In the 1630's, it was tulips. More specifically, it was Semper Augustus, a tulip of extraordinary beauty; deep, deep blue with a band of white and touches of crimson flares. In its day, it was the must have thing. There was one man who owned the dozen flowers known to exist. He was offered the equivalent of one year's annual income from a wealthy merchant for one bulb. He turned it down.

Tulip prices increased throughout the decade as more speculators got into the game. In 1633, a farmhouse was traded for three rare bulbs. By 1636 any tulip could be sold for extraordinary sums. Futures markets started. Trades were made in fields or taverns, between farmers and merchants. Some bulbs were bought and sold 10 times in a day. One father left his seven children an inheritance of 70 tulips. One sold for the all-time record price of 5,200 guilders.

Then, one day in 1637 everyone decided to stop playing. No buyers showed up at the local tulip auction in Haarlem. Within days, panic started, then spread. Tulips that sold for 5,000 guilders soon went for less than 50. (Source: Tulipomania by Mike Dash)

There was a very interesting piece written by Karen Blumenthal in The Wall Street Journal yesterday. Blumenthal takes a look at the Beanie Baby craze and how we can all learn from the "Beanie Baby Bubble." Blumenthal has studied bubbles and has determined that there is a pattern that drives these economic phenomena - be it Beanie Babies, real estate, or "Dot Coms."

Blumenthal contends that bubbles need these characteristics: fertile ground, people getting on board, ignoring warnings, greed, and an after-party. Think about the fertile ground, when Beanie Babies first came out, there was a fertile ground. Kids, parents, and grandparents were looking for a new toy, one that could be both a cherished heirloom and a cute adornment for mantles, dressers, and the back window of Cadillacs. The ground was fertile, and this group quickly jumped on board the Beanie Baby train and pushed the prices to a point where some people would pay upwards of $100 for a $5 bean-bag animal.

Another day, another oil record.

Oil easily pushed past $145 Thursday morning after traders calculated that the already weak dollar has further to fall after the European Central Bank increased a key interest rate by a quarter point to 4.25%.

Oil rose as much as $2.28 to $145.85 per barrel -- an all-time high -- before easing back slightly to trade at $144.40 at mid-day.

Oil tends to rise when the dollar falls as investors/traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, it's important to note that the dollar/oil correlation is not perfect: there have been instances in which the dollar fell and oil fell.

Every economic problem or setback seeks a scapegoat -- someone decision makers, pundits, and others can blame (unjustifiably) for a turn of events that's preferred by virtually no one.

The criticism is parsimonious, unfair, and injurious -- but that hasn't seemed to stop practitioners from venturing forth with charges that are often tenuous, if not absurd.

Scapegoat-of-the-moment

The ever-incisive FT columnist Martin Wolf points out that former U.S. Federal Reserve Chairman Alan Greenspan is being cast as 'the villain' for the housing bubble, its bursting, and consequent impact on credit/bond markets and credit availability. All of it is unfair, Wolf notes, and he provides ample evidence to support his point.

Chiefly: Greenspan did not create low, long-term interest rates. The low, long-term rates were caused primarily by a global savings glut, Wolf said. (See: China's savings rate.) The Fed had little control over this -- Greenspan even creatively and accurately referred to the Fed's inability to force long-term rates higher despite the Fed's best effort: he called it "a conundrum." Given the surplus savings sloshing around in global markets at that time, among other factors, those low rates would have occurred regardless of who was Fed chairman.

Robert J. Shiller's Irrational Exuberance is the classic book for understanding the stock market bubble of the late 1990s and early 2000s. His contribution to the study of real estate is equally compelling. The House Price Index used to track our real estate market was co-developed by Mr. Shiller -- and is innovative in that it adjusts for the quality of homes involved in transactions.

So given his expertise in bubbles and real estate, he is probably the guy to listen to when it comes to the topic of the real estate bubble.

In a column in this Sunday's New York Times, Shiller gives an interesting possible explanation for a question that hasn't gotten a lot of attention: Why were Alan Greenspan -- and a lot of other presumably intelligent people -- unable to see that real estate bubble for what it was given that, in retrospect, it seems so obvious?

The answer may lie in a psychological phenomenon known as information cascade. Be sure to read Shiller's column for an explanation of how this may have applied to the real estate market. It's fascinating stuff.

And understanding why the bubble wasn't widely detectable is key to understanding why it happened. As Shiller writes, "The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks."

Earlier today, BloggingStocks' Lita Epstein wrote about the rampant mortgage fraud that has played a big role in perpetrating the recent foreclosure surge and subprime meltdown. People have lied about their incomes and assets at an unprecedented rate on mortgage applications and now many of those homes are in foreclosure.

