Dissecting a Manic Bubble and Subsequent Crash

I took an on-line course at MIT on Behavioral Economics, and one of the topics was manias and asset bubbles. I'll leave out the higher math equations, and summarize what seems painfully obvious, but illustrative nonetheless.

Every asset bubble has similar characteristics, whether it's the Tulip Mania, the South Seas Bubble, the Internet Bubble, or whatever we experienced in 2008 (let's call it a Subprime Mortgage crisis).

1) First, you have to have a catalyst (tulips, internet, real estate, easy money),
2) Then, smart money insiders quickly claim stakes (railways, gold, securitization, IPO's),
3) Development of infrastructure to sustain the bubble for the mainstream citizens (setting up exchanges, networks, charters, assessors, government subsidies)
4) Authoritative blessing (government approval, official government support, parliamentary passage, AAA credit ratings),
5) The inevitable crash (stock market crash, real estate crash, defaults, bankruptcies, foreclosures),
6) Post-crash political reaction (regulation, litigation, fraudulent activity, accounting reforms, creation of government agencies).

The discomforting fact is that bubbles need an inflow of progressively more naive investors, much like a malignant tumor needs blood to metastasize. Prognosticators who predict these crashes in the midst of a bull market are demonized as heretics. These manias can be back-dated several hundred years, and the similarities are eerily haunting. Let's hope we don't go overboard with step 6 and put a death chokehold on our economy this time around.