Dear Higgie,
Higgenbotham wrote:
> I've been paying closer attention to this e-book on the South Sea
> Bubble in the past week.
Here's the location of the PDF for this book:
[Peter_M._Garber]_Famous_first_bubbles(BookFi.org).pdf
Anyone who saves this on a Windows disk should change the name
to something like the following:
Peter_M_Garber-Famous_first_bubbles-BookFi-org.pdf
This is very interesting as a historical account of the three bubbles,
including the well-researched data on the bubbles.
What's hilarious about this book is the political agenda of the author
-- essentially to deny that bubbles exist.
But his book was published in 2000, just as the Tech bubble ws
crashing. Talk about bad timing. He's very critical of
Kindleberger's book, but it's not surprising that Kindleberger's book
is still being sold as a book, while Garber's book is available for
free as a PDF.
He describes many of the facts that occurred during Tulipomania, but
he completely misinterprets the facts.
His reasoning for saying that there was no "Tulipomania" is that tulip
bulb prices returned to peak levels over the next few years and
decades. That is truly moronic.
If you apply that reasoning to the housing bubble of the 2000s decade,
then there's been no housing bubble, since it's quite possible that
housing prices will return to comparable peak prices during the 2020s.
Of course, in 2000, Garber had no idea that a housing bubble was in
progress. The past decade has completely disproven his analysis.
But there's a far more important point that he completely misses. The
real Tulipomania bubble occurred in tulip futures. Garber reports on
these, but ignores them as irrelevant to the issues.
When you look at the housing bubble, you have to separate two things.
The bubble in housing prices is bad enough.
But the most destructive bubble of all was the credit bubble -- the
securitization of mortgage debt with mortgage-back collateralized debt
oblications (CDOs). There are still tens of trillions of dollars
(nominal value) of these in the vaults of financial institution,
propped up by regulators who demand that they NOT be marked to market,
and that therefore investors should continue to be defrauded on a
daily basis.
In each of the major generational bubbles, the worst of it came from
securitization of debt -- tulip futures, south sea shares, assignats
(French monarchy bankruptcy), railway shares, foreign bonds and stock
shares (1929).
What these people don't understand is that hard assets -- like tulips
and houses -- that have to be physically transferred to and maintained
by a new buyer -- are limited even in bubble situations by the cost of
that maintenance.
But securities are pieces of paper. They require no maintenance. I
can sell a stock share to you for $100, and you can sell it to someone
else for $200 -- and in doing so, you double the market value of all
similar stock shares in the world. You can't do that with a house or
a tulip.
Returning to Garber, his overlooking of the significance of the
securitization of debt is the major flaw that makes his analysis
pretty much worthless.
His treatment of the other two bubbles is, once again, fascinating in
historical detail, but moronic in analysis. Here's his conclusion:
Garber wrote:
> Fascinated by the brilliance of grand speculative events,
> observers of financial markets have huddled in the bubble
> interpretation and have neglected an examination of potential
> market fundamentals. The ready availability of a banal explanation
> of the tulipmania, compared to its dominant position in the
> speculative pantheon of economics, is stark evidence of how bubble
> and mania characterizations have served to divert us from
> understanding those outlying events highest in informational
> content. The bubble interpretation has relegated the far more
> important Mississippi and South Sea episodes to a description of
> pathologies of group psychology. Yet these events were a vast
> macroeconomic and financial experiment, imposed on a scale and
> with a degree of control by their main theoretical architects that
> did not occur again until the war economies of this century. True,
> the experiment failed, either because its theoretical basis was
> fundamentally flawed or because its managers lacked the complex
> financial skills required to undertake the day-to-day tactics
> necessary for its consummation. Nevertheless, investors had to
> take positions on its potential success. It is curious that
> students of finance and economists alike have accepted the failure
> of the experiments as proof that the investors were foolishly and
> irrationally wrong. pp 124-25
He's packed so much misinformation into this paragraph, it's hard to
know where to start. He overlooks the importance of the
securitization of tulip futures, which is a fatal flaw in his
analysis, as I've said.
But he DOES recognize the importance of securitization in the other
two bubbles, but calls it, incredibly, "a vast macroeconomic and
financial experiment," and gives as a reason that it failed, "because
its managers lacked the complex financial skills required to undertake
the day-to-day tactics necessary for its consummation."