According to Ms. Epstein, "The FBI told the Journal that the percentage of white-collar agents and analysts devoted to prosecuting mortgage fraud is 28%. That's four times the number working on those types of cases in 2003 when it was only 7%. Lenders must file Suspicious Activity Reports when they suspect fraud. The number of reports being filed is up by nearly 700% between 2000 and 2006. In 2003 there were 436 active mortgage fraud cases and in 2007 the case load is 1,210."

One expert believes that half of foreclosures may be due to fraud.

Here's what's interesting: It seems likely that a big part of the run-up in housing values may also have been a result of fraud. Demand was inflated by fraudsters making bids on homes that they couldn't afford -- and lenders who were lending based on fraudulent misrepresentations.

According to the Wall Street Journal (subscription required), more than half of this year's IPOs have been for companies that are unprofitable, the largest percentage in 7 years: since when the dotcom bubble burst. The piece points out that the unprofitable IPOs are more diverse than they were then, and investors are looking to companies that at least have a shot at being profitable at some point in the near future.

While there may be reasons to be worried about the optimistic climate on Wall Street, the recent run of unprofitable IPOs probably isn't one of them. Even though the companies may not currently be profitable, investors are at least examining them for sign of improving fundamentals. This isn't a case of pie in the sky optimism, with investors paying huge sums for companies with no revenues or hope of profitability.

The continued strength in private equity may indicate that markets have more room to run: Buyout firms are seeing value in many different industries.

So while it might be tempted to see a rise in unprofitable IPOs as a sign of the apocalypse, I think that would be an over-reaction.

Overnight, the Shanghai Composite fell almost 7%. Part of the reason is that the Chinese government is increasing the tax on stock trading to try to slow the overheated market.

The same index dropped 9% in one day last February. Markets around the world sold-off due to concerns that a collapse in the Chinese markets could hurt that economy and the ripple effect would hurt global growth.

But, that did not happen. Within a few days, the markets in China were moving up and made a number of new highs from April through late February.

The drop in the Shanghai market has a very different cause this time around. Increasing the tax on trading 3 times in one day is a pretty good incentive to cut down trading. Reuters quoted one analyst as saying: "In theory it shouldn't matter if Chinese stocks plunge, but markets are at high levels and investors are very aware of the downside risk."

But, the main reason for speculation, a hot Chinese economy, has not gone away. The price of trading is just a little higher, and that means that the market will probably keep going up.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Earlier on The Fly and on bloggingstocks.com, we analyzed the "saving surplus" -- the plentiful global supply of capital -- and its obvious benefits for the U.S economy: Continued, relatively low interest rates for fixed-rate mortgages, among other instruments.

In other words, the savings surplus has created a sort of a unconventional "mortgages on sale" condition for the U.S., and we also noted that the favorable condition is not likely to disappear soon, unless investors, particularly foreign institutions, lose their appetite for U.S. Treasuries and other debt instruments.

However there is another down-side dimension to the large and increasing pool of capital that's spanning the globe in search of return and yield: Emerging market bubbles and speculative excesses.

Emerging markets, particularly in China, India, Brazil, and Russia are helping fuel a global growth rate of better than 4% -- a robust rate that's increasing trade, earnings, and jobs worldwide -- but analysts caution that within this macro-picture growth story there will be speculative excesses -- commonly referred to as "bubbles."

The February 12th issue of Time features a story called "China Braces for a Bubble." The piece points to numerous signs of an unsustainable speculative bull market including novice investors with no experience in the market borrowing money to invest in stock, astronomically high price/earnings multiples, and price discrepancies (shares trading at widely different prices on different exchanges.

But Lan Xue, head of China Research for Citigroup Inc. (NYSE:C), tells us not to worry: "Judging from history, the stock market doesn't bust when the buying is concentrated on blue-chip names. It's when the buying goes into the second line, third line, fourth line [companies] --the speedy names -- this is what would get me more worried."

Oh really. Investors who lost money buying the Nifty 50 during the 1960's and 70's would be surprised to learn that blue-chip stocks can become grossly overvalued as well. Andrew Tobias, author of The Only Investment Guide You'll Ever Need, summed up the Nifty 50 bubble well on his website. Nor should investors content themselves with the belief that the rapid growth that is probable in China will lead these stocks to be strong performers. I would argue that the most important lesson for every investor to learn is this: a good business does not a good stock make. Valuation matters. From Tobias's site:

Well, Avon was close to 140 in mid-1973 and under 20 by the Fall of 1974 (and what a Fall it was)... Disney dropped from 210 at the end of 1972 to 31 less than two years later...The fall wasn't fast in the sense of its taking just a week or two...But these companies were basically doing fine...just their stock price multiples that were deflating. Where once they had been selling at 60 times earnings, the world changed and now they were selling at 15 or 20 times.