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October 3, 2008 2:08 PM   Subscribe

A housing boom and bust, interbank lending rates reaching record highs, people losing faith in complex financial instruments, a stock market crash. We've seen it all before... The Great Depression of 1929? No, the Panic of 1837...
posted by fearfulsymmetry (33 comments total) 5 users marked this as a favorite

"We learn from history that we do not learn from history." -Hegel
posted by SaintCynr at 2:14 PM on October 3, 2008 [1 favorite]

But this time it's different...
posted by mazola at 2:18 PM on October 3, 2008

The two earlier depressions were caused by this or that buty after 1929 Great Depression, the govt and the people knew that things could be managed by the govt. Thus FDR built in constraints...over a period of time, these regulations and constraints have been removed and/or ignored, and we got the present crisis. Oddly, the "free market" folks, anti-govt regulation, now turn to the govt (our money) to bail them out: ie, save their butts from their greed and folly and malfeasance. We will soon hear about too much govt interference, once again, as the speculators once again do their thing. The Right will carp about govt, controls, socialism, etc but ignore the govt subsidies given to various industries. The big 3 auto industry got a healty bail out (loan), slipped in the bundle, and once again, the free market needed our money to keep them "free," free to make shoddy products, too big and with limited (in many cases) life expectancies, so that many of us have turned to foreign-made autos. I ow a bar bill: will the govt pick up the tab for me till I can see my way clear to paying it back?
posted by Postroad at 2:21 PM on October 3, 2008 [1 favorite]

I hope you realize that the Chronicle article discusses the Panic of 1873, but you linked to the wikipedia page for the Panic of 1837.
posted by Pastabagel at 2:30 PM on October 3, 2008 [3 favorites]

"We've seen it all before..." posted by fearfulsymmetry

posted by Joey Michaels at 2:36 PM on October 3, 2008

Which interbank lending rates are reaching record highs? The ones I know of aren't.
posted by 517 at 2:39 PM on October 3, 2008

I hope you realize that the Chronicle article discusses the Panic of 1873, but you linked to the wikipedia page for the Panic of 1837.

Oh, damn... dyslexia strikes again. (Though having Panics of both 1873 and 37 is just sneaky)
posted by fearfulsymmetry at 2:39 PM on October 3, 2008 [1 favorite]

You’d think the one thing we’d learn is not to let a small handful of greedy bastards monopolize all the wealth processes or we have panics and crashes when people try to corner the market.
Not that I don’t like capitalism, but c’mon, redundancy in any system is not that bad a thing. You put too much on one thing and if that thing (or person) fails you’re in a tight spot.
Oh, sure J.P. Morgan “saved the country” economically, but he also got to that position by selling the union outdated and near useless rifles during the civil war and went on to monopolize the steel industry. I mean some people say folks owning handguns is dangerous, but someone with billions of dollars of assets who can pauperize 1/2 country if they don’t get their way? No, that’s not dangerous at all.

As a conservative, I’d like to see some government controls on the government controls - that is - controls that don’t depend on which way the political wind is blowing that day. Otherwise it just turns into this back door deal system that’s been going on for years. Maybe income tax is the way to go. I don’t know.
I’m no economist, but I know a thing or two about stability. And the broader the base the more stable the platform.

Nothing wrong with someone making a few million, or a few tens of millions. Past that it starts getting a little dangerous. (I’ve got buddies who have MONEY money - they’re a bit divorced from reality. Some folks out here a while back stopped Metra from installing those high-contrast bumpy surfaces on the edge of a train station railroad platform. (Because, y’know, it’s *ugly*) Think about that. Metra - huge government organization -with a legal mandate for blind and low-vision folks. On what is ostensibly their own property. Uh, uh. Not here, pal. Stopped them - on a whim. Yeah, that’s maybe a bit too much juice in one place).
posted by Smedleyman at 2:43 PM on October 3, 2008 [1 favorite]

Which interbank lending rates are reaching record highs?

Money-Market Rates Climb to Records

posted by fearfulsymmetry at 2:48 PM on October 3, 2008

But to my main point, yes, the Panic of 1873 is a good analogy, but only because all panics are basically the same, in the way that starts can be very different but once they collapse into black holes, all black holes are basically the same.

