Which came first—the news media or the frenzied financial bubble? In his book on speculative manias, Irrational Exuberance, Yale economics professor Robert Shiller argues that the first “bubble of any consequence” occurred at about the same time as the advent of newspapers. Bitcoin, the latest financial fascination, also owes some of its soaring rally to $10,000 to the media’s appetite for a good story.
The first known price bubble was the Dutch tulip mania in the 17th Century. While there’s some debate about whether the volatility in tulip-bulb prices was entirely the result of greedy speculators, there’s no question that booms and busts captivate the public’s attention, and news services can and do boost their audiences by promoting stories about financial manias. They also contribute to market froth, according to Shiller:
Although the news media—newspapers, magazines, and broadcast media, along with their new outlets on the Internet—present themselves as detached observers of market events, they are themselves an integral part of their events. Significant market events generally occur only if there is similar thinking among large groups of people, and the news media are essential vehicles for the spread of ideas.
News reports about market prices tend to reinforce whatever has already happened: Articles typically take their cue from price changes and try to explain why it happened. Quotes and statistics that buttress that particular trend—which may only last a few minutes—are commonly swapped out when the price changes direction.
That probably shows why some explanations for bitcoin’s soaring price seem particularly flimsy. Timelines that try to make sense of its dizzying heights often cite news reports about Goldman’s interest in the cryptoasset, for example, which has baffled some in the industry. (Of course the New York bank is exploring it. Every institution is probably studying bitcoin, however loosely you define that phrase.)
Still, the news media shouldn’t get all the blame. During the tulip mania, for example, there were also advances in financial markets that likely helped enable the frenzy, said Garrick Hileman, a research fellow at the University of Cambridge. At the time, as an example, promissory notes for buying tulip bulbs were transformed into an instrument for speculation (a futures market), according to a blog post by the Federal Reserve Bank of New York.
And as bitcoin climbs ever higher, it’s also worth keeping in mind the limits of media influence. Right now, the price appreciation actually seems to be accelerating even as media companies publish warnings from experts that the bitcoin bubble could end badly for a lot of people.
That phenomena of investors buying into something they know is dicey isn’t unprecedented. Some penny stock traders knowingly put money behind companies that they expect are fraudulent, or whose prices they expect could be manipulated. There’s no fundamental reason to invest in such companies—they’re just betting someone else will come along to buy it from them at a higher price.