Saturday, March 21, 2009

Old observations...

Old observations because they're not new, obviously: but they are interesting and telling. I'm using up a lot of my spare time reading various articles and sources about the current financial turmoil; I'm also discovering these old observations (but new to me if you see what I mean - as in my previous blog post): various accounts that over the years have predicted exactly what is happening and why. Reading Stephanomics (the blog of Stephanie Flanders, the BBC's economics editor) this morning some of the comments caught my interest: firstly comment 10 (John from Hendon; because he seemed so right!) but then further down another comment (number 12) mentioning that trying to compare this slump to others in history is not particularly accurate or helpful...and then, conversely, saying that if it can be compared then "John Law's Louisiana super-bubble" would be the nearest.

Now I knew of the South Sea Bubble but not John Law and the Mississippi Bubble so I began reading; to my surprise I find that BOTH these events, as well as being almost simultaneous - and nearly 300 years ago (!!) - show similarities to today's events.

Law pioneered the concept of a note-issuing bank, shares in the company acting as a form of paper currency - the need had asisen due to the lack of precious metal and 'real' money. The company was private but to all intents and purposes tied to government and Royalty; it was successful at first but its collapse - after rampant speculation - caused an economic crisis in France and Europe: the system was based on trading shares in the Mississippi Company in return for government debt and the subsequent collapse had been delayed until eventually the entire government debt became property of the company, the company became property of the creditors (now shareholders) and the effective control fell into the hands of the government. Sound familiar? [Wiki] Law was dismissed, fled France and died in poverty less than 10 years later.

Only a year later in Britain, an Investigation in 1721, after the South Sea Company stock value had collapsed - leaving a trail of personal and company bankrupcies (including banks) - revealed widespread fraud amongst the company directors and corruption in the Cabinet. The Chancellor of the Exchequer was imprisoned and the Postmaster General and other Lords (ministers) were impeached.

Financial guru Marc Faber, in 2003 whilst reviewing 'The Great Swindle - The Story of the South Sea Bubble' by Virginia Cowles (Collins, 1960) - [Lesson of History I] said he...

"...became more and more fascinated by the many parallels between this early period of speculation in our capitalistic age and today’s financial environment. In particular, I was astounded by the similar role that paper money, excessive credit creation, and highly questionable practices - by governments as well as businesses - played in fuelling the financial excesses in both periods.

"The 'bubble' model always involves a 'displacement,' which leads to extraordinary profit opportunities, overtrading, over-borrowings, speculative excesses, swindles and catchpenny schemes, followed by a crisis during which fraud on a massive scale comes to light, then by the closing act during which the outraged public calls for the culprits to be taken to account. In each case, excessive monetary stimulus and the use of credit fuels the flames of irrational speculation and public participation, which involves a larger and larger group of people seeking to become rich without any understanding of the object of speculation."

In a second piece Marc Faber also points out [Lessons of History II]:

"The Mississippi Scheme and the South Sea Bubble are also interesting from another point of view.The wave of speculation in the period 1717 to 1720 spread across the entire European continent and the subsequent crisis was international in scope"

I know the entire fault of the international aspect of this current recession/depression isn't you-know-who's but I do wonder if it will come to be known as Brown's Bubble.
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6 comments:

Paul said...

Talking of history repeating, in the U.K recessions of the 70's, 80's and 90's it took 13 successive quarters before the GDP rose back to the level it had been the quarter prior to a recession being declared. As ours officially started with the June 08 quarter it should be around October 2011 before things get back to how they were! Good article in the Times today about how the Conservatives are planning for putting the economy back on track apparently the last time they came up with a cunning plan it backfired so horribly this time they won't tell anyone anything. I know from a private conversation a couple of weeks ago that at least one bank is waiting until the summer before unleashing the dogs of war.

Span Ows said...

I think the cunning plan is massive decentralisation in a "post bureaucratic age"...

it-is-not-enough-for-labour-to-lose-this-election

God only knows why no major national media have picked it up.

Paul said...

Interesting article - it reads to me like they are distancing themselves from the Thatcherite values of the early 80's - I can remember Michael Heseltine taking power away from local government, particularly with the rate-capping issues.

People have to realise that more safeguards doesn't equal a better run society, it actually encourages people to find ways around them, rather than leave common sense to prevail.

Span Ows said...

...who'd of thought it; I don't particularly see it as distancing themselves from MT except of course with the way technology has moved on so rapidly and allows greater freedom. In the 80's they only took power away when it was clearly being abused for party-politic purposes IMHO.

That said, what with Osborne and the tax rise news etc, it's not too surprising that things aren't always as they seem or as we think they should be.

links of london said...

As ours officially started with the June 08 quarter it should be around October 2011 before things get back to how they were! Good article in the Times today about how the Conservatives are planning for putting the economy back on track apparently the last time they came up with a cunning plan it backfired so horribly this time they won't tell anyone anything.

Span Ows said...

hahaha...I would have put LOL but you would think it just a salutation! the last time Gordon bottled the election, this time he can't. However I don't doubt for a second that the budget this month will include several Tory-nullifying aspects.