Copyright 2013 by John T. Reed
The subtitle of this book is more descriptive than the title: “An Uncommon History of America’s Financial Disasters.”
I am not sure I understand this book. I am not sure the author knows what he is talking about when he analyzes and draws conclusions about economic theory. I am sure that he did not explain it well enough for me to understand.
Some might say that he is aiming for a higher IQ reader. I doubt his publisher, Alfred A. Knopf, is. I am a publisher. I only publish my own books, but I know enough about publishing that a book store book about financial disasters that goes over the head of a West Point graduate Harvard MBA is probably not going to sell enough copies. If it is for people with PhDs in economics only, it should have been published by a textbook publisher and sold by mail or in university bookstores only.
Having said that, I assume the history in it is accurate. The author is a full professor of history, not economics, at the College of William and Mary. And just reading the time line aspect of it was very educational and scary.
It focuses on what were called “panics” before the Great Depression. Namely the Panics of 1792, 1819, 1824, 1837, 1857, 1873, 1893, 1907 as well as the Great Depression and the 2008 Subprime crash. A lot of the problem was London was sort of in charge of world finance before World War I and they took care of Number One which was not America. Our financial dependence on them was akin to our energy dependence on the Middle East of late. We took over finance after World War I.
A lot of the book is about personal rivalries, like between Andrew Jackson and Nicholas Biddle. Biddle was a Wall Street type, albeit Philadelphia then. The U.S. financial system then, and to an extent still, was shaped by Jackson hating Biddle and wanting to get him.
Nelson says the Federal Reserve changed everything when it came into existence in 1913, an institution that the Democrat party wanted and created to reduce Wall Street power and enhance their own. I would add that the Federal Reserve’s current “Quantitative Easing” policy of “printing” a trillion dollars a year to cover federal budget deficits seems likely to bring down the currency the Federal Reserve was created to protect. That is, the U.S. dollar will cease to exist which means any asset you own that is denominated in U.S. dollars, like a bank account, will also cease to exist. Transferring power from Wall Street to the federal government is only an improvement if the federal government is more efficient, competent, and honest than Wall Street. It is not.
My book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition has a very important chapter with a similar time line. Indeed, most of Nelson’s events are also in my time line, but he goes into them in more detail than my prior readings.
What the book does is show that the current economic crisis—“printing” excess amounts of money—is a recurring plague in the governments of American and western European countries since at least the American Revolution.
You think the subprime lending and derivatives and “printing” money and structured investment vehicles and all that were just invented in the last 20 years? Nope. This crap has been going on here and in Western Europe for 220 years at least. The book starts in 1792, the year of the first “panic” in the United States after they became a country. They use different words to describe it, and different assets to post as collateral for it, but it’s just minor variations of the same game being played over and over.
Main Street hates Wall Street has apparently been going on for or 200 years. As a Harvard MBA who knows actual Wall Street people I have always found that goofy. I figured it was just the fact that Main Street people do not know any Wall Street people that causes that hatred.
Not that I would claim all Wall Street people are paragons of virtue. At Harvard we could sign up with any firm that was recruiting for an interview. I did not sign up for any Wall Street firms, but they could also sign up for us as individuals based on our resumes which are bound into a book that is sold to corporate recruiters annually—a CD now.
Salomon Brothers, I think, signed up to interview me on their own initiative. I went, but mainly said don’t you guys expect people to work 80 to 100 hours a week? They admitted that was the norm. “Why would anyone want to do such a thing?” I asked. To get big Christmas bonuses was their answer. I told them that I knew what their salary offers to Harvard MBAs generally were and that such an offer would be my highest, but that on a per hour basis it would be the lowest. They said the bonus would increase the per hour pay but would not commit to a penny of bonus.
I also do not like these industries like law, consulting, and investment banking where you sort of pledge for a number of years doing grunt work then come up for partner and either make it or get thrown out. It sounds like a fraternity with totally subjective cool guy admission criteria rather than a merit-based situation. I don’t know if I would have gotten a second interview or an offer from Salomon because I told them a flat no based solely on the hours.
