Call it good timing or déjà vu, it certainty is a testament to history, how perfectly it is built to cyclically repeat. Optimism, quadrupling money in a few weeks, insane valuations, precede crash, bankruptcies, frauds. The repetitive nature of societal memory erase is incredible. Do we really need Machine Learning when History works so perfectly?
First published in Bucharest Daily News, April 12, 2006.
Bubbles come and go and come again
Human psychology is fascinatingly cyclical. Bank failures and manias mar the history of markets on a cyclical basis. Whatever the regulators may do to control frauds they invariably happen with the cyclical accuracy. The reason being that human behavior is patterned and mass psychology moves from confidence to optimism to greed and to fear to panic and then back again.
The Florida land boom began in the early 1920s when America had started to enjoy a long period of prosperity. The wealthy North Westerners visited glamorous Florida sun resorts as Miami and Palm Beach. Initially land prices were below the national average. It was easy to settle permanently or have a second home as demand increased land prices rose initially on a sound basis and later it started becoming a boom. In 1923-26 Florida's population grew by 25% to 1.3 million and hence the real estate grew faster. There are many examples of a lot of Miami beach purchased at $800 resold several years later at $0.15 million. There are even examples of a lot of purchased in 1896 for $25 near Miami sold for $0.125 million in 1925.
The stories of instant wealth and rapid capital gains spread like fire and since there was a limited amount of land in the subtropical belt the scarcity added to the lands perceived value. The tremendous appeal pushed prices to undreamt-of levels. Scarcity, as they say, is a key ingredient in giving a mania both credibility and capability to grab imagination. A sure sign of mature land boom is an unrealistic number of real estate agents. There was one broker for every three residents.
There were even examples of people quadrupling their money on a beachfront in a week. Few people questioned that these so-called real estate experts had gained their reputations in fields other than real estate. Sooner or later some of the more heavily leveraged players began to come unstuck and bank margins of 10% evaporated overnight as prices moved below the value of mortgages. Everyone was aware of bullish arguments as ads were all over the place but when the tide turned no new buyers were available and hence the crash.
The South sea bubble. One of the requirements of any financial mania is a revolutionary concept. In 1711 the South sea company operated in trade between South America and South Pacific which was considered a growth area the company got exclusive rights to English trade with Spanish colonies of South America and South Pacific. The purchasers not only got a chance to participate in company growth but also in the monopoly situation. In six months the stock multiplied 8 times reaching 1000 pounds and the stock was on everyone's lips. At the height of mania the value of the company's stock was the equivalent of five times the available cash not just in England but in whole of Europe. Hindsight tells us that this was unrealistic. As when the question becomes not whether the price will go up but when and how much, it is time to reflect and do some objective thinking there were stories floating regarding the company's new projects like draining Irish bogs, importing jackasses from Spain and even trading human hair.
It did not matter what the company was going to do there was a surplus of funds and few places to put them. The new issues quickly sopped up the surplus funds just as did the marginal land in Florida and silverware in 1980. Many fraudulent companies came in, like a London printer who came up with an undertaking of the great advantage he raised £2000 in six hours and left Europe never to be tracked again when the stock tumbled there was no collateral and so many banks failed. Even the Bank of England itself narrowly escaped financial ruin strange. As these stories might seem Romania, India in the US even had their share of bank failures and this was not a time centuries back but just half a decade or a few decades back. Bubbles form and bubbles burst the cycle happens again and again.
