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How the French invented subprime in 1719
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This Link is located in the Public Channel Housing Bubble and Bear Links.
Posted by ian 1 year 259 days ago (ft.com). Views: 38
Tags: housing bubble |
| Related Tags: credit crisis gold wall street economics peter schiff inflation banks |
Imagine the following: a collection of debts owed by a highly leveraged borrower with a bad credit record is magically transformed into marketable securities with triple-A yields. How is this miracle performed? It is through the power of financial innovation and free capital markets.
It could be the story of subprime mortgages in the US; but it is not. It is, in fact, the story of government debt in France in the early 18th century. In 1719-20, a financial whirlwind even more dramatic than anything witnessed today swept through France. Shares in the Compagnie des Indes, or the Mississippi Company, rose 1,000 per cent and then fell by 90 per cent in less than two years. The story illuminates current events.
.... The lessons seem obvious. Financial innovation can achieve much, but cannot transform sows’ ears into silk purses. Moreover, there are risks that innovators do not fully understand their inventions and get carried away. The correct regulatory response to this risk is not to fuel it with easy monetary and credit conditions. The collapse of the Mississippi bubble had ruinous consequences in France. The government concluded that paper money, banks and stock markets were inherently dangerous (“financial weapons of mass destruction”). It took until the 19th century for France to recover its nerve and its rival, Great Britain, leapt ahead in the race for financial supremacy. In the rush to reregulate markets, let us hope western governments do not repeat the French mistake.
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