RSS Output
French    German    Spain    Italian    Arabic    Chinese Simplified    Russian

Letters by a modern St. Ferdinand III about cults

Gab@StFerdinandIII -

Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

Tempus Fugit Memento Mori - Time Flies Remember Death 

Back     Printer Friendly Version  

Bookmark and Share

Thursday, April 9, 2009

The Real Estate bubble of 1815-1819

See a pattern ? – corrupt governments, corrupt politicians, state managed banks; free money......

by StFerdIII

The current meltdown has a quite few historical precedents. One such era of real estate collapse and financial destruction occurred in the early 19th century from about 1820 to 1830. In effect it was a deep depression and it was a world-wide phenomenon in which all developed states suffered. And like today's financial melt-down it was caused by the nexus of government-corrupt banking and wild real estate speculation. But unlike today, bigger government was not deemed the right answer to correct what corruption and government had wrought.

After the end of the Napoleonic wars and the war of 1812, the banking system in the US and Europe grew in complexity and size. New financial markets and products were created to take advantage of peace time trade and expansion. This was especially true in the US.

From 1816-1820 the US added 6 new states and a legion of new state-run banks. Literally hundreds of new US state-level banks came into existence in those years. There was a huge demand for capital – not only for industry, trade and existing agricultural development, but most importantly for the settlement of new lands to the West. The rush to the West began in earnest post 1815 and in America, banks were the vital platform in establishing the young Republic in the West.

This growth in banks and land settlement fuelled rampant real estate speculation. State bank charters blossomed as Americans and immigrants migrated en masse to the new lands. As America grew land speculation was probably inevitable, but it was certainly fueled by bad policy, inept government, and basically free money.

The US economy in 1815 was largely rural. Industry was developing along the East Coast but it was less than 20% of total GDP. However the entire world, and especially British steam powered mills needed US cotton. From 1815 onwards the price of US cotton rose, as world wide demand for the material which was used in clothing and in sundry other products, boomed. As cotton became more profitable, the demand for cotton friendly land accelerated. In essence the US real estate bubble of 1816-1820 was driven by king cotton and the cross-Atlantic cotton trade.

To fund the purchase of land, banks relaxed lending standards. They allowed a 25% down deposit in cash on the land. The rest was borrowed. The US central bank at the time [the Standard Bank of the US] pushed this policy set – limited equity investments and cheap money with low interest rates. They also added what was to become common in buying stocks – buying on margin or credit. After putting down 25% on land, speculators or owners, were able to raise a second mortgage on the assumed rising value of the property, to make payments on the first mortgage. In effect the SBUS and state banks were allowing people to buy most of the land with little or sometimes, with no, money down.

The result was a literal explosion of estates, individuals and speculators engaging in buying and selling land – all of it fueled by the profits, credits and the erroneous assumption and one which destroyed the economy of today, that land prices only go up. The real estate bubble migrated from the rural to the urban. It created America's first great urban housing boom in both construction and sales. No one believed that the glory days of housing would end. Speculators moved in to all urban areas and secured by cheap money, erected ever larger developments or urban renewal programs. Buyers likewise took advantage of lax SBUS lending policy and low rates and bought not only one house but in many cases, 2 or more.

By 1819 the bubble was in full flower across the entire US economy. But the collapse of the bubble was not long in the making. By 1819 significant amounts of cheaper and better India cotton were making their way to English looms and factories. The price of US cotton started to decline and then accelerate downwards. The sharp drop in cotton prices mauled US land prices which fell 75 % in 1819. Banks now found themselves in possession of assets far below the loan value. The US government in a panic decided to tighten money supply, resurrect prudent lending practices, raise interest rates and generally compound the problems and initiate a depression. Credit dried up, foreclosures became common, banks went bankrupt, and businesses and estates were ruined.

It took a while for the depression and the failure of the banking system in the US to traverse the Atlantic. Indeed during the 1820s many consumer inventions from products to plumbing were radically improved or created. Life became better, and more modern for all classes. It is in the 1820s that we can see the rudiments of a consumer based society – one in which innovation, gadgets, technology and rising expectations were all prevalent.

But the banking explosion of 1819 did have other less propitious and profoundly influential consequences. Its effects were felt for over a decade. Economic, political and social change and flux followed the collapse of finance and the economic downturn. By 1830, in both Europe and America, profound political change had taken place. The 'old order' was not only challenged but in many countries replaced. In France and the Continent violence displaced les ancien regimes. In America and across much of the modern world, a new age of demos and populist politics - much of it targeted at finance and corrupt politicians - became the new social power. In short the banking collapse of 1819 heralded the collapse of the old landed aristocracy and the rise of mass politics and a shift in power from the rural to the urban.

The world in 1820 was not as integrated as it was to become in 1890. Barriers to trade, imperial preferences and the reasonably slow dissipation of communications and technology were all powerful impediments to quick and immediate and coordinated international trends – either up or down. But as the financial collapse in the US worked it ways overseas it had an impact.

