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A History Lesson for President B.O.

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February 26, 2009 – Comments (8)

Wow, lots of good discussion in the thread below.

We all know president B.O. isn't going to read this blog, so I don't feel the need to be particularly reverent on the subject of housing, especially for a guy who engaged the services of a convicted influence-peddler in order to expand his own piece o' the Illinois real estate pie. (He's a product of the Chicago Way, after all.)

And yes, the example below is oversimplified, but it proves a very simple point in a very simple way. The $8,000 tax credit is a complete waste of money and it's like spitting in the ocean -- it' won't move the overall tide. The cash received by anyone buying a home this year will, with great certainty, be more than offset by big losses in equity over the next couple of years. Let the prices correct on their own, more quickly, and you have a better, cheaper solution. Drag it out, and you have a longer, more painful solution. Who benefits from this program? Well, the people plugging hardest for it were Realtors and home builders.

I believe the president is mentally capable of performing the basic math I described below, but I don't think he's psychologically capable of doing it, because he's in a state of denial, as are the rest of the politicians in Washington. Too busy with their Twittering Blackberries to see the obvious, they try and curry favor with a disaffected homedebtors by taking money out of the pockets of those who didn't do something stupid with a big mortgage.

And yes, President B.O. needs to stop trying to sound intelligent, and head back to grade school for some basic grammar lessons. There's nothing more annoying to me than pretentious hack- grammar used by otherwise intelligent people who think words like "I" and "myself" sound more sophisticated than the requisite "me."

Finally, I voted for Obama, and I think he's a decent statesman, but his idiotic policies -- and pretentious grammar gaffes -- get no free passes from me. I didn't take it easy on Shrub, Rove, or Gonzales and his goon squad, either.

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Here beginneth the history lesson, President B.O. It's short. You could even twitter it on your Blackberry.

You cannot borrow your way out of a bursting credit bubble. The overpriced assets will fall. History proves it over and over.

Here endeth the lesson.

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Here beginneth the homework. Your assignment, President B.O., is from Volume 1, Chapters titled "The Mississippi Scheme," and "The South Sea Bubble." For extra credit, you may review the Tulip Mania.

In case you are too busy, Mr. President, here are some snippets that will give you the gist of the second of these schemes. At the end of the run, despite the government's best efforts to support a bubble in worthless assets, the prices fell anyway.

It seemed at that time as if the whole nation had turned stockjobbers. Exchange Alley was every day blocked up by crowds, and Cornhill was impassable for the number of carriages. Every body came to purchase stock. “Every fool aspired to be a knave.” In the words of a ballad published at the time, and sung about the streets,16

“Then stars and garters did appear

Among the meaner rabble;

To buy and sell, to see and hear

The Jews and Gentiles squabble.

The greatest ladies thither came,

And plied in chariots daily,

Or pawned their jewels for a sum

To venture in the Alley.”

The inordinate thirst of gain that had afflicted all ranks of society was not to be slaked even in the South Sea. Other schemes, of the most extravagant kind, were started. The share-lists were speedily filled up, and an enormous traffic carried on in shares, while, of course, every means were resorted to to raise them to an artificial value in the market.

It is a deeply interesting study to investigate all the evils that were the result. Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later...

During the progress of this famous bubble, England presented a singular spectacle. The public mind was in a state of unwholesome fermentation. Men were no longer satisfied with the slow but sure profits of cautious industry. The hope of boundless wealth for the morrow made them heedless and extravagant for to-day. A luxury, till then unheard-of, was introduced, bringing in its train a corresponding laxity of morals. The over-bearing insolence of ignorant men, who had arisen to sudden wealth by successful gambling, made men of true gentility of mind and manners blush that gold should have power to raise the unworthy in the scale of society. The haughtiness of some of these “cyphering cits,” as they were termed by Sir Richard Steele, was remembered against them in the day of their adversity. In the parliamentary inquiry, many of the directors suffered more for their insolence than for their peculation. One of them, who, in the full-blown pride of an ignorant rich man, had said that he would feed his horse upon gold, was reduced almost to bread and water for himself; every haughty look, every overbearing speech, was set down, and repaid them a hundredfold in poverty and humiliation...

