Economic Development

Speech bubbles

April 19, 2012

Europe

April 19, 2012

Europe
Tom Upchurch

Former programming manager

Tom Upchurch is Managing Editor at Euromoney Institutional Investor Thought Leadership. He produces content across the finance, energy and corporate sectors. Previously Tom worked as a Conent Editor with The Economist Events team for the EMEA region. His particular sectors of interest include financial services, banking and emerging markets. Additionally Tom was a contributing editor for The Economist Events Management Thinking blog and was responsible for developing the countries, trade and investments section.

I’ve recently been in touch with the office of one of the World’s most renowned and respected economists.

I will refrain from naming any names but I can assure you that it is someone who is as pre-eminent as they are prominent – for this website, the economist will be referred to as Dr. X.

I invited Dr. X to speak at our European capital markets conference, Bellwether Europe. Dr. X has shown a remarkable prescience in charting the fluctuations and failures of the financial system - specifically the nature and formation of asset bubbles. For this reason I thought the Dr. would be the perfect person to kick-off the conference with a keynote introduction. After a quick call and email I was duly informed that the Dr was honoured by the invitation and may well be available to speak at the summit. All was well; progress was being made.

You can imagine my dismay when just a week later the office gets back to me. "Yes, the Doctor would love to do it! For just £100,000, Dr. X is all yours!"
I was hugely disappointed. There was no way I could afford such a fee. Coming in at a whopping £4,000 per minute for a 25 minute talk, this was one of the most impressive rates I’ve ever encountered in the conference world.

This got me thinking - even with a Dr. of such fame and notoriety, how on earth can this price be justified? This figure must be supported by demand. Extremely wealthy individuals and private organisations must have forked out this kind of cash in the past. With the demand to hear the Dr. speak and the disposable funds both there, this would place a premium price on Dr. X's time and physical presence. The assumption is that this price will maintain itself or even escalate as the popularity and enthusiasm builds behind Dr. X's ideas and personality.

Could it be argued that a £4,000 per minute speech is a radically inflated price? I don't know much but I do know the 'conference market' and I would guess that this is a bubble ready to burst. Dr. X will tell you (and he made his name by telling us), one of the key elements of any bubble is the collective mania which inflates it; the 'irrational exuberance' of people buying into an asset, rapidly increasing demand and inflating prices beyond a sustainable level. This has been seen in housing markets, equity markets and even tulip markets, the world over. No matter how good Dr. X maybe, the popularity of his ideas and the demand to hear them live will wane, causing his stock to decline.

Dr. X is not the only speaker who commands exorbitant speaker fees. More famous examples include Bill Clinton, coming in at $450,000 per speech and Donald Trump who raked in $1.5 million per speech (albeit during the boom years of 2006 and 2007!) Can these prices be sustained during the current cold, harsh recessionary climate? Maybe – the cult of personality and celebrity is not going away any time soon. This is the ultimate reason for spending such vast amounts of money on one speaker. However, a question mark still hangs over whether the internet, with sites such as youtube, really means you need to be in the room any longer. Will this cause the bubble to burst? Who knows.

This doesn't tell us a lot more about asset bubbles than we don’t already know but it does highlight two interesting points. Humans can understand the intrinsic value of assets but when it comes to setting a sustainable price, we come undone. Even if you are a noted economist, who spends most of his life studying how humans value things, you can still get it wrong.  As soon as demand starts to creep up, the temptation to inflate the price can get the better of us. Perhaps if we tried to set prices according to long-term sustainable profit, bubbles would be a thing of the past. But that would also mean rewriting our basic human nature – which isn’t going to happen anytime soon.

Which leads to the second point - we rarely know we're in a bubble until it bursts. Apart from the odd dissenting voice usually from astute, brave and outspoken individuals, we collectively only find out once they have already popped.

Dr. X can be considered as one of those individuals which did warn the world of the asset bubbles forming in the build up to the recent financial crisis. For this reason, when the speech bubble bursts, Dr. X will still be on my invitation list.

For a little more on bubbles and the recent financial crisis, you have to see this video from Niall Ferguson. Recorded before last year's Bellwether Europe, it's a forceful argument (and compared to Dr. X, he came in at an absolute bargain.)

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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