Rising prosperity had brought about a land speculation boom in Britain and France as well. Much of this was built on a more muscular banking system, flooded with capital post the Napoleonic era, tied to the increase in industry and profits, which innovation and peace allowed. Like all unsustainable bubbles real estate in Europe also went through a much needed correction during the 1820s. The problem was not modern methods of production or capital. The problem was the usual suspects of incompetence and corruption. Industrialization had simply quickened the age-old problem of irrational bubbles and speculation. The creation of a powerful banking sector coupled to corrupt governments, corrupt politicians and bad policy only accelerated the impacts – both up and down – of speculative practices.

One glaring and obvious aspect of the US real estate bubble of 1819 was the gross level of almost unbridled corruption in US politics and its ties to the US banking system. US administrations were famously corrupt in the 19th century – much like their British and French counterparts. Banking fraud, payoffs, bribery and outright theft dominate US political reality from 1815-1830. This unsavoury aspect of US corruption certainly had a large role to play in the collapse of its real estate sector during this period.

Many parallels exist with today's recent economic decline. Easy money, low credit, government programs to stimulate real estate speculation, bribery of politicians to ignore regulations and impropriety, and outright fraud are some. There was no 'market' failure in 1819. And there was no 'market' failure in 2008-9. It was governmental distortions which precipitated both crises.

What is most peculiar however about this current economic fracas is that the creators of the crisis – banks, government and regulators – are now being rewarded with other people's money and in the case of the latter 2, a huge increase in size and power. At least in the early 19th century, the general population and the average politician was bright enough to know that this was not the solution. It is a fact lost on most commentators today and the future consequences will be severe. Government causing crises should not be expanded and rewarded.

Article Comments:

Related Articles:

USA - cult of big Gov't

11/13/2014:  Central Bank cult, free money, no interest rates....Keynesian nirvana

9/8/2014:  Stockman and the cult of central banking

3/26/2014:  The cult of government and micro-managing the economy

1/29/2014:  Globaloneywarming and Economic illiteracy

1/28/2014:  Bernanke and the next great implosion[s]

4/13/2013:  Economist-Quacks ''Assume a Perfect World'

12/5/2011:  Statism. The inexorable rise of big nanny government since 1947.

9/9/2011:  Obamism and the failure of the Keynes model

8/21/2011:  The 2011 Recession.

8/8/2011:  Only the media and the politicians are surprised by the financial meltdown.

5/12/2011:  Old age transfers and bankruptcy.

5/10/2011:  GDP calculations are wrong

4/23/2011:  Inflation and debt.

4/18/2011:  Why does America still have a Triple A credit rating?

4/15/2011:  Cut government in half or see your taxes double.

4/14/2011:  US debt and the Republicrats.

1/10/2011:  Unions, the surest path to failure and bankruptcy.

11/5/2010:  Central Bank madness. Another bubble is guaranteed.

10/29/2010:  Economist Kotlikoff: 'US is bankrupt.' We know.

10/25/2010:  Regulations and government killing local jobs. Choquant!

2/17/2010:  Government stimulus programs only stimulate government not jobs

2/5/2010:  Economic Lies – US GDP ‘Growth’ [Hardy Har Har]

1/14/2010:  Government created stock fraud.

1/10/2010:  Politicized Central Banks do not control inflation.

10/6/2009:  The Empire's decline is forecasted in its dollar.

8/25/2009:  Governments caused this 'crisis'.

8/22/2009:  The Chairman's failure - Government 'Stimulus' never works.

7/16/2009:  Obama Health Care – a very sick idea.

4/9/2009:  The Real Estate bubble of 1815-1819

3/24/2009:  A contrarian view on Obama's bank bailout and spending plans

3/13/2009:  Economists Fail Prophet Obamed.

2/10/2009:  Stimulating nothing but fear, big government and Obama's left wing addictions

11/29/2008:  The Black Jesus and the old, 'New Deal ' to 'create' 2.5 million jobs!

11/23/2008:  Keynesian economics is a failure.

5/2/2008:  Recession evidence is now finally here and it will be nasty.

4/13/2008:  Who are the 'poor' exactly?

1/3/2008:  We need tax cuts not massive interest rate cuts.

11/13/2007:  US Income mobility is strong

11/9/2007:  The Empire's declining dollar.

10/31/2007:  America vs. Europe

10/14/2007:  The Mommy-State cult

9/10/2007:  Tales of market woe and pain: Blame the Fed

8/17/2007:  Conrad Black Deserved to Fall

8/24/2006:  Supply side economics works

5/12/2006:  Illegal immigration is a net drain on society

8/17/2005:  US Protectionism – Steel Tariffs, the Byrd Amendment and now Lumber

7/15/2005:  US Revenues are up, deficit is down, but no media reports

5/25/2005:  US Savings and Net Assets Highest in the World

5/25/2005:  Bush’s Fiscal Policy is Wrong

4/25/2005:  The US Economy – rising expectations

3/25/2005:  Why Trade Deficits Don't Matter

1/4/2005:  Why the US$ will go up

11/15/2004:  Jobs, Jobs, Jobs