Makings of the next bubble could be among us now

During Holland's "Tulip Mania" in the 17th century, the slender flower became a status symbol and sparked a brief but ruinous bubble that saw tulip bulbs sell for as much as the price of a house before the market crashed. In the late 1800s, shares of U.S. railroads soared and crumbled. And just a few decades later, after the birth of the U.S. auto industry helped pump up the economy - and home prices - the stock market made its historic ascent and 1929 crash, triggering the Great Depression.

From World War II up until the 1980s, large-scale asset bubbles in the U.S. were rare.

World economies were tightly regulated and the flow of international capital was restricted, making it much harder for bubbles to form, says Carmen Reinhart, an economics professor at the University of Maryland.

It's a vastly different picture today. International financial markets have become deeply enmeshed, and the cross-border flow of money has ballooned, making the U.S. economy "much more crisis prone," Reinhart says.

It's true that credit is harder to come by today and that could temper the threat. But until lending standards are further tightened, a "misalignment" between the risks and rewards of investing with borrowed money will persist, says Mark T. Williams, professor of finance and economics at Boston University.

The Obama administration is calling for tougher measures against subprime lending to ensure that only qualified borrowers get loans. It also has proposed limiting executive pay to discourage excessive risk-taking and making banks keep more capital on their books to safeguard against risky borrowing, or leverage.

Harrison Hong, an economist at Princeton University who researches bubbles, says the same short-term mind-set that prods investors to pile into the next boom also allows them to forget the previous bust.

After the bursting of the tech bubble in 2000, it only took a few years before the same investors who lost money on Internet stocks turned their attention to real estate as home prices rose rapidly. "Memories are fairly short," Hong says. "My sense is that we're going to be in for a repeat of this stuff somewhere down the line."