Archive for the ‘speculation’ tag
An antebellum political speaker makes his case in George Caleb Bingham’s painting, Stump Speaking.
The Kentucky Relief War of the 1820s
The battle of creditor and debtor has been present since the first days of the colonies, and the episode that occurred in Kentucky from 1819 to 1825 is particularly illustrative. In that interval Kentucky’s political factions established parallel banking systems and courts, grinding the state’s business to a standstill over the issue of inflation and debt relief. This battle has been called the “Kentucky Relief War” or the “Old Court – New Court Controversy”.
On a human interest level, future luminaries of American politics such as Henry Clay, Francis Preston Blair, and Amos Kendall all played roles as young participants. Blair and Kendall would later be closely aligned with Andrew Jackson while Clay became a staunch opponent.
Land speculating and its fruits in Kentucky
The process repeated itself thousands of times in Kentucky, starting in the 1770s and continuing into the 1800s.
A scrabbler entered a county from the east and used bank loans to gain title to a large amount of land (usually with the help of some political connections). There he sat for a few years (often as an absentee owner), or sometimes less, until the inevitable waves of settlement followed him up.
Via a shrewd distribution and sale of the land, the speculator pocketed his profits and moved west to the next open plot. As the population increased these men took to creating entirely new towns and developing them. With a different backdrop, it’s hardly different from the practice of house and condo flipping that survives into the present day.
A real estate map of Franklinville, Kentucky — a town which existed only in the dreams of a land speculator (click for source).
This practice lived and died on the availability of credit, which in those days meant the assets of a bank backed by gold or silver. Some banks loaned out a large amount of currency relative to their assets, while others managed their portfolio in a more conservative manner. In Kentucky during the 1810s the economy boomed and the population grew rapidly. State banks (and the Second Bank of the United States after 1817) prospered under loose lending guidelines and the availability of credit was rarely an issue for speculators.
In this environment many were drawn to real estate investing. The profits were high and the work was not as taxing as it was in other professions. A few men could be forgiven for believing they had entered a no-lose situation.
The Panic of 1819 and the real estate collapse
The Panic of 1819 decimated these speculators. As the first bankruptcies and foreclosures came in, the banks in Kentucky belatedly realized they had overextended themselves. As their gold was called back to the east they were unable to write loans commensurate to the needs of the real estate speculators who then withered on the vine, their rage growing hotter by the day. Common farmers found themselves shut off as well and joined the chorus of anger.
The elite of Kentucky society supported the banks. Most of them were creditors and were philosophically amenable to the virtues of a gold standard. Land speculators were usurpers in the eyes of this crowd, and the panic was now giving them their just comeuppance. Many of these elite were planters who owned slaves and had established plantations. They had invested in the banks in many cases and stood to lose greatly from any sort of debt forgiveness or inflation.
The speculators and indebted farmers of the state formed the Relief Party to press their claims. Above all they wanted inflation. They elected majorities to the state legislature in the 1820 elections who promised to fulfill these goals.
Conservatives in Kentucky and elsewhere looked upon these developments aghast. Kentucky had been among the first states to remove property qualifications as a criteria for voting, and now it seemed to those outside the fray like a rabble had seized control of an entire state government.
The Relief Party in control, and the fracturing of Kentucky’s banks and courts
The Relief Party wasted little time in enacting their agenda. By the end of 1820 an experiment in loose banking was established, virtually guaranteeing a wave of inflation. The legislature also suspended collections on any loans for the period of one year. Outrage ensued from the creditor class.
The legislature created inflation via a new Bank of the Commonwealth, designed to be extremely debtor friendly. This new bank had no specie behind its notes, but creditors were required to accept them by state law. In practice this established a fiat money system in the state, which was extremely radical for those times.
With the legislature lost to them, creditors challenged these laws in the state courts. Here they won victories and by 1823 were able to strike down the suspension of collections. Bankruptcies, foreclosures, and payments from debtor to creditor continued apace.
Not giving up, the Relief Party simply established a new state court. Competing decisions were handed down, the old courts refused to dissolve, and an extraordinary situation came into being whereby two separate courts claimed to have the highest authority in Kentucky. These became referred to, simply enough, as the Old Court and the New Court. Observers feared a civil war would erupt within the state if passions continued to remain inflamed.