Nearly, every panic, every depression, and every financial crisis is caused by the same thing - hyper expansion of the money supply driven by bubbles in one or a handful of assets which eventually triggers inflation and slowing economic growth, at which point the bubble bursts and through a cascading effect, the money supply contracts severely. The expansion that may have taken years in undone in weeks or even days.

Part of the blame for the Panic of 1873 lies with the decision to abandon sliver and switch to a gold-only currency standard in 1873. This crashed silver prices, which destoyed western mining, which in turn destroyed the railroad and the train companies that serviced the mining industry. I'm not convinced by the argument in the Chronicle article that the slump in European markets caused by American low-cost agriculture imports somehow triggered the economic collapse in the U.S., because the U.S. economy at that time was firing on all cylinders. And national economies were not as tightly linked to one another as they are today.

But the rail industry at the time was massive. Don't forget that all those steam trains were built before the advent of assembly line mass production. It was very labor and capital intensive, and you needed creative financing to be able to fund those operations. So when mining crashed, rails followed immediately. The Jay cooke bank was at that time almost a one product company (rail bonds), so the bank failed. In the 1980's Drexel Burnham met a similar fate as it too evolved into a one product bank--junk bonds.

So maybe the Panic opf 1873 is instructive, because the govt. switching to the gold standard functioned as a deliberate and extremely brutal money supply contraction. did the government even know how much coinage was in circulation as gold vs silver when they did this? So while the mining and railroad expansion after the civil war inflated the money supply due to credit, the government slammed the brakes, and destroyed the money supply.

In fact, later that decade, the govt passed a bailout of sorts in 1879 that mandated the Treasury buy up the silver at inflated prices.

The difference now is that finance is a much more precise science than it was then. People more or less hate the Fed right now, but Bernanke ins't trying to save Wall Street more than he has to to save the banking system. I think what he realized from the moment he started the job is that Greenspan's last act ofter years of growing the money supply was to open the spigot full blast, and that it was going to be his job to undo it. I think he thought that by tightening rates starting in early 2006 he could deflate the bubble before it popped, but I think we know know that he came into the job too late - the bubble starting popping in late 2005. When Bear Stearns failed, he began a very methodical process to keep banks flush with money to the extent possible. He's added over $600 billion to the money supply even before this bailout. The money is there, he just needs to restart the system so it starts flowing again.

People need to understand that finance is to economics as engineering is to physics. Wall Street needs to understand that trading is to finance as driving is to engineering.
posted by Pastabagel at 2:50 PM on October 3, 2008 [14 favorites]

There were a bunch of panics in the 1800s. We essentially had a boom and bust economy, and inflation and deflation were all over the place. There had been hardly any net inflation during that century, IIRC, certainly compared to the 20th century.

After the great depression and WWII the government took a much more active hand in economic regulation, and the results were decades of steady growth. At least until the end of the bush administration.

The markets took an absolute crash after the bailout (or right before, actually). I wonder what happened. I suspect people pulled out after the runup in the morning, thinking the vote might not pass and people ought to take their profits and run. After the vote, I suspect people just freaked out that the market didn't recover what it lost the last time the vote failed and just continued to panic.

Anyway, the bill's been signed, so it will be interesting to see what kind of takeovers or nationalizations go on over the weekend.

Also, Citibank and Wells Fargo are fighting over the corpse of Wachovia like starving hyenas.
posted by delmoi at 2:51 PM on October 3, 2008

Today's volatility in the DJIA after the vote was like nothing I've seen before. On a volatile day, you might see the average move several points with one tick. But today, there were 10- to 50-point jumps from one tick to the next, moving in either direction. You can't even see the volatility on the 1-minute charts; they look orderly in comparison to what was happening on my screen. Crazy.

517 - From Bloomberg: The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to 5.33 percent, an all-time high, the British Bankers' Association said. The rate for dollars climbed to 4.33 percent, the highest since January. The Libor-OIS spread, a gauge of cash scarcity among banks, widened to a record and Asian bank rates climbed to the highest levels in at least nine months.
posted by malocchio at 2:52 PM on October 3, 2008

Ah, yes. I remember it well.
posted by jimmythefish at 3:11 PM on October 3, 2008

Whenever you see major booms and busts, it seems there's nearly always games with money at the core. In this case:

This was caused by banks issuing excessive paper money (unbacked by bullion reserves), leading to inflation.