My oldest son could also have worked in investment banking on Wall Street. He was on the Columbia football team and they have a sort of pipeline into Goldman Sachs and a bunch of other investment banking firms. Indeed, taking potential recruits to Wall Street is a standard part of the way they persuade high school kids to come to Columbia, Manhattan’s only college football team. I told him about the hours and he had the same reaction I did. No way!
So although I know many Wall Streeters and they seem like perfectly respectable people to me, I did not want to be one of them and neither did my son. Had I gone there, I suspect my reaction would have been similar to that of best-selling author Michael Lewis who went to Salomon Brothers from Princeton undergrad and the London School of Economics in 1985 and ended up disgusted and wrote the book Liar’s Poker about the experience.
So I must now admit, that after reading almost every book written about the subprime crisis, and now Nation of Deadbeats, that the Main Street laymen are sort of right on a gut level. They could not pass a simple ten-question quiz about what Wall Street does, but their gut feeling that Wall Street is often or usually misbehaving and taking advantage of Main Street is pretty much correct. Nation of Deadbeats relates one high financier after another, not always on Wall Street per se but always connected to it, becoming filthy rich by methods that generally would be fairly described as conning the unsophisticated rubes outside of Wall Street and the world of high finance.
When I stop and think about it, I used to trust Wall Street with money in some index funds and money market deposit acounts and to hold TIPS bonds I owned. I got rid of all those assets and thereby, Wall Street. Now my money is in hard assets and in banks on Burrard Street in Vancouver and Martin Place in Sydney. No Wall Street involvement for me anymore. I have read too much financial history. Those of you who are tangled with with Wall Street through ETFs and mutual funds and all that need to read more financial history.
Real estate used to have a lot of limited partnerships that the public could invest in. The saying was that at the begining of a limited partnership, the limited partners have the money and the general partners (guys in charge of the limited partnership) have the experience. At the end of the limited partnership, their positions are reversed. That’s also a good description of Wall Street.
I once wrote a generic article that could be used to describe the REIT crisis of the early 1970s, the S&L crisis of the 1980s , and the subprime crisis of the 2000s, leaving blanks for the dates and names. But the basic idea was the same for each. Wall Street’s traditional money makers stop making money, they look elsewhere, discover real estate doing somewhat well thereby providing a plausible scenario for a con, then securitize some real estate asset, like REITs, syndicates, or CDOs of subprime mortgages. They sell far too many of them for the number of good deals available, meaning most end up being bad deals, then are gone by the time it crashes. That article, which appeared in my newsletter Real Estate Investor’s Monthly, will also accurately describe the next Wall Street real estate debacle and the one after that. Written a little more broadly, it would probably describe every panic and depression in Nelson’s book.
That article was a sophisticated version of the gut mistrust that most Americans have for Wall Street. That article was only about Wall Street’s real estate cons. Nation of Deadbeats is about all sorts of cons by not only Wall Street but also Lombard Street (roughly the old London equivalent of Wall Street—more recently the London financial district is called “The City”) and other European “Wall Streets.”
Another surprising part of A Nation of Deadbeats was the apparent fact that our political parties are essentially two sides of an ongoing debate about monetization of debts. If I understand Nelson correctly, America has always had a political party of creditors and one of debtors. The creditors want to be highly leveraged—making them debtors—but they do that in ways such that they bear little or none of the normal risk associated with borrowing, especially high-leverage borrowing. And the creditors want to be paid in gold or some other rock solid money. The debtors on the other hand are perennially borrowing too much, getting into financial trouble as a result, then wanting the government to inflate the currency so the debtors have an easy time paying off their debts.
At present, the Democrats are the debtor party, generally, they always have been going back to Thomas Jefferson. The Republicans, founded by Lincoln and others generally are opposed to “printing” excess amounts of money. At present, Democrats are “printing” money in monstrous quantities to make it easy to pay off the national debt and to pay off all the freebies like entitlements and welfare and the Republicans are trying to avoid being taxed to pay for all that Democrat vote buying.