Henry Clay, Francis P. Blair, and Amos Kendall
Amos Kendall and Francis Preston Blair were two figures in the center of this controversy on the side of the Relief Party. Blair was one of the judges on the new court, and Kendall was a publisher who became famous in his defense of the system. Both of these men became key allies of Andrew Jackson and later formed part of his so-called “Kitchen Cabinet” when he was President.
A portrait of Amos Kendall, late in his life.
Henry Clay, on the other hand, was the most prominent opponent of the scheme. He supported a strong, national financial system backed by the Second Bank of the United States, and he was appalled at Kentucky’s willingness to strike out from this situation.
The Relief Party succeeded in their goal of initiating a round of inflation. This may have been good in the short-term for those who were indebted, but it caused great instability in prices and land values and did not help to grow the larger economy. Eventually a backlash developed against the scheme and by the mid-1820s the Relief Party fell out of favor.
Henry Clay’s reputation was enhanced. By combining his defense of nationalism and of conservative financial practices, he burnished his credentials with the Democratic-Republicans (later the Whigs) and ran for President several times. As a candidate in 1824 he carried the state of Kentucky and then assisted in the election of John Quincy Adams.
Eventually the economy of Kentucky picked up again, gaining momentum from the national recovery, and the issue of the New Court vs. the Old Court receded from prominence. In 1826 the New Court was rescinded and the judicial branch of Kentucky was reunited. Thus was demonstrated the other eternal truth — that the only lasting remedy for a financial crisis is a renewal in growth generating new, performing loans for the banks.
Hard Times, Debt Relief, and Inflation
The demand for inflation and debt relief has always been present during rough economic times (be it the 1780s, 1819, the 1890s, or the 1930s), and it no doubt will reemerge at some time in the future. Perhaps the issue will be student loans, state and local pensions, or even the federal debt itself. Perhaps it will be something else that’s not yet apparent.
Whatever the cause, anyone who is tempted to believe that the real estate crisis of 2008 was an anomaly, or that better regulation will prevent it in the future would do well to look upon the history of finance in the United States. It is littered with the tales of panic and collapse, such as that in Kentucky and elsewhere that occurred in 1819, and the aftermath of such events is always devastating for the unprepared.
The best an individual can do is to remain vigilant on behalf of their own interests, for surprise is the most dangerous adversary of all.
Arthur M. Schlesinger, Jr. — The Age of Jackson
Wilma A. Dunaway — “Speculators and Settler Capitalists: Unthinking the Mythology about Appalachian Landholding, 1790-1860″ (in Appalachia in the Making: The Mountain South in the Nineteenth Century)
David S. Reynolds — Waking Giant: America in the Age of Jackson
“Bank of Kentucky and Bank of the Commonwealth”
“Class Rivalries in Frontier Kentucky and the Applicability of Jeffersonian Agrarianism”
“Murder and Inflation in Kentucky”
by Joseph P. Farrell
I ran across this interview of Randy Maugans by William Henry, courtesy of Facebook friend Patricia Howard that brought it to my attention:
I have to say, that I am entirely in agreement with their assessment. The last year saw the alternative research community – what Mr. Henry calls the “truth community” – taking high dives off the cliffs into belly-flopping hysteria. We were treated to endless hype and the so-called testimony of “whistleblowers” – who must always remain anonymous of course, with little by way of corroboration from other sources to back any of it up.
But we have to ask ourselves why this is happening? Why the tailspin into endless speculations and apocalyptic scenarios, including replays of Hale-Bopp with Elenin, the reliance upon science fiction novels as “analysis”, the heavy dose of alleged “whistleblower” testimony, the construction of macro-scenarios of apocalyptic “grandeur”(or perhaps better put of apocalyptic grandiosity)?
In his questioning of Mr. Maugans, William Henry elicited the response that Mr Maugans was connecting dots that would indicate that some of this, at least, is deliberate, suggesting that the aim is really to cast a pall of suspicion over anyone researching in the field. This, is, indeed, what has happened. 2011 saw a move within this “community’ (and I hesitate even using that word in connection with alternative research) away from research and analysis, and toward rampant speculation and scenario construction, “whistleblower” testimony, and…well… what I like to call the “diva” personality, i.e., the reliance upon a kind of “capital” built up over the years to promote speculation whose acceptance is based upon the stature or standing individuals have or had within the “community.”