In other words: bad debt. We've been doing the same thing for the last ten years or so, but on a truly epic scale, because we don't actually promise to pay anything in particular with dollars, so there's no check on how many we 'print'. (most are issued electronically; the value of each keystroke goes up by ten times!) There's no 'safety breaker' in the system. If too many dollars go overseas, there's no signal that too many dollars are going overseas.

Like in 1837, there isn't the actual wealth to repay creditors (holders of currency) in value that they were expecting to get. They had a specific promise back then. The promise today is more nebulous; that dollars you cash in next year will be worth almost as much as dollars today in terms of the goods you can buy with it. Neither promise was or is true.

There are always lots of other ancillary explanations as well: bad money alone doesn't cause these problems, but it makes them possible. It lets stupidity run unchecked for too long, and lets problems get too large.

Bank failures like this don't happen out of nowhere; they take a long time to build up. The whole business of banks is lying about how much money they have. Sometimes they lie too much, and get caught.
posted by Malor at 3:26 PM on October 3, 2008 [1 favorite]

But to my main point, yes, the Panic of 1873 is a good analogy, but only because all panics are basically the same, in the way that starts can be very different but once they collapse into black holes, all black holes are basically the same.

When the LHC comes back online, this panic actually could collapse into a black hole.
posted by oaf at 3:29 PM on October 3, 2008

In many of my FPPs and comments I advise folks to look at the big picture, at the history of finance. While we can learn much about what might happen tomorrow as a result of our decisions today, the history of finance show us that, for some reason, we don't care to learn. Many of us who study asset bubbles hope that by understanding in detail how these events arise, we can change things, perhaps prevent them going forward.

I've been reviewing these quotes about the panic of 1837 for some time now, looking for context and since fearfulsymmetry made this wonderful FPP I'll post them here. They were excerpted from A Tale for Our Times: The Great Mississippi Bubble , by Washington Irving, who was writing about "The Great Mississippi Bubble", an investment bubble which blew up rather spectacularly in France in 1719.

Irving was attempting to understand the events of his time by looking to the past. Almost two hundred years ago Irving, like many of us now, wanted to know what might happen tomorrow - in those tumultuous times that were the panic of 1837 - by studying a previous asset bubble, one that took place in 1719 over a century before.

And while many of the specific details have changed since Irving's time, the broad themes are the same.
"Every now and then the world is visited by one of these delusive seasons when the credit system, as it is called, expands to full luxuriance; everybody trusts everybody; a bad debt is a thing unheard of; the broad way to certain and sudden wealth lies plain and open; men are tempted to dash forward boldly from the facility of borrowing."
"Promissory notes, interchanged between scheming individuals, are liberally discounted at the banks, which become so many mints to coin words into cash; as the supply of words is inexhaustible, it may readily be supposed what a vast amount of promissory capital is soon in circulation. Everyone now talks in thousands; nothing is heard but gigantic operation in trade, great purchases and sales of real property, and immense sums made at every transfer. All, to be sure, as yet exists in promise, but the believer in promises calculates the aggregate as solid capital and falls back in amazement at the amount of public wealth, the ‘unexampled state of public prosperity!’"
"Now is the time for speculative and dreaming or designing men. They relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions, and set them maddening after shadows. The example of one stimulates another; speculation rises on speculation; bubble rises on bubble; everyone helps with his breath to swell the windy superstructure and admires and wonders at the magnitude of the inflation he has contributed to produce."
"Speculation is the romance of trade and casts contempt upon all its sober realities. It renders the stock jobber a magician and the exchange a region of enchantment. It elevates the merchant into a kind of knight-errant, or rather a commercial Quixote. The slow but sure gains of snug percentage becomes despicable in his eyes: no ‘operation’ is thought worthy of attention that does not double or treble the investment. No business is worth following that does not promise an immediate fortune. As he sits musing over his ledger with pen behind his ear, he is like La Mancha’s hero in his study dreaming over his books of chivalry. His dusty counting-house fades before his eyes, or changes into a Spanish mine: he gropes after diamonds or dives after pearls. The subterranean garden of Aladdin is nothing to the realms of wealth that break upon his imagination."
"Could this delusion always last, the life of a merchant would indeed be a golden dream; but it is as short as it is brilliant. Let but a doubt enter, and the ‘season of unexampled prosperity’ is at an end. The coinage of words is suddenly curtailed; the promissory capital begins to vanish into smoke; a panic succeeds, and the whole superstructure, built upon credit and reared by speculation, crumbles to the ground, leaving a scarce wreck behind."
We see asset bubbles about once every ten years or so. This has been true for hundreds of years, regardless of the currency, political party, regulatory system, financial instruments employed or whatever. While the details change the story remains the same. Asset bubbles just seem to happen. As I've said before, I think humans are programmed for irrational behaviour on some level, at least when it comes to money, to speculation.