The funny thing is this is pretty much what was happening in variations throughout American history. The political parties either emerge from the various financial crises, or have their platform altered radically by those crises. In other words, the political history of the U.S. is essentially the financial crisis history of the U.S. Those creamed by financial crises have always wanted the federal government to bail them out, not just since the New Deal. I was not aware of that.
The overwhelming conclusion I took from the book was that, as I have recently said because of other stimuli, we are just mice trying to avoid being stepped on by flailing, panicky federal politician elephants (both Democrat and Republican) who are trying to preserve their power. There will be no fix or resolution. This has been going on in America and western Europe for at least 220 years. It will never get fixed.
I can see the fixes needed, but when you read financial histories like this and This Time Is Different by Reinhart and Roggoff and The Ascent of Money: A Financial History of the World by Niall Ferguson you can see that the public will never get it. And even if they did, they would probably prefer the current chaos because the fix essentially requires them to live within their means and pay their debts and I really don’t think at bottom they want to live in such a world.
All this talk about “social justice” you hear from Obama and the Left is really just euphemisms and code for we demand to live as high off the hog as the successful even though we have not been successful. It is as simple, selfish, and immoral as that. The persistence of this pattern was well, if unintentionally, described in the well-known hymn Gloria Patri
As it was in the beginning, is now, and ever shall be: world without end. Amen.
And a significant portion of the Wall Street successful want to continue to be able to run highly-leveraged but riskless-to-them cons on the unsophisticated. As has been well put, they want to
privatize profits and socialize losses.
Which side is right? Neither. The various government reforms I have advocated are right, but although the creditors would welcome them, they would try to subvert them immediately. The debtors hate my reforms on sight because they recognize the no-free-lunch character of it.
One of the things my hero does in the novel The Unelected President I am writing does is try to create a special zone in America where his reforms are the law. One of them is no limited liability companies or corporations and no punitive damages. That would mean all large organizations would be general partnerships where the big shots were fully liable for the screw-ups and misbehavior of the organization. Punitive damages being outlawed would enable the big shots to buy insurance of the errors and omissions variety—but then the insurers—also general partnerships like Lloyds of London—would be evaluating and watching over them not like government bureucrats but like guys whose own money was at stake.
Punitive damages must be outlawed because it is against the law to insure against them. The big business guys love the Unelected President’s free enterprise zone, but tell him he needs to let LLCs and corporations in. He tells them to come in as general partnerships or stay the hell out. In other words, no Wall Street in the sense of escaping responsibility for their mistakes or misbehavior in his free zone.
The book is a fantasy.
To live your real life, assume continuation of the “As it was in the beginning, is now, and ever shall be: world without end. Amen” never-ending see-saw battle between the makers and the takers including inflating the currency as a favorite tactic of the takers and their politicians.
When I wrote my 2009 book Best Practices for the Intelligent Real Estate Investor, I was trying to answer the question how should you have conducted your real estate investments so as to not get hurt by the Subprime Crisis or other prior crises. Now, having read A Nation of Deadbeats and the other financial crises histories, I ask myself what is the approach to life that would have prevented you from being stepped on by the elephants of the last 220 years?
Uh, subsistence farmer with good land and lots of storing food and wood in the good years with silos, Mason jars, smoke houses, and so on? Sort of the Amish way of life without the religious part.
Note that I said subsistence farmer, not farmer which would include farmers who raise cash crops. Cash is the battleground in all these crises, including the one we are now approaching. Based on centuries of recent history, not to mention millennia of wider world financial history, you want to stay off that battleground. Lots of people getting hurt very badly there throughout history.
In my book How to Protect Your Life Savings from Hyperinflation & Depression, 2nd edition I contrast my father’s family with my mother’s when they were kids. My mother’s family—Ellis Island immigrants—owned a row house with a mortgage in Philadelphia. They lost that and the father’s job during the Great Depression. My father’s family, which probably had about the same net worth as my mother’s, had a 500-acre subsistence farm in West Virginia. They did not notice the Depression and would not have even heard of it had they not gone to town.
