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PIVOTAL EVENTS
JULY 12, 2002
RECRIMINATORY LEGISLATION
BOB HOYE
If there was such a thing as a country dude with market sense in 1929, he
might have mixed some metaphors when looking at the runaway stock market: "The sky is going to
darken as the chickens come home to roost and the sound of barn doors being
slammed will be deafening.".
While today's concerns are ostensibly about the Enron, Andersen, and WorldCom debacles, it is essentially officialdom outraged by another
financial hangover and seeking relief by again slamming doors after the horse has
bolted. Seemingly without knowledge of financial history, both politicians and their
bureaucrats boasted that the good times of the 1990s were due to brilliant
policymaking. Actually, it was the sixth such rush of reckless speculation and
abuse of the credit markets otherwise celebrated as a new financial era.
Similar control delusions accompanied previous outbreaks and the collapse of
speculative abilities forced an equally rapid discovery of hubris, chagrin, and
allocation of the blame. Prosperity has many fathers and financial calamity is
an instant orphan.
Using previous examples, defaults have statistically clustered into the 2-3 years
following the dramatic climax of a new era. Typically, these have occurred
twice per century since the first one erupted with the notorious South Sea
Bubble in 1720. A pamphlet's complaint effectively described all subsequent
new eras: "The poor English nation run a madding after new inventions,
whims, and promotions … They can ruin men silently, undermine and impoverish, fiddle them out of their money by strange,
unheard of engines of interest, discount, transfers, debentures, shares, projects, and the
Devil and all of figures and hard names."
In those days, the "board" was called the court of directors and they made
appropriate contributions to politicians who could assist the company's ambitions. With the
consequent contraction, everyone became furious and in 1721 the House of Commons
passed the Bubble Act which, quite simply, outlawed a runaway stock market.
Fortunately, it was repealed just in time for the next bubble, which climaxed in
1772. Sacrificing its dignity to the urgency of widespread offense and chagrin, the
House then passed another Bubble Act. Interestingly, no such recriminatory legislation was passed
with the collapses of the 1825 and 1873 New Eras – no doubt due to the macho
common sense of 19 th Century liberalism.
However, the U.S. establishment wasn't as enlightened. The credit pressures
that accompany the culmination of a new era became all to evident in the summer of 1873
and the leading New York newspaper editorialized that there was no need to be
concerned. The pitch was that the Treasury System was superior to a central bank in
maintaining a boom. (America was between central banks.)
After decades of condemning the excesses of the old system, Wall Street
spokesmen and academics in 1929 celebrated the wonders of the new Federal Reserve System,
ensuring that nothing could go wrong. Understandably, there was a lot of recrimination
to go around and those dedicated to perfecting financial history came up with
Glass-Steagall and Securities and Exchange acts of the 1930s' "New Deal".
The intention of both acts was to prevent another runaway financial boom, which legislators
saw as the cause of the depression. Glass-Steagall separated banking from stock brokerage and the SEC insisted
that proper accounting and reporting would prevent extravagant claims and promotions. Its
drafters boasted that it would "put a policeman on the corner of Wall and Broad".
Fortunately, the historical imperative was fulfilled as, at least,
Glass-Steagall was tossed out just in time to assist ours - the greatest financial mania ever.
After basking in false glory, the pols are really pissed and scapegoats must be
hammered. The "perfections" of the Treasury System, the Federal Reserve System, and then the SEC are quickly
forgotten with talk of a more perfect agency; some are finding solace in tightening up
insider reporting, which is just another method of socializing stock markets.
As anyone outside academe knows, the bigger the boom, the bigger the bust,
and those with the monopoly on the currency have played a big part in the excesses. As run by
unopposed adventurers in public policy, we have seen the most reckless depreciation
of the senior currency in 400 years, which fostered the greatest CPI inflation in 400
years and the most reckless financial boom in 300 (bubbles started in 1720).
When it comes to laying the blame, the underlying shredding the wealth policies pushed
by statist intellectuals upon gullible politicians must be included. As for speculators, all
they have been trying to do is discount relentless but official currency inflation, first in
tangible assets, then in financial assets, and now most know that these phenomena don't
last forever.
This time around, the clean-up committee should include those who understand
the markets and exclude fanciful theories about intervention that have been
little changed since Old Rome came up with the New Deal following the bust
of 33 AD.
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