What we're seeing now - this struggle between greed and revulsion, between euphoria and fear, isn't much different from what we've witnessed in the past. From what we've seen during pretty much any other asset bubble in history. As basic human nature seems to be almost inextricably intertwined with asset bubbles, I'm not so sure if things will ever change.

I'm hopeful, but I'm just not sure.
posted by Mutant at 3:51 PM on October 3, 2008 [13 favorites]

I really dig these banking posts. Thank you.

Here's another panic: as long as were bouncing from panic to panic in this post -some say a lead up to our current central banking system.

The Panic of 1907

The Federal Reserve Act was singed in 1913
posted by captainsohler at 4:21 PM on October 3, 2008

“As basic human nature seems to be almost inextricably intertwined with asset bubbles, I'm not so sure if things will ever change.”

Yeah, but we have laws concerning other irrational behavior.
Seems to me this is a bit like nomic - or am I way off there?
posted by Smedleyman at 4:23 PM on October 3, 2008

As the Chronicle Review suggests, it will be consolidation of the smaller firms by the bigger firms that can hold on through these rough times.
posted by captainsohler at 4:36 PM on October 3, 2008

I would like Mutant to write a book, so I can buy it.
posted by empath at 4:44 PM on October 3, 2008 [3 favorites]

Are we then to assume that the sort of thing we are now undergoing is like \weather cycles and are not man-made but a natural phenomenon? Irving et al lived prior to a time when we had a govt that could deal with economic problems through the Fed, inflation etc. We have had regulations and controls in place and they have been removed or ignored or not policed properly. That has allowed greed to play its role, uncontrolled. Any number of Democrats, back to Carter, have been involved in deregulation (including Schumer and Dodd) but it is the GOP that has made it central to its party: free markets good; govt bad. Now of course, govt can help restore "freemarkets" but then must step back to avoid what they would call socialism.

easy solution: you fuck up, you get nationalized.
posted by Postroad at 4:54 PM on October 3, 2008

I think humans are programmed for irrational behaviour on some level, at least when it comes to money, to speculation.

I wonder why stories about banking and stock markets are often so full of extreme emotions: adrenaline spikes, frenzied trading, fear, excitement etc. Take those emotions and put them into a basic human relations Ask MeFi-question and you would be instructed to take a long walk and not try to do any important decisions until you have calmed down.

I suspect that all cognitive biases have much more effect when trying to make quick decisions under stress, there is no room or time for metacognition about these biases, just clinging to familiar patterns and mental shortcuts. As clever as banking people claim to be, I suspect that when 'interesting' days happen, they often operate on level stupid while thinking that they are 110% in it. Are they really making smart decisions, or are they all just assuming that their decisions are well thought out because there is intense feel of thinking and mental pressure going on? At any other profession, people avoid those conditions because then they make mistakes.
posted by Free word order! at 5:13 PM on October 3, 2008 [1 favorite]

Saying that the market is suffering from 'irrational exuberance', or a 'panic', is using the metaphor of a market as a person, and is not necessarily a description of the mental states of the individual participants. In fact, individual investors could all be acting rationally and calmly and still generate a 'panic', for example, in the market as a whole.
posted by empath at 5:26 PM on October 3, 2008

I'd like to panic, but I don't know how. I mean, what would I do in a panicked state? I don't have any stocks, and my windows aren't high enough to kill myself if I jump out of them. The neighbors would just think I'm weird. I guess I'll just keep reading about other people panicking. That sounds nice and relaxing!
posted by jamstigator at 6:34 PM on October 3, 2008

People need to understand that finance is to economics as engineering is to physics.

But physics is an actual science.
posted by rough ashlar at 6:55 PM on October 3, 2008

Mutant: 'As I've said before, I think humans are programmed for irrational behaviour on some level, at least when it comes to money, to speculation.'