Of course, in the year 2000, Garber thought this could never happen
again, because we're all so sophisticated, with our complex financial
skills. But what actually happened is that the toxic securities,
created by people who graduated with masters in "financial
engineering" majors in the 1990s, did have the "complex financial
skills," but used them to create synthetic securities that are
mathematically provable to have been fraudulent -- which these people
with masters degrees must have known.
Here are some other quotes that I noted as I skimmed through the book
this morning:
Garber wrote:
> To the authorities, the tulip speculation represented an obviously
> unsafe financial speculation in which a legitimate business had
> suddenly degenerated into a bizarre form of gambling. The futures
> trading, which was the center of the activity, was clearly banned
> by the edicts; and in the end, the courts did not enforce deals
> made in the taverns where such trading occurred, all of which were
> repudiated. It is incomprehensible that anyone involved in the
> fluctuating associations of the taverns would have entered such
> unenforceable agreements in the first place unless they were
> merely part of a game. p. 35
"It is incomprehensible" is hilarious today. It's incomprehensible
that the Europeans would loan money to a country which IT IS
GUARANTEED will not pay the money back, but that's what's happening
today with Greece.
Garber wrote:
> Even after the collapse of the speculation, they continued to
> trade rare bulbs for “large amounts.”12 To the extent that rare
> bulbs also traded on the futures markets, this implies that no one
> arbitraged the spot and futures markets. Taking a long position in
> spot bulbs required substantial capital resources or access to the
> financial credit markets. To hedge this position with a short sale
> in the futures market would have required the future purchaser to
> have substantial capital or access to sound credit; substantial
> risk of noncompliance with the deal in the futures market would
> have undermined the hedge. Since participants in the futures
> markets faced no capital requirements, there was no basis for an
> arbitrage. During most of the period of the tulip speculation,
> high prices and recorded trading occurred only for the rare
> bulbs. Common bulbs did not figure in the speculation until
> November 1636. p. 46
> Moreover, I cannot separate the spot from the futures deals,
> although all transactions after September 1636 must have been for
> future delivery. p. 49
> The tulip speculation collapsed after the first week of February
> 1637, but there is no explanation for this timing. A general
> suspension of settlement occurred on contracts coming due—that is,
> contracts were not rolled over. p. 61
> Individual bulbs then could still command high prices six years
> after the collapse. Four bulbs whose prices were listed
> individually also appear among the bulbs traded in 1636–1637:
> Witte Croonen, English Admiral, Admirael van der Eyck, and General
> Rotgans (Rotgansen). Witte Croonen were pound goods, and the
> others were piece goods. Table 9.1 presents a comparison of 1636,
> 1637, and 1642 or 1643 prices. Even from the peaks of February
> 1637, the price declines of the rarer bulbs, English Admiral,
> Admiral van der Eyck, and General Rotgans, over the course of six
> years was not unusually rapid. We shall see below that they fit
> the pattern of decline typical of a prized variety. p. 64
> As further evidence of this standard pattern in bulb prices, I now
> turn to the market for hyacinths. p. 71
The market for hyacinths is completely irrelevant. Was there a bubble
in hyacinth futures? This guy doesn't know what he's talking about.
Garber wrote:
> Kindleberger, in his new edition of Manias, Panics, and Crashes
> (1996), which dominates the popular mind on the history of
> bubbles, added a chapter on tulipmania, which had not been in
> previous editions, to critique my view that the tulipmania was
> based on fundamentals. p. 77
> A Preliminary View: The Mississippi and South Sea Bubbles. The
> financial dynamics of these speculations assumed remarkably
> similar forms. Government connivance was at the heart of these
> schemes. Each involved a company that sought a rapid expansion of
> its balance sheet through corporate takeovers or acquisition of
> government debt, financed by successive issues of shares, and with
> spectacular payoffs to governments. p. 88
He blames "government connivance" for the other two bubbles, as if the
government CAUSED these bubbles -- in contrast to Tulipomania, where
he found no way to blame the government. A truly remarkable book.
Actually, this book creates a great deal of perspective. I now know
why Bernanke said that he didn't believe in bubbles, and I know why
Greenspan was so cautious in declaring the housing bubble to be a
bubble.
John