A cautionary tale from the 1790s
A speculator named William Duer borrowed like crazy in the 1790s to build a fortune. When he went bust, lenders said he was too big to fail. Sound familiar? Author David Liss recounts the story that led to the founding of the NYSE.
Author David Liss (www.davidliss.com/)
More on The Economy, Investing, Wall Street, America's Financial Crisis
TEXT OF COMMENTARY
Kai Ryssdal: When things are bad it's always tempting to try to find the silver lining, some clue that things aren't as bad as they seem, or that at least they've been worse before. By most accounts this is no Great Depression we're looking at. But commentator and novelist David Liss says while historical context offers perspective, rarely does it provide anything like comfort.David Liss:
Irrational greed is nothing new.
In fact, Wall Street emerged from America's first encounter with the sort of disastrous exuberance that has produced the current financial crisis.
And like today, the market of the eighteenth century had to learn the hard way, the consequences of a system that offered no restraints.
In the early 1790s, the first Treasury secretary, Alexander Hamilton, took innovative measures to strengthen the nation's new economy. His efforts were undermined by his former assistant--a speculator named William Duer.
Duer decided to use his inside information to build a massive personal fortune. He borrowed from banks he wanted to seize. He borrowed from his partners after lying about his worth. He borrowed from citizens by promising an impossible rate of interest. Not surprisingly, he failed.
His lenders thought Duer was too big to fail. So, his bankruptcy set off a panic that nearly destroyed Hamilton's fledgling banking system.
The government swooped in and snapped up securities to stabilize the markets. The same speculators who earlier wanted government out of the way, now realized they had to be saved from their own greed.
In response, a group of stockbrokers gathered under a buttonwood tree on Wall Street to form the now-famous Buttonwood Agreement. It established what was to become the New York Stock Exchange.
These founders of Wall Street believed they could establish rules to prevent speculators from ever again risking the nation's economy.
They took it as an article of faith that rational actors engaged in rational trade could--as a group--keep each other in check.
They learned the wrong lesson. Investment strategies may be rational, but speculators engaged in wild trades, with huge profits in the balance, cannot be.They are like gamblers at the craps table--high on a good roll.
A system cannot police itself when success makes its participants oblivious to the consequences. Looking over the wreckage of the past few weeks, you have to wonder when we're finally going to learn this lesson.
Ryssdal: David Liss is the author of the historical novel "The Whiskey Rebels."
Comments
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From Peoria, AZ, 12/08/2008
KB: While I understand that there were many, many people of varying professions who didn't see this coming I fail to see how this has anything to do with why you are tired of hearing the credit crisis being blamed on the lack of regulation. Maybe you didn't mean for it to or maybe I am missing it entirely.
10/22/2008
I am more than a little tired at hearing, particularly economists, say that the credit crisis was a failure of regulation. (One commenter to Marketplace opined that she was chagrined that during a period where we have more MBAs than ever, we have this crisis. - Without tarring everyone with the same brush, it is interesting to note that this happened on Bush's watch, the first President MBA.)
Where were the academics? Where were the economists? A few academics who are not really of the economics profession, such as Volcker or Nassim Taleb, warned of the looming problem. But it is remarkable how almost uniformly professional economists were either blind to the problem or ignorant (willful or otherwise).
And what of academic finance professors? Most cheered the asset bubble on.
What is one to conclude? Is academia intellectually bankrupt? We may have to answer, yes. For too long business schools have focused on individual competition without focusing on the public benefit. They adopted a bizarre view that Adam Smith's invisible hand meant that individual gain provided public welfare. (In fact, he said no such thing but rather the invisible hand guided persons together to transact in a public market.)
Alexander Hamilton was a brilliant, but largely self taught man. He saw the problem, he responded to it and set America on a solid financial footing. By this calculus, maybe we should close the business schools for the reason that they failed to provide any value to public welfare.
From Tucson, AZ, 10/21/2008
Thank you for this context. Let's change the name to "The Greed Market" not "the Free Market"
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