Serious Studies

Panics! Crashes! A look back.

19th Century Bank Run

Europe is melting down like fondue over a stale crust of baguette. And I can't help but feel sometimes that we're headed back into the ooze if we don't watch out. Not only because Europe's cold may be catching. We're back doing stupid things again. Like, there's this couple I know who couldn't afford their mortgage any more. So they went to their bank, where their banker says, "Don't worry. We'll sell the house and take whatever we can get. Then we'll give you another loan so you can buy a new house." I don't know. For some reason that makes me nervous. 

To calm myself I like to look back at the blastomas of the past. 

It's 1819 here in the almost new USA. The nation had indulged in a huge real estate boom involving the western territories of the new United States. When that bubble burst, a number of state banks failed, leading to a collapse in the credit market. People had gotten used to borrowing to meet their personal and business needs, and it proved to be a hard habit to shake. Foreclosures proliferated, followed by a recession, and then a six-year depression. The president at the time was James Monroe. His constituency had no experience in dealing with the situation, since this was the first in the boom/bust cycles that have since been integral to the character of American capitalism. In 1819, he addressed the nation, stating that, 

" The great reduction of the currency which the banks have been constrained to make in order to continue specie payments, and the vitiated character of it where such reductions have not been attempted, instead of placing within the reach of these establishments the pecuniary aid necessary to avail themselves of the advantages resulting from the reduction in the prices of the raw materials and of labor, have compelled the banks to withdraw from them a portion of the capital heretofore advanced to them. That aid which has been refused by the banks has not been obtained from other sources, owing to the loss of individual confidence from the frequent failures which have recently occurred in some of our principal commercial cities."

In other words, the banks called in their loans and stopped giving credit. In response, Monroe cut taxes and otherwise floundered around until the end of the cycle.

Let's see what elements may be found in this iteration of the story:

  • Wild speculation in real estate
  • Collapse of real estate market
  • Excessive borrowing and lending
  • Banks fail
  • Bigger banks survive but are almost mortally wounded and stop giving credit
  • Prices fall because people have no money
  • Depression sets in
  • New boom is required to break cycle.

I'll be back whenever I like to look at other examples of mass stupidity and hysteria throughout history, both here and elsewhere.

Two things are remarkable, in the end. First, how all such catastrophes essentially all look the same when you strip away the funny clothes, hats and languages, and second, why, if that is so, no one has demonstrated the ability to predict or avoid them. And you don't have to be a fortune teller or chicken little type to feel that here we go again. 

Coming soon: Panic in Rome!

25 Comments Add Comment

I think the phenomenon is called 'driving by ear.'

Great post, Bing. Just one tiny little nit to pick - some people HAVE demonstrated the ability to predict and/or avoid booms.

They have different names, depending on where we are in the cycle.

During booms, they're called "bears", or "party poopers" or worse.

During busts, if they made money on the bust they're called sharks (or some similar predators), or if they're more community-minded they're called saviors - at least until the next boom comes along.

What has NOT been demonstrated is the ability to listen to and the political will to act as a group on reasonable concerns raised by these people - and THAT'S what's REALLY remarkable.

President Monroe's comment was one long sentence. There's another thing 1819 has in common with our present dilemma: the explanation is impossible to understand.

Predicting disaster is easy,,getting someone to pay attention and prevent it, is the hard part..

To predict failure of most any kind, all one has to do is to imagine circumstances to the extreme by way of extension...eventually..this senario indicates a bending or breaking point in any system..

Apply this simple logic to Wall street stocks and earning ratios, home equity etc..debt ratio,,,and you get a view that something will eventually fail,,,predicting when is a little harder....but predicting failure is easy...

Bing, how does the recent turn of events affect the 'Canadia' takeover? can we get credit to pursue such a venture anymore.

Ah yes, but in order to avoid, policy makers need to do the studying and stripping of funny hats and old words. And they need convince masses of people to do the same (or at least trust that those in power to use lessons learned from the past). Since more people know about 30 Rock than what happened more than 30 years ago, we continue to be in a tough place.

Man's infalible confidence in his own wisdom is only shaken when his bubbles burst. but hey, you can allways blow another........

Hey! I did predict it, over and over and over to anyone who would listen. I predicted the dotbomb crash all the way up to the top. That was obvious from every idiot I knew who figured they were a web developer and actually got hired!
I predicted the housing bubble all the way up to the top. It was obvious that the borrowing had to stop someday. It is just that damn timing thing.
So how do you figure that I didn't make any money off knowing what was going to happen when it was all so obvious to anyone who looked?

It will be interesting to learn how people was affected, which groups were affected more, what did people do to survive, how long this lasted, what specific actions were taken, who were the winners and losers, which industries thrived and which were annihilated, that at least will serve as a roadmap,,,,, I'm convinced that history repeats itself, same circumstances, different actors. And the eternal question: why do we keep making the same mistakes over and over and infinitum.

