| Almost every living individual is being effected | | | | Tulip Mania. His "Extraordinary Popular Delusions and |
| adversely in some way by the international economic | | | | the Madness of Crowds" remains in print to this day. |
| meltdown we are experiencing today. The genesis of | | | | Business schools and economists refer to Mackey's |
| this severe financial downturn is attributed to the United | | | | study of the herd mentality of people during manias. |
| States government encouraging the expansion of | | | | Nevertheless, though Extraordinary Popular Delusions |
| homeownership to people who would have historically | | | | is still studied, its lessons have hardly been taken to |
| been deemed unworthy of obtaining credit. The | | | | heart. |
| banking systems participation and eagerness to | | | | The greed and hubris that are always present in |
| leverage credit risks by extending loans to people with | | | | manias too often define the human condition. People |
| poor credit histories is the principal cause of the current | | | | tend to see someone profit from an enterprise and try |
| sub-prime mortgage crisis. | | | | to emulate their perceived success. This engenders |
| Historically, the bursting of the credit bubble follows a | | | | ever more people attempting to participate in the affair |
| long and dubious line of similar scandals. Greed, hubris | | | | and the result is a panic, a mania, a bubble, then |
| and suspension of common sense and disbelief are | | | | disaster. |
| always present before the hen comes home to roost | | | | The no money down payment, zero document loans, |
| after the gravy time has ended. The panic of 1908 in | | | | offered in the last decade created a completely |
| the United States, the worldwide Great Depression | | | | different type of borrower and lender. The borrowers |
| and the implosion of the technology stock bubble in the | | | | have no skin in the game. They get to possess a |
| late 1990's are memorable examples of euphoric | | | | home in which they have no equity. As long as their |
| periods followed by great loss and assignation of | | | | condition is stable they can maintain possession. |
| blame as to the causes of these financial busts. | | | | However, if their fiscal condition recedes, or the value |
| These peaks and troughs in economic fortune are not | | | | of the property declines, they are in deep trouble. |
| unique to modern times. One of the earliest | | | | Foreclosure is a reasonable action for them to |
| documented financial crazes was the Dutch Tulip | | | | undertake to simply walk away from a gamble that did |
| Mania in the 17th century. The Dutch, being a tiny, | | | | not work out for them. |
| mercantile nation, surrounded by larger, stronger | | | | The lenders have suspended proper underwriting |
| empires were the earliest creators of trade policies | | | | standards in order to induce entry into these risky |
| and sophisticated financial products. One of their most | | | | home sales transactions. They have little skin in the |
| creative vehicles was the introduction of the futures | | | | game, because they have conceived exotic packaged |
| market. | | | | investment vehicles where mortgages are bundled and |
| Tulips were introduced into the Dutch economy and | | | | sold to investment speculators all over the world. The |
| agronomy early in the 17th century. They quickly | | | | owner of the mortgage is actually unknown to the |
| became prized for their beauty and the floral | | | | mortgagee, or even the originator of the loan. The loan |
| engineering that created many unique, exotic varieties | | | | originator collects their fees and offloads the loan |
| of tulips. An exchange mechanism developed for | | | | obligation from their balance sheet. The risky |
| speculation in the valuations of the various strains of | | | | transaction is now someone else's responsibility. |
| bulbs. By 1637 a full-scale mania had erupted in | | | | As a result we have endured a period of fake |
| evaluating future tulip bulb harvests. | | | | prosperity built on credit swaps, personal irresponsibility, |
| Records from that period are sketchy, but it is known | | | | corporate irresponsibility and governmental corruption. |
| that a single Viceroy Tulip bulb was valued under | | | | The mania of our time is cheap credit. This bubble has |
| contract for between 3000 and 4200 Dutch florins in | | | | burst, and every homeowner faces shrinkage in the |
| 1637. Contrast this with the annual wage of a skilled | | | | valuation of their property because of the greed of |
| Dutch craftsman of 150 florins per year. Isn't this a | | | | speculators and the attempt of government to secure |
| definitive example of excessive senseless mania? | | | | homeownership for people who should be renters. |
| The Dutch referred to such trading contracts as "wind | | | | Community banks and credit unions that have |
| trade". This was because no one ever actually took | | | | maintained high lending standards are being hurt |
| possession of the tulip bulbs. They simply owned a | | | | because of the recklessness of the giant money |
| piece of paper, a contract that documented their claim | | | | center banking institutions. |
| on the tulip bulbs. Does this example of financial | | | | Retirees and prudent investors have seen their |
| engineering ring any bells today in our current | | | | savings and investments slaughtered because of the |
| distressed situation? | | | | inane greed and corruption of others. |
| The popularity of the tulip trade, and the amazing | | | | The 1990's technology stock bust decimated a |
| returns, mostly paper gains that were realized by the | | | | generation of people who came to believe that |
| early speculators created a stampede of | | | | investing in the inter-net was the new "Holy Grail" for |
| inexperienced, gullible speculators. Noblemen, farmers, | | | | prosperity. Startup companies with no sales, no |
| sausage makers, chimney sweeps and day laborers | | | | balance sheets and inexperienced management were |
| began to speculate hoping to turn a few florins into | | | | given huge market valuations. Investors were advised |
| exponentially huge investment returns. Of course, the | | | | that the tech boom was just in the first or second |
| last investors in, were the most harshly abused by the | | | | inning of this nine inning game. Brokerage firms |
| implosion of the tulip bulb speculative bubble. This is true | | | | provided guidance on equities that they actually made |
| in all bubble cycles. | | | | markets for. This bit of double dealing lead to constant |
| The British economist Charles Mackey wrote a tome | | | | buy calls on tech firms stock that insiders knew had no |
| in the 18th century cataloguing the history of the Dutch | | | | prospects for success. |