I'm going to have to agree with this (although maybe not the requirement of speculation), and it seems there is literature to back it up (especially if you believe the results of experimental economics researchers.)

Few worthwhile papers (definitely not an exhaustive survey of the material out there):

- Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets - Smith, Suchanek, Williams - Econometrica 56.5 - Sept 1988 (I think Smith is the same one as 'An Experimental Study of Competitive Market Behavior' from JPE'62)

- Nonspeculative Bubbles in Experimental Asset Markets: Lack of Common Knowledge of Rationality vs. Actual Irrationality - Lei, Noussair, Plott - Econometrica 69.4 - Feb 2004

- Price bubbles in laboratory asset markets with constant fundamental values - Noussair, Robin, Ruffieux - Experimental Economics 4.1 - June 1001

(Sorry that some of those are gated - might be able to find better links w/ goog scholar)

Anyways, in 'simplistic' situations, it seems we naturally fall into bubble situations, and from an historical point of view they appear to be a repeating phenomenon. Unfortunately, there doesn't seem to be one root cause, nor one obvious solution.

On a side note, the Kindleberger book is very much worth reading if you're interested in the history of bubbles.
posted by rider at 9:07 PM on October 3, 2008 [1 favorite]

What was John McCain's role in ending the Panics of 1837 and 1873?

See, McCain is quite old.
posted by ROU_Xenophobe at 9:15 PM on October 3, 2008

I've not studied this, so maybe this is a well-trod idea— but Mutant, you and lots of people describe these bubbles as “irrational” behavior. Is that necessarily true? It seems to me that many people know that they're participating in a bubble, but believe that they personally can profit from it. The “greater fool theory” and so on. Everyone knows that at the end of a hand of poker, the pot will “collapse” and most players will walk away with nothing, but people still bet.

What's more, a fair number of people clearly do benefit from bubbles. Especially when the lifetime of the bubble is long enough that its inevitable collapse is beyond the participants' planning horizon (3-5 years?), even a temporary period of wealth is enough motivation to push things along. The entities making the decisions are individual humans, after all, rather than the banks or corporations they're making decisions on behalf of.

Sure, there are always a bunch of people who believe that this boom is different from all the ones that came before and it'll never end. But I don't think that describes everyone.
posted by hattifattener at 12:50 AM on October 4, 2008

Perhaps there is an evolutionary/biological advantage to the human propensity towards asset bubbles. Seems to me that Mr. Caveman would want to horde as much meat or mates or fire production equipment as he could get his hands on in order to improve his chance of survival and reproduction. Sadly, money today is no different.
posted by afx114 at 1:24 AM on October 4, 2008

By way of contrast, there are some interesting alternate theories of boom-and-bust/credit cycles typically associated with Austrian School Economics. Adherants argue that these cycles are not a natural feature of economies, but a result of some fundamental errors is modern banking.

As I understand it, the core of the arguement is that various mechanisms artifically expand money supply, leading to over-leveraging and speculative bubbles (and then the inevitable correection). Fingers of blame are pointed variously at central banks mismangement (as opposed to a free banking system), fractional-reserve banking and the use (and abuse) of fiat currency.

I don't really know enough to usefully comment (I've probably got the above half-wrong), but do find ideas intriguing. Any mefites care to refute or expound on this view of the causes of credit cycles?
posted by MetaMonkey at 3:36 AM on October 4, 2008

When the LHC comes back online, this panic actually could collapse into a black hole.

Do not forget the bosenova option where things can blow up like a supernova.
posted by rough ashlar at 5:41 AM on October 4, 2008

By way of contrast, there are some interesting alternate theories of boom-and-bust/credit cycles typically associated with Austrian School Economics. .... I don't really know enough to usefully comment

That is why arguing economics is like arguing religion. Lots of belief based on observation/reading - not alot of provable cause effect as the people who were on the loosing side of the argument will say 'oh, forgot this, did not predict that, or just wait what I said will happen'. (And Ron Paul is an author on Austrian Economics in case ppl care/want to pre judge the theory)

Arguing Money theory for a local currency is another example of arguing how many angels can dance on the head of the pin.
posted by rough ashlar at 7:12 AM on October 4, 2008

I just saw The Devil and Daniel Webster earlier today, which deals indirectly with this the 1837 panic.

...just one of those interesting coincidences.
posted by Target Practice at 2:45 AM on October 5, 2008

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