You might also take a look at

It is part of - the Internet's largest site devoted to business and management history.

Best Regards,

Kip Altman

Dog Gone, Bing. I have two they're both still here.

I am so glad you identified the writer as James Monroe. I and many others who correspond here would have wagered, Alan Greenspan.

Hey, I wonder what odds you can get wagering on Greenspan?

I'll see your Greenspan and raise you A. Mitchell.

I'm all in.

Well here's my 1.5 cents (it should be 2, but money's a little tight)

Groupthink- despite overwhelming historical evidence of how these things evolve and eventually end up, so many times it seems that individuals are drawn together and cling to each other like the last 10 Cheerios in a bowl of milk, and justify and rationalize as a group that "this time it will be different" or "this isn't the same as that, because blah blah blah..."


Maybe it's just because there is a blissful ignorance of History, because it's really kinda boring, and reading about it interferes with my TV time, My Space time, On-Line Poker time, golf time, Jam time, sex time...whatever...we have our priorities...

I think human nature is the unlikely culprit of all economic cycles. Beyond metrics, beyond assumptions, beyond performance, beyond logic.

Part mean there's more?Waaaaah

on fortune mag. people have always written on crashes,booms and panics some articles as old as in the 1980's............
but the cycle continues its nature.let us hope a few learn this time around!

as a relatively young man 28,i started working at the onset of the last boom............i prayed for a market crash just in order to witness what it felt like & to make gains from it,now i know.... am only sadden by the impact of lost jobs on peoples families.
i entered a mutalfund already suspecting the fund manager ran a ponzi scheme...(a lot of people suspected same but still jumped in)the Economic Financial Crimes guys spoilt the fun by clamping down on him much too early.............i lost 5% of my money,that sad........but the exictment of winning out weighed the fear of a loss.if we prevent the disaster something worse may occur...........why dont we stick with the crashes we know!

Panics are a result of sudden and unreasonable fear; they can cause a stampede of people or animals.

People that are nearest to the epicenter of a disastrous action or inaction get spooked first; they probably are the most knowledgeable of a cause and cure for any action or inaction; they are the spark that ignites the explosive panic or the ice on the mosquito bite.

Imagine the "boat people" at the first rumbling of the quake that set off the "tsunami" and their innate wisdom and instincts that kept them from panicking from the faint but clear signs that things were very wrong; their instincts led them to safety.

All others on in the area operating on automatic pilot were caught in the tailspin of the disaster. A disaster of huge proportions that has left an incomplete body count.

How one develops the ego they were born with can posssibly determine their net worth, longevity, and satisfaction.

Hammond's right; if one is in the right place at the right time to spook a panic---"starting a rumor will get you there"!

Robbie P: In front of situations like this, I'm more interested in knowing how this did happened and how can it be prevented in the future,, I think you are right about the groupthink phenomenon when it comes to explain how come this happened,,,,,NASA is, supposedly, the expert when it comes to groupthink: how to spot it and avpoid it, this after the Challenger incident in 1985.

A large part of the problem here in the UK is negativity and fear created by the media on a daily basis that hinders economic recovery.

We are at the start of a fairly major slump in the mortgage market where people who rather than having one home, purchased several properties on buy to let mortgages and now with the responsibility of several properties are finding it too difficult to tread water.

Of course as they have several properties when they declare bankruptcy their loss is multiplied in its's effect on the economy.

Bing, Very interested in your next topic about Rome. Many comparisons can be made to today's situation.
-Majority of wealth in the hand's of a few.
-Politicians more worried about themselves than the good of the country
-High levels of debt
-Replacement of intelligence with "the circus" (i.e. major sports and American Idol
-More interest in "rights" rather than "responsibilities"

Hmmmmm...Look what happened to Rome.

Some of us have predicted these things. We're sneered at as "bears", and then when we turn out to be right, we're blamed for causing the mess.

You've stated a rather dim view of those of us who bet the short position in more than of your pieces, Bing.

Isaac, thanks...sometimes it seems like rabid fishermen who find the ultimate spot on the end of a pier, so they all crowd crowd together there and everybody is pulling in fish after fish, and more fishermen keep coming because the fishing is so great...but after awhile the catches become fewer and further between, and then the pier finally collapses into the ocean because there were too many fisherman standing on it, and the pier police were not enforcing the maximum capacitý regulations...


Nice, Robbie.

Thanks Bing...

this was perdicted in a book called the great depression of 1990. The author missed his analysis because he did not include the stagflation of 70s in his analysis. His thesis was that capitalism abhors an overconcentration of wealth and self corrects. Read it. It speaks to our current situation.

What I find most interesting about Robbie P's explanation of too many fishermen is why, even after the catch got smaller, people kept crowding onto the pier? No one may be watching this post anymore, but any ideas?