6 ideas
Galbraith argues that speculative disasters recur partly because financial memory is extremely short, fading within roughly a couple of decades. As a new generation enters finance, it meets the same old pattern as a fresh discovery and trusts it.
In markets, people read the possession or control of large sums of money as evidence of superior insight, so wealthy financiers get deference their judgment does not warrant. During a boom, gains that come from simply riding rising prices are credited to personal genius. This attribution discourages scrutiny exactly when it is most needed.
What gets celebrated as financial innovation is almost always a small variation on an old device, most often debt leveraged against a limited real asset base. The only thing truly new is the ignorance of those who believe it is new, and that belief is what licenses the excess.
A rising price draws new buyers because it is rising, and their purchases push the price higher, which draws still more buyers. The price loses its link to underlying value and holds only as long as new money keeps arriving. When the inflow stops the reversal is sudden, because everyone tries to exit through the same door at once.
While euphoria lasts, people who question it are dismissed as unable to grasp the new reality, and they are often attacked by those with a stake in continued belief. There is a strong vested interest in the illusion, so the social cost of skepticism is highest at the moment skepticism is most accurate.
In early 18th-century France, John Law's bank issued notes supposedly backed by coin reserves, and those notes were used to buy shares in the Mississippi Company, whose promised Louisiana riches were largely imaginary. Note issuance and share prices rose together until, in 1720, holders sought to convert notes to specie and the system collapsed. In Galbraith's telling, the episode shows how the apparent magic of creating money concealed that the notes far outran the coin supposed to stand behind them.