Another more modern, more worldly approach that probably would have worked throughout the last 220 years would be to be a sort of international man. The type of person described in the coach’s slogan from Remember the Titans:
Mobile, agile, and hostile [to lousy government policies like inflation, trade wars, wars, etc.]
In other words, when your country screws up and creates a financial crisis, get the hell outta Dodge. That would generally mean having money prepositioned overseas in better-managed countries. It would mean not being tied down by real estate or career. You need portable savings, portable net worth, and a portable career and a willingness to keep moving whenever the need arose. You avoid being stepped on by the elephants by going to countries where the elephants are not currently flailing around.
Don’t get me wrong, you could probably stay for decades in one place typically. It would not be like an itinerent farm warker moving annually, or even a member of the U.S. military moving every one to three years. But when you gotta go, you gotta go.
To pull that off, you would probably have needed to be able to live in and make a living in each of the continents (other than Antarctica). You would not have wanted to be in Europe in the 1940s. The U.S. was not much fun in the Depression except on my father’s farm and others like it. But my father could not wait to leave the farm and did as soon as he graduated from high school.
Austria, Germany, and Hungary were NOT the place to be from 1914 to probably most of the period before World War II. Europe in general was not much fun during World War I. Generally, when they were having a financial crisis in Europe or America, there was some country or continent where things were going well financially or at least okay—better than a financial crisis. I know during World Wars, the American rich who used to go to Europe in the summers went to Latin America instead, perhaps to Asia during World War I. There was little ocean traveling in World War II because both oceans were war zones.
What about other careers or places thought of as havens?
Government job? You gotta be kidding me. I recently saw a graph of government jobs at the local, state, and federal level for the recent decade. Municipal employment fell rather dramatically; state, somewhat, and federal was fairly steady. But federal is about to get hit with the hyperinflation. And tons of government employees were hit hard in the Great Depression.
Clipping coupons? During hyperinflation!? That’s maybe the worst thing you could do.
Entertainment? What—on the theory that people need to be cheered up? It is a myth than Hollywood did not suffer during the Great Depression. Really cheap entertainment does well. Miniature golf and the board game Monopoly became popular during the Great Depression. As did getting drunk.
Doctor? Dentists? No. They suffered greatly during the Great Depression. Their patients could not pay and simply did without.
International trade/tourism? When I read histories of hyperinflation episodes around the world, people who do business with foreigners typically do great because they have access to stable foreign currency. Hyperinflation is accompanied by capital controls. Those prohibit possession, import, export or use of of foreign currency and sometimes gold. But foreign tourists and businessmen are exempt and those Americans who deal with them have limited licenses that make them exempt from the capital controls. So I have recommended being in those businesses as a way to get around capital controls and get your hands on some real money when that can save you from your country‘s hyperinflation.
But when you read A Nation of Deadbeats, you learn that the U.S. frequently boomed because of exports but that it just as often crashed because of exports being cut off. International trade is great when your products are competitive and you are allowed to sell them abroad. But time and time again, Americans suddenly found their ability to export shut off. Why? Shooting wars at either end of the voyage or trade wars or tariffs or bans at either end of the voyage. And those happened often in the history of the U.S. At times, wars abroad increased U.S. exports as the warring countries bought needed war supplies and other necessities from the U.S. But international trade over U.S. history has been an on again off again business. Being dependent on it has often been a good way to starve. Make money from international trade when you can, but don’t quit your day job.
Have you ever heard the expression “doing a land office business?” It means selling a whole lot of whatever you sell. The land office in question was the U.S. Land Office created by Thomas Jefferson’s Land Act of 1800. Why were they doing such big business? They were making subprime mortgage loans. According to Nelson, the Land Office “…would loan to everyone regardless of his ability to pay.” Jefferson was a Democrat. Democrats still have annual Jefferson Day celebrations to honor him as one of the founders of their party.
Later, when the booming market for U.S. flour in the Caribbean collapsed because Britain made its Caribbean islands stop buying U.S. wheat, land prices in the U.S. collapsed 30% to 40% causing the Land Office mortgages to be largely underwater.
Some things never change, huh?
