Market Bubbles and Crashes

Speculators are unaware that their gains are unearned. If the market wipes them out, they feel they have lost earnings when actually it was just the odds of the gamble and their turn to lose.

Like the casinos they are, the stock markets are primarily a mechanism for the redistribution of wealth upwards towards the already wealthy and powerful, not its production.

It is a gambling game in which the rest of society’s members are spectators, spectators who continually have their share of the nation’s increased wealth thrown on the table of a game of chance they are not playing. The danger of gambling with the nation’s wealth was addressed by Business Week’s cover story, “Playing with Fire”:

By stoking a persuasive desire to beat the game, innovation and deregulation have tilted the axis of the financial system away from investment toward speculation. The U.S. has evolved into what Lord Keynes might have called a “casino society”—a nation obsessively devoted to high-stakes financial maneuvering as a shortcut to wealth…. “Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill-done.”[1]

What is normally spoken of as a market “bubble” is only the claiming of wealth produced by others through exclusive titles to nature’s wealth which has gotten out of hand. History is replete with examples. Charles Mackay, in Extraordinary Popular Delusions and the Madness of Crowds, describes the tulip craze that broke out in Europe in the 17th century.

Before that insanity dissipated, one particular tulip bulb cost “two lasts of wheat, four lasts of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four tuns of butter, one thousand lbs. of cheese, a complete bed, a suit of clothes and a silver drinking cup.”[2]

One wonders at the variety of commodities traded for that one flower bulb, but their total value of 2,500 florins serves as a guideline to the money value paid for other bulbs. During this period, prices ranged from 2,000 florins for an inferior bulb to 5,500 florins for the choicest varieties.

“Many persons were known to invest a fortune of 100,000 florins in the purchase of 40 roots.”[3] Although tulips are not stocks, the principle is the same.

At the turn of the 18th century, John Law implemented a plan to sell stock in gold mining in the Mississippi wilderness to pay off the huge debt of the French government. Though this scheme was seriously flawed, the French economy prospered.

The plan went awry when the money rolled in. Those selling paper were so busy getting rich they neglected to invest in production anywhere; they merely reinvested in more paper. In a speculative frenzy, fortunes changed hands as people sold, and then bought back, nothing but paper. The stock in this Mississippi scheme had no value because there was no investment and thus no production.

Law’s scheme was borrowed from the cunning financiers in England who a few years earlier sold stock in a South Seas venture, known as the “South Sea Bubble.” Although Spain controlled most of South America, stock companies were set up to trade within this territory.

Visions of wealth stirred up a speculative fever, companies were formed for very unlikely endeavors, and the money rolled in as speculators dreamed of getting rich. Soon, so many joined the game that it got out of hand and the government had to call a halt to new issues.

The intention of most of these promoters can be summed up by one audacious proposal. This promoter touted “a company for carrying on an undertaking of great advantage, but nobody to know what it is.”[4]

Since the organizers of these companies had no intention of producing anything, their capital was 100% fictitious. Proof that this capital was not real was when the speculative bubble collapsed.

There were no tangible assets, production, or services to back the value of the stock; there was only the transferring of wealth from the naive to the cunning or lucky.

When wild speculation breaks loose, there is no relationship between value and price. Even when the stock market behaves normally, there are always stocks whose prices defy logic. This activity can only be attributed to crowd psychology, as described by Mackay, although sly promoters pull strings at every opportunity.[5]

Among the many cults entrenched in the monetary theory world is that “private banks create money.” This is so wrong that even a discussion of that error does not belong in a our monetary theory book.

But this serious error leads to other serious errors and totally unworkable monetary theories end up pushing rational discussion off the table. Thus we provide Logical Reasons Proving Private Banks Do Not Create Money so visitors can seriously evaluate monetary reform.

Those crucial 170 words describing an honest, efficient, capitalist economy. Does anyone have the ear of President Barack Obama’s Economic Recovery Team?

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[1] Anthony Banco, “Playing With Fire,” Business Week (September 16, 1987), p. 78.

[2] Charles Mackay, Extraordinary Delusions and Madness of Crowds (New York: Farrar, Straus and Giroux, 1932), pp. 90-97.

[3] Ibid, pp. 1-45; Lester Thurow, The Future of Capitalism: How Today’s Economic Forces Shape Tomorrow’s World (England: Penguin Books, 1996), p. 221; John Train, Famous Financial Fiascoes (New York: Clarkson N. Potter, 1985), pp. 33-41, 108-89.

[4] Mackay, Delusions, pp. 46-88; see also Train, Fiascoes, pp. 88-95; Charles P. Kindleberger, Manias, Panics, and Crashes (New York: Basic Books, 1978), pp. 220-21.

[5] As this goes to press, major banks have lost hundreds of billions seizing up markets around the world. Stock markets worldwide have lost $7.7 trillion. As always, central banks are pouring newly created money at the ethereal world of high finance to reflate the economy. A much surer plan would be to establish an authority and use the same created money, or more, to buy up the unsaleable CDOs and SIVs. Those currently bankrupt banks, hedge funds, and derivative traders would then be relatively solvent. As it costs nothing to create money, the interest on those home loans could be reduced to 3% thus effectively dropping the price of, and payments on, those homes by over half. The bankrupt financial institutions, the home owners facing foreclosure, and the economy are all now protected. The powerbroker’s plans have yet to unfold but our bets are the government will buy up those toxic debts, protect those speculators and shady dealers, and take just a little pressure off a few within the main stream (follow Democracy Now, Free Speech TV, Link TV, .information,, globalnet news,,,,, etc).

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