
Top hiring questions for 2026

Our Health

AI gene breakthroughs coming
How our bodies repair damaged DNA
Chinese health AI ahead of US’s

BUSINESS

Finance

Bank earnings disappoint
Corporate credit could threaten Treasury supply
Consequences of 10% credit card rate caps
Worrying signs in corporate bond market

Real Estate