Speculation is, of course, the name of the game within this whole field, nothing would get done without it. But there is a great deal of difference between speculation based on research, documents, reasoned argument, and so on, and that based upon a diva’s reputation and hysterics and histrionics, whistleblowers, alleged threats, marketing schemes in conjunction with said threats, anecdotes, and so on.
The bottom line, for me, is this, and I have said it often before: “research” based upon whistleblowers, channeling, science fiction novels or Hollywood movies, dubious “word analysis”, and all the other claptrap that one so often hears, is not research. One cannot footnote a whistleblower, a channeled source, and so on. These things may, from time to time, shed interesting light on an argument, or even connect an interesting dot or two, but in the final analysis, there is no substitute for real documentable sources, for reasoned speculation and argument. Let’s hope that 2012 brings some sanity back to the field.
Why is “whistleblower” testimony such a problem? Well, as I pointed out in Saucers, Swastikas, and Psyops, and as Dr. de Hart and I observed in Yahweh the Two-Faced God, such testimony is inevitably religious in its structure, it is a kind of “special revelation” in the face of which one is forced by the nature of the case to become either a “believer” or a “skeptic”. The net effect of those relying upon such cases or indeed promoting it and pandering to it, is to transform the whole field into yet another form of “revealed religion”, sans the deities, whose roles are replaced by the “divas” doing the singing of the aria.
As for Mr. Henry and Mr. Maugans, three cheers, guys, for having the guts and cahonies to call it all into question. Bravo!
The commodification and expansion of credit and the transformation of housing from shelter to speculation doomed the nation to debt-serfdom.
by Charles Hugh Smith
How did America become a land of debt-serfs? We can trace our debt-serfdom to three core dynamics which now dominate the American economy. To understand the transition from a state of minimal financial wealth/maximum freedom to one of debt servitude (illusory wealth and sacrifice of freedom for all that lifetime debt can buy), we first need to understand the gradual nature of this transmogrification.
It has become a cultural given that major political changes are often wrought by conspiracies, official or informal. Conspiracies–otherwise known as crony or cartel capitalism and insider manipulation of process and perception–do exist. However, major cultural shifts are long, drawn-out affairs that result not from conspiracy but from the steady application of self-serving agendas by wealthy, politically powerful special interests.
It may be difficult for many to imagine, but it was once difficult to obtain credit.Two generations ago, “if you want a loan, you have to prove you don’t need it.” Applications for credit cards, auto loans and mortgages were examined by bank officers in your local branch, people who had actual working knowledge of your payment history, account balances, etc. (Student loans did not exist.)
A modest home improvement loan required lengthy applications and a face-to-face meeting with a senior bank officer, who asked probing questions about your personal finances. (I know this because I went through the process in 1980.)
Credit card limits were low–$500 was common–and it required an application to raise the limit on your one credit card (multiple cards were frowned upon as risky). An increase in your credit card limit was a reason to celebrate–you’d won the trust of your bank through prudent management of your money.
I know this sounds like 1880, but it was actually 1980, a mere 30 years ago. People had a home mortgage, but prior to 1970 the balances were modest in terms of annual income, and the primary reason people got a mortgage was not to speculate on housing but because it was cheaper to own than rent, as millions of veterans qualified for low-down payment VA loans. (The Armed Forces were much larger in those days, in terms of active-duty personnel as a percentage of the population.)
In this environment of what we might call “artisan credit” issued by local bank branches, debt was frowned upon as risky and buying things required saving money. The auto industry had long depended on auto loans to sell millions of vehicles, but a hefty down payment was generally required.
A household with minimal savings was deemed a credit risk; the only way to get credit was to slowly build up savings and perfect history of paying one’s bills and debts. The only way for many to qualify for a credit card was to pledge cash savings to the bank: if you failed to pay, the bank would take your savings for payment of your debt.
You see the problem with this low-credit, low-risk environment: profits were slim, not just for banks but for retailers and the real estate industry. If people had to save up to buy a new item of clothing or an appliance, then the retailers were limited in how many gew-gaws they could sell. If people stayed put and didn’t buy and sell their houses frequently, then developers, lenders and realtors had a very limited field of profit-making opportunities. If only people who qualified via stringent credit standards had access to credit, then the transactionf ees and interest earned from credit were also limited.
