The bubbling vat of irrational exuberance could boil over again

Focus: A regulator's sharp eye should prick a bubble before it bursts. But that is often not the case.

It is often said that it is difficult to spot financial bubbles until it is too late, so here is a little test. Which of the following do you suppose were difficult to predict?

1 The price of a single tulip bulb in Amsterdam in the 17th century was the equivalent of 10 years' salary for a skilled craftsman.

2 The price of off-plan apartments in Dubai for delivery in two or three years' time was more than the price for ready-built ones.

3 Van Gogh's Vase with Fifteen Sunflowers selling for almost US$40 million (Dh146.9m) in 1987.

4 The Imperial Palace and gardens in Tokyo being worth more than the state of California.

5 Oil hitting $147 a barrel; cocoa doubling in price in two years, gold and silver hitting record highs.

The answer is, of course, that anybody with half a brain can see what's happening, but they prefer either to look the other way or to believe in gravity-defying leaps of logics.

Sometimes even a journalist can spot a bubble in the making, although it takes a businessman of genius to work out how to profit from it.

In a few years in the middle of the last decade, I wrote property pieces for The Sunday Times. It was a rather enjoyable, if not especially profitable gig. I would fuel up the Jaguar and drive wherever the editor fancied. One time I drove all the way to Galicia in Spain, more than 1,000km from my home; on another occasion to Seville, often to Barcelona, and a few times to Marbella, all also in Spain.

Marbella was the site of the most frenzied buying, I don't know why because the place is hideous. I would meet sun-bronzed, bleach-haired Englishwomen who were buying apartment after apartment, convinced they would make a fortune and retire at the age of 50. I dread to think what these women are doing now. The values of the places they were buying - assuming they were ever built - must be just a fraction of what they paid for them. It was clear to me then that it was a bubble expanding with every breath. Bubbles get bigger and bigger and then burst. Dubai's most expansive year was 2008 - the first half of it at least - with property prices soaring by up to 60 per cent. Then Lehman Brothers went bust, all bets were off, and the bubble slowly began to deflate.

Alan Greenspan, when chairman of the US Federal Reserve, described the behaviour of investors as "irrational exuberance". However, when you consider that whenever market conditions looked unfavourable to investors - such as in the aftermath of the 1987 stock market crash, the First Gulf War, the collapse of Long-Term Capital Management, the threat of the Millennium Bug and the bursting of the internet bubble right up to the aftermath of 9/11 - interest rates were eased, so maybe they weren't so irrational after all. When a regulator becomes synonymous with a policy of supporting the market come rain or shine, a phenomenon nicknamed the "Greenspan Put", surely it is the regulator who is irrational and not the people who are betting on your policy?

Regulators should be trying to prick bubbles before they pop. One US central banker described his job as like "taking the punch bowl away from the party", but unfortunately it is advice Mr Greenspan and his ilk failed to follow. And despite the lessons of the pain bubbles cause when they finally explode, they haven't gone away.

Clearly there is more than a hint of irrational exuberance in the recent internet listings. LinkedIn may well be a good way to communicate with people in grey suits, but can it really be worth $5 billion? I would have thought all it needed was for Facebook to come up with a Facebook Pro with a feature preventing people from posting pictures of you at a stag party, and it would blow LinkedIn out of the water.

Commodities definitely look set for a correction, and here's another bubble in the offing: education. According to Peter Thiel, a co-founder of PayPal, young Americans are spending far too much money on it - apparently the average graduate leaves university with debts of $24,000 - with student loans now the country's largest single source of debt, closing in on $1 trillion.

"Education may be the only thing people still believe in in the United States," he says. "To question education is really dangerous. It is the absolute taboo. It's like telling the world there's no Santa Claus."

As with the housing bubble, the education bubble is all about security and insurance against the future. Get a good education, goes the mantra, and you will always get a job. But here is a statistic from Egypt: a graduate is 10 times less likely to have a job than somebody without a degree. Everyone needs their car cleaned and maintained, food cooked and brought to the table, lawns clipped and laundry pressed. But what is the use of a business degree if there's no business?