Apparently it is a running joke in the financial services that a banking crisis happens every time those old enough to remember the last one retire, so maybe bankers and politicians should pay clos
Apparently it is a running joke in the financial services that a banking crisis happens every time those old enough to remember the last one retire, so maybe bankers and politicians should pay closer attention to the lessons of the past.
“Those who cannot remember the past are condemned to repeat it”
George Santayana.
South Sea Company
18th Century and Victorian Britain is reaping the benefits of the economic boom. As the first European country to industrialise, the marked increase in trade spurred on an ever growing empire, which in turn spurred on more economic growth. With quality cotton goods being made at a tremendous rate in the Northern mills of Manchester to be traded with the colonies of the Atlantic for slaves, sugar and gold. But the bubble was about to burst, The South Sea Company backed by government following a number of bribes is to become the first joint stock company to collapse.
As the name suggests, the South Sea Company advertised itslef to supply goods from the South Americas, an area renowned for its gold and silver. With great publicity in the recently created newspapers, people flocked to invest in South Sea Company shares, a seemingly safe investment.
With share prices soaring, exuberant and irrational thoughts take hold as speculators pay ever-higher prices for shares. However all the speculation on South Sea trade could not be backed up as South America was owned by the Spanish and very little trade was ever on the cards. The company continued to accrue government debt in exchange for shares, which they subsequently sold at an outlandish profit, corruption of the highest calibre. Eventually the stock prices could raise no-more and for those who could not get out in time, the bubble burst, ruining many financially.
Enron
Of course people never learn from past mistakes and corruption again followed an invention, this time the internet. Energy giant, Enron (who was masquerading as a dotcom business) was able to increase the price of its shares through corrupt bookkeeping and carful propaganda. With an increase in dotcom speculation and an ability to move funds between companies, Enron was again a company on the verge of collapse as its wealth did not sit on any wealth producing assets.
The current economic market
According to Sir John Templeton; stock market guru, the four most expensive words in the English language, are “it’s different this time” and with America’s Federal Reserve warning of irrational exuberance long before the financial crisis, why were bankers left to increasingly gamble?
The economic crisis came about when following banker’s investments in the sub-prime debt market (a bunch of suspect deals deemed safe by the credit agencies), Lehman Brothers collapsed, sparking fear in the stock market as banks rushed to deal with the default. This collapse could however have come from a number of developed economies, as complacency lead to benign control of investments and lack lustre security, everybody feeling that they are riding the high and pushing for more and more. As with each economic crash, it is the greed of a few which drives destruction.
Culpability
As with Enron ten years earlier and the South Sea Bubble of the 18th century, shifty deals allowing over-exuberant speculation and artificial increase in demand, sending stock shares sky high with a lack of increase in productivity will always lead to a crash.
The difference however between the current economic crisis and the South Sea Bubble is that although the government has taken on the debt on both occasions, the directors of the south sea company were ordered to pay huge compensation and the chancellor at the time was sent to the tower. Whereas our bankers reap large benefits and the chancellor swans around looking smugger than ever!
The only way to stop the next financial crisis is for those at the top to learn from the mistakes of the past and until someone can be made culpable for financial short fallings, I am sure that we will see another economic crisis in the near future.
Image: South Sea Bubble by William Hogarth
