Panics! Crashes! A look back.
Tuesday, Jun. 19, 2012 at 6:40am
Europe is melting down like fondue over a stale crust of baguette. And I can't help but feel sometimes that we're headed back into the ooze if we don't watch out. Not only because Europe's cold may be catching. We're back doing stupid things again. Like, there's this couple I know who couldn't afford their mortgage any more. So they went to their bank, where their banker says, "Don't worry. We'll sell the house and take whatever we can get. Then we'll give you another loan so you can buy a new house." I don't know. For some reason that makes me nervous.
To calm myself I like to look back at the blastomas of the past.
It's 1819 here in the almost new USA. The nation had indulged in a huge real estate boom involving the western territories of the new United States. When that bubble burst, a number of state banks failed, leading to a collapse in the credit market. People had gotten used to borrowing to meet their personal and business needs, and it proved to be a hard habit to shake. Foreclosures proliferated, followed by a recession, and then a six-year depression. The president at the time was James Monroe. His constituency had no experience in dealing with the situation, since this was the first in the boom/bust cycles that have since been integral to the character of American capitalism. In 1819, he addressed the nation, stating that,
" The great reduction of the currency which the banks have been constrained to make in order to continue specie payments, and the vitiated character of it where such reductions have not been attempted, instead of placing within the reach of these establishments the pecuniary aid necessary to avail themselves of the advantages resulting from the reduction in the prices of the raw materials and of labor, have compelled the banks to withdraw from them a portion of the capital heretofore advanced to them. That aid which has been refused by the banks has not been obtained from other sources, owing to the loss of individual confidence from the frequent failures which have recently occurred in some of our principal commercial cities."
In other words, the banks called in their loans and stopped giving credit. In response, Monroe cut taxes and otherwise floundered around until the end of the cycle.
Let's see what elements may be found in this iteration of the story:
Wild speculation in real estate
Collapse of real estate market
Excessive borrowing and lending
Bigger banks survive but are almost mortally wounded and stop giving credit
Prices fall because people have no money
Depression sets in
New boom is required to break cycle.
I'll be back whenever I like to look at other examples of mass stupidity and hysteria throughout history, both here and elsewhere.
Two things are remarkable, in the end. First, how all such catastrophes essentially all look the same when you strip away the funny clothes, hats and languages, and second, why, if that is so, no one has demonstrated the ability to predict or avoid them. And you don't have to be a fortune teller or chicken little type to feel that here we go again.
Coming soon: Panic in Rome!