The next consideration of the legislature, after the punishment of the directors, was to restore public credit. The scheme of Walpole had been found insufficient, and had fallen into disrepute. A computation was made of the whole capital stock of the South-Sea company at the end of the year 1720. It was found to amount to thirty-seven millions eight hundred thousand pounds, of which the stock allotted to all the proprietors only amounted to twenty-four millions five hundred thousand pounds. The remainder of thirteen millions three hundred thousand pounds belonged to the company in their corporate capacity, and was the profit they had made by the national delusion. Upwards of eight millions of this were taken from the company, and divided among the proprietors and subscribers generally, making a dividend of about 33l. 6s. 8d. per cent. This was a great relief. It was further ordered, that such persons as had borrowed money from the South-Sea company upon stock actually transferred and pledged at the time of borrowing to or for the use of the company, should be free from all demands, upon payment of ten per cent of the sums so borrowed. They had lent about eleven millions in this manner, at a time when prices were unnaturally raised; and they now received back one million one hundred thousand, when prices had sunk to their ordinary level.

But it was a long time before public credit was thoroughly restored. Enterprise, like Icarus, had soared too high, and melted the wax of her wings; like Icarus, she had fallen into a sea, and learned, while floundering in its waves, that her proper element was the solid ground. She has never since attempted so high a flight.

In times of great commercial prosperity there has been a tendency to over-speculation on several occasions since then. The success of one project generally produces others of a similar kind. Popular imitativeness will always, in a trading nation, seize hold of such successes, and drag a community too anxious for profits into an abyss from which extrication is difficult. Bubble companies, of a kind similar to those engendered by the South-Sea project, lived their little day in the famous year of the panic, 1825. On that occasion, as in 1720, knavery gathered a rich harvest from cupidity, but both suffered when the day of reckoning came. The schemes of the year 1836 threatened, at one time, results as disastrous; but they were happily averted before it was too late.27

 

8 Comments – Post Your Own

#1) On February 26, 2009 at 8:22 PM, djemonk (< 20) wrote:

You've got some good points there.  I think you are spot on about the effects of a tax cut on many people.

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#2) On February 26, 2009 at 8:23 PM, Zanibel17 (97.42) wrote:

Awesomeness.  A defense post.

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#3) On February 26, 2009 at 9:34 PM, zgartz (< 20) wrote:

Hey.  Good work.  Here's more math for Messiah B.O.

Divide the $700 trillion uncollateralized derivative market by the total number of ounces of gold ever produced and arrive at a current price.

Now all countries with gold reserves can value their currencies relative to each other.

But you say, some countries don't have any gold.  Guess what, they can shop for credit and earn their gold ounces.

So simple even I can figure it out all by myself!

Zgartz

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#4) On February 27, 2009 at 12:10 AM, EverydayInvestor (< 20) wrote:

Haha you voted for the loser. I would've voted against him solely b/c he was from Chicago. Now Glenn Poshard, there's an Illinoisan I would've voted for (oh wait, I did, for guv'ner, two corrupt guv'ners ago).

We get the government we deserve. I'm coming more and more to believe that perhaps a device such as the Osterhagen Key would be a good idea. Call me a misanthrope and I will not be offended.

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#5) On February 27, 2009 at 12:15 AM, EverydayInvestor (< 20) wrote:

hmm, my oblique Dr. Who reference may not be correct judging from some fan speculations (what crazy people spend all their time obsessing about TV, anyway? They should obsess about politics and the stock market). Anyway, perhaps we should kill off the whole human race, and maybe in 50 million years the chimpanzees will evolve into a more intelligent and rational race than we were.

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#6) On February 27, 2009 at 5:09 AM, camistocks (< 20) wrote:

hmm, don't try to teach people a lesson. It is just so arrogant...

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#7) On February 27, 2009 at 6:47 AM, PrestonCheek (31.71) wrote:

Bent, great defense to the other post.

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#8) On February 28, 2009 at 5:54 PM, camistocks (< 20) wrote:

Sorry for my comment, I was in a bad mood.

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