Another recurring theme in A Nation of Deadbeats is that the U.S. has long been considered a safe haven for capital. I must note that lately, Germany has requested their gold back—physically. And many countries are having second thoughts about the U.S. being a safe haven for gold or cash. Hell, I myself have moved my savings out of the U.S.
Why is the U.S. considered a safe haven? The two big oceans have made invasions of the U.S. by foreign countries rare since 1776. The U.S. for a long time was strong financially. It’s not now as evidenced by our approaching-Greece debt-to-GDP ratio. We also had a lack of corruption. Now, our Transparency International rating on lack of corruption puts us at 19th below Barbados and St. Lucia!?
And also look at the source of the money flowing into the U.S.: Europe During the 224 years of the U.S.’s existence, the various European countries have repeatedly invaded each other. U.K. has not been invaded per se since 1066 but it did not look like a safe place for gold or anything else during the Battle of Britain in 1940. Pax Americana broke that multi-century string of wars for the last 68 years. At present however, America is liquidating its military in order to get the money to pay for seniors’ cruise tickets so Pax Americana is about over. But now that the Soviet Union is gone, no immediate threat exists in Europe. Asia could use a little Pax Americana but they probably are not going to get it because of our deteriorating financial situation, which may explain why Chinese are putting money in Canada and the U.S.
The habit of thinking of America as a financial safe haven is one of the reasons our excessive “printing” of U.S. dollars has not yet tipped us over into hyperinflation. But our ability to abuse the world’s trust of our currency is not limitless.
Another lesson I learned from reading all these histories of financial crises is you want to avoid long chains of complicated financial instruments where the ultimate asset securing your getting paid is far away and buried in complexity and you are one of many investor in the deal. This has always been my instinct and my financial configuration going into reading A Nation of Deadbeats was savings accounts in the U.S. and several selected foreign countries, owning my home and cars in the U.S., no stocks, no bonds, financially portable career (writer), no pension or IRAs. The book reinforced that. The financial stuff that people get hurt by are these “high yield” investments where you are one of many owners in a pool of REITs, or LLCs, or CDOs of subprime mortgages, or loans to foreign entities, etc. 9,000 U.S. banks failed during the Great Depression, but a very simple savings account at the U.S. Post Office did not.
Gold and silver looked like good things to have before 1933, but not so much since. Maybe their reputation is from those eras and no one has thought it through recently. See my article on the disadvantages of precious metals today.
I had not focused on it before, but the foreign exchange or currency market (forex) is the biggest in the world ($4T a day) and is unregulated. There are no exchanges (like the New York Stock Exchange), no prospectuses, no registered dealers, no SEC of currency, no margin rules. In a heavily regulated world, it is a free market oasis. Of course the entire world does not participate. banana republics like China do not allow free convertibility of their currencies. And some countries that have pretensions of being above banana republic level, like Italy, are edging over toward banana republic behavior with furtive capital controls and such. But at the moment, the currencies that mater are generally trading in a free market setting with no rules.
The fact that I moved all my rainy-day savings into that market in the last year and a half makes me wonder if I subliminally was attracted to the free market aspect of it without realizing it. I have certainly condemned exchange risk and counterparty risk up one side and down the other in recent years. Potentially, there are political risks with forex—possible future laws like capital controls and financial repression. But compared to other markets, forex seems to have been out of bounds to regulators and legislators for the last 40 years or so. Since there are no exchanges in currency trading, there is no exchange risk—like the exchange ceasing to trade the asset in question which recently happened to pork bellies or suddenly imposing rules that slow down or suspend trading. I do have counterparty risk, but my counterparties are entities like the Bank of Montreal and Westpac Australia—which have extremely high credit rating and which are backed up by federal deposit insurance of the countries in question. In other words, I am not counting on the equivalent of Lehman Brothers to give me back my money. And I do not have any derivatives which can be used for currency trading. I have no idea WHY anyone would ever buy such a thing but many do.
I recommend A Nation of Deadbeats for its history facts. I do not recommend Nelson’s analysis because I do not understand it, which is enough reason, but also because I think he may be wrong.