The “solution” to that low-risk, low-churn, low-credit environment was the commodification and mechanization of credit. An analogy can be found in industrial consumer goods such as autos. When autos were hand-made by artisanal craftsmen, they were extraordinarily expensive. When Henry Ford mechanized the production, effectively turning them into mass-produced commodities, they became affordable to tens of millions of households.
The same thing happened with credit when computers took over the task of qualifying borrowers. A computer program assessed credit on a simple point system, and voila, the costly task of assessing credit risk fell to pennies per borrower. Not entirely by happenstance, banks found that millions of households that had been viewed as risks now qualified for credit, as the issuing and servicing of credit–credit card annual fees, transaction fees, late fees, etc.–became a fast-growing, monstrously profitable gusher for banks.
Retail sales could now be driven by desire rather than arduous, purposeful savings and a prudent credit record. The consumerist vision of the American Dream can be summarized thusly: to become a better, grander, different person, all you need to do is consume differently. With access to commoditized credit, virtually anyone with a job could buy, buy, buy on whim, impulse and advert-created desire. Easy, almost-universally accessible credit in vast amounts created the perfect world for both retailers and banks.
Powerful real estate interests funneled the rapid expansion of credit into vast profits by incentivizing “moving up,” a code-phrase for transforming the housing market from one focused on security and shelter to speculation: the more times people sold and bought homes, the more transaction fees could be generated and the more developments sold.
A great number of seemingly subtle policy changes drove this transformation of housing from shelter to a speculative market accessible to Everyman and Everywoman: jumbo loans, expansion of Federally guaranteed mortgages, the easing of credit standards, the erasure of capital gains on owner-occupied residences, and so on. All these worked to expand access to credit, the incentives to churn and the size of loans available to consumers and homeowners.
What was not visible at the start of this commodification of credit was the inevitable end-game: anyone with a pulse and a willingness to lie/prevaricate/mislead via omission was issued jumbo mortgages to speculate in a real estate bubble of truly epic proportions; consumers were issued not one or two credit cards, but dozens, many with astronomical credit limits given the modest income of the borrower; students became indentured debt-serfs to lenders via massive student loans, and the need for saved cash essentially vanished as “no down payment” mortgages, auto loans and credit-based purchases became the norm.
Credit is a form of leverage. If a household earns the median household income of $49,000 a year, then trade-offs and disciplined sacrifices have to made to save up enough cash to buy consumer goods, education, a bigger, more luxurious house, etc. With access to abundant credit, then the need for adult-level discipline, sacrifice and trade-offs all go away; the household can indulge every desire and goal with child-like abandon.
So a household income of $49,000 can leverage purchases made with borrowed money up to $250,000 or even higher; with no down payments and super-low “teaser” interest rates, such a household could leverage their modest income into $500,000 in debt for everything from a university education to a McMansion to a boat to lavish overseas vacations–there was almost no limit to the debt “qualified” once down payments/cash vanished as a requirement and interest rates were manipulated below market rates to foster the illusion of solvency.
The initial conditions of any system set up the end-state. The commodification of credit to serve the interests of powerful industries made a credit bubble and collapse inevitable. It also made debt-serfdom inevitable. A culture and economy that once rewarded adult values and behaviors–discipline, sacrifice, trade-offs and the understanding that there is a price to every decision–was transformed into one that richly rewarded adolescent abandon, impulse and the temptations to lie to get what you want right now, or even more telling, “what I deserve.” In that phrase, the propaganda of the marketer reached perfection.
So how do we fix an economy and culture gutted by debt, its people reduced to debt-serfdom? We write off all bad, uncollectable debt, and we severely restrict credit to everyone and every financial entity. Now that the economy has become dependent on debt the way a junkie is dependent on heroin, going “cold turkey” will be painful. But just as for the junkie, the only alternative to rehabilitation/moving beyond addiction is extinction. There is a price to every decision.
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My new book is available in both print and ebook formats: An Unconventional Guide to Investing in Troubled Times (print edition) or Kindle ebook format. You can read the ebook now on any computer, smart phone, iPad, etc. Click here for links to Kindle apps and Chapter One.
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