It's tulips all over again, isn't it?
Lemme explain ...
Here we are in the grip of this latest financial market crisis, trying to dig ourselves out from underneath the slippery remnants of yet another burst speculative bubble, checking for scabs and bruises AND trying to diagnose the disaster.
Well, trying to find somebody to put the finger point at. The rating agencies were to blame, the reckless mortgage salesmen, careless mortgage banks, too-much-in-love-with-sophisticated-financial-gadgets investment bankers, Alan Easy-Money Greenspan ... the list goes on and on. And, fair enough, some of the blame can be thrown at any of these parties. But that doesn't really get to the heart of the matter now, does it?
I tell you what caused this AND any other financial market bubbles, crisis, fracas, since the dawn of time: Religiously speaking, one of the deadly sins - GREED. Plain and simple greed. Or, as Karl Marx wrote in his DAS KAPITAL: "All nations with a capitalist mode of production are seized periodically by a feverish attempt to make money without the mediation of the process of production."
Do I see some upright capitalists cringe at the mention of Marx? - Well, let me quote an ex-Bundesbank President with a similar statement. "The exponential expansion of financial markets, just from the multiplication of financial revenue with less and less underlying business that's anchored in industrial or any production will cause increasing friction and ultimately lead to crisis scenarios", ex-Bundesbank President Helmut Schlesinger put it succintly way back in the eighties, when the so-called Big Bang had just ... well, banged.
Remember - IF you are old enough - this was just a few years after the Drysdale affair. The Drysdale affair of 1982 ... It was almost MY first brush with financial fracas. I was in my last year in university in London and read about it all with jaw-dropping fascination.
For those of you who don't remember: In a nutshell ... A handful of middle-management executives from prominent brokerage firms supposedly went into business for themselves in the purchase and sale of government securities. This tiny handful of executives, on their own presumably, were able to raise $5 million of capital to start their firm a paltry sum when measured against the government securities market estimated at the time to have roughly more than $500 billion.
In a brief period of not more than a few months, this small group of middle-management executives was able to generate -- that is get as customers -- people who would be able to build up the portfolios of Drysdale Government Securities to the tune of $4.5 billion!
By what means could a small group like this, with such a paltry sum of money -- $5 million -- so quickly earned the confidence of any big securities dealers so as to be entrusted with $4.5 billion? Would anybody know what was really happening or how and by what hocus pocus the interest on this vast sum of $4.5 billion was regularly paid? Nobody, of course would really know, had not the Drysdale firm suddenly been unable to pay the $270 million of interest on this billion-fold portfolio.
A few weekend emergency sessions of the Fed with prominent bankers from Chase Manhattan and Manufacturers Hanover Trust (all you spring chickens out there: these were giants of global banking at the time ... alas, long vanished), there were rescue packages and bailouts ... and the banking system was saved - of sorts. Does THAT sound familiar?
Then, too, there was much (blame) soul-searching and little real change. Oh, AND a great deal of perpetual reassurance that there was definitely NO systemic problem. Now, that DEFINITELY sounds familiar.
Mind you, in a refreshingly frank letter to the Times published May 31st, 1982 a certain Albert Gaylor Hart, professor emeritus of economics at Columbia University, had a few damning questions and conclusions.
"If the U.S. money market were successful in any public spirited sense, how could it permit Drysdale Government Securities within months of its birth to build up a portfolio of $4.5 billion, and to generate interest flows so large as to give scope for a loss of $270 million all on a capital of $5 million?" Prof. Hart asked candidly and he continued, "I fear that this market is judged to be successful not on a record of integrity and responsibility but on the strength of its showing a huge volume of dealings, dealings which nobody fully understands but which enable some people to siphon off large gains from financial manipulations." - Uhmmmmm .... Yes! Spot on.
And: "The intimate involvement of major banks in the Drysdale fiasco illustrates the permeation of our financial system by get-rich-quick ambitions and by creative accounting," he concluded.
Now replace Drysdale by SUBPRIME .... and? Yep, bullseye. Or LTCM. Or E-commerce. Or .... tulips for that matter ...
Remember Tulip-mania in the year of our Lord 1637? ... Well, not personally, of course. Or at least not, unless you are MinHeer Jan van Goven or one of his contemporaries who were among the financial casualties of the tulip market bubble at the time.
No one quite knows WHY tulips suddenly became all the rage in the Low Countries and from, there in the rest of Europe in the 1620s ... just like nobody quite could predict that the internet would suddenly take off and that IPods would sell like hot cakes. But by 1635, a sale of 40 tulip bulbs for 100,000 florins was recorded. And the Semper Augustus, the most famous of the bulbs, went for 6,000 florins in Haarlem one fine day.
By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon was dubbed Windhandel, or "wind trade", and took place mostly in the taverns of small towns using an arcane slate system to indicate bid prices.
Well, we all know what happened ... Came February 1637, tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst ... as bubbles do. Suddenly, the coveted bulbs could be had for 100 florins or less and then for virtually nothing.
Does THAT sound familiar? ... Replace TULIP by Asset Backed Security, Conduit or Structure Investment Vehicle and? ... Yep, it's tulips all over again. Tulips and Windhandel.
But - do we, do the markets learn? - Nope.
And why? - How did Prof. Hart put it so succinctly? - "Get-rich-quick schemes". Or, in one word: Greed.
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