Sunday, April 13, 2008

Of bubbles past, the things that come and go

Please don’t miss today’s Debt Rattle, April 13 2008: Tradable and expendable

Ilargi: A bit of historic perspective can’t hurt.; here are two stories. It’s all happened before. Just not as bad as the coming one. Plus, did anybody know the story of the Wall Street Rag?

Rags and Riches: How Scott Joplin Had Wall Street Down
By David Yearsley
A parallel survey of the historical soundtrack and stock market crashes reveals that musicians are not deaf to the beat of the financial markets, the euphoric crescendo and inevitable diminuendo of boom and bust, the ecstatic coloratura of good times and the gloomy introits to bad. While bottom-line laments sung by executives in recent years have silenced many artistic enterprises from across the musical spectrum, financial indices reflect, even if in inverse proportion, the universal demand for healing song when things go bad.

How else to explain the fact that the resounding collapse of 1929 led seamlessly into one of the great years of American popular song: 1930 yielded Hoagy Carmichael's Georgia on Mind, Johnny Green's Body and Soul, George Gershwin's Embraceable You, and Cole Porter's Love for Sale to name just a few. There's also Harold's Arlen's Get Happy. Composed in 1929 and published the following year, the song might be heard to respond, if indirectly, to economic depression. Coupled with Ted Koehler's bouncy lyric, the music is almost ridiculously optimistic, though it is not the Secretary of the Treasury (then the tax-evading tycoon Andrew Mellon), but the Holy Ghost that provides the necessary stimulus package:

Forget your troubles c'mon get happy,
you better chase all your cares away.
Shout hallelujah c'mon get happy
get ready for the judgment day.

Good humor mixes with apocalyptic for this much-needed palliative for those newly dark times: the music and lyrics are all about diverting the listener from the cruel realities of the present.

Indeed, music has buoyed markets for as long as they have existed. The greatest musician of the Dutch Golden Age, Jan Pieterszoon Sweelinck had already been dead fifteen years by the time the tulip craze imploded in 1637, but his music remained popular at the time of the crash. Sweelinck had made himself famous in part by playing organ concerts featuring variations on secular dance tunes in the Old Church in Amsterdam as traders strolled below, making deals which included rampant speculation on tulips. That's why I've always heard in the insouciant charm of his variations something of the effervescent thrill of high-risk stock trading.

The Old Church was then, as now, in the heart of Amsterdam's red-light district, so that these schemes were forged with sex for sale just outside the unconsecrated walls. (In the reformed church, religious buildings became sacred only when The Word was present-a convenient theological principle that allowed the enterprising Dutch to make multi-purpose use of ecclesiastical edifices.) That the secular songs treated by Sweelinck often had lascivious texts -- not sung but implicit in Sweelinck's instrumental elaborations of them -- confirms that his performances were energized by the same magnetic field that binds sex and money. Stock-jobbing and prostitution offer kindred, and sometimes conjoined, forms of arousal, something the recently deposed Sheriff of Wall Street, Eliot Spitzer, clearly knew but didn't let on about until the spectacular tumble of his own share price a few weeks ago.

Before the advent of the Euro, Sweelinck's proud portrait graced the ten guilder note on what was then Europe's most colorful currency. This was an apt commemoration for the Orpheus of Amsterdam's vital contribution to culture and commerce-an artificial distinction in more than just the case of the entrepreneurial Dutch.

Similarly, I like to think that Handel penned the music for the South Bubble Sea, which burst in August of 1720, puncturing a host of similarly corrupt stock schemes across Europe.

The bubble was born with The Treaty of Utrecht in 1713, a curiously far-reaching document that concluded the War of the Spanish Succession. One of its terms granted the South Sea Company exclusive British trading rights in the South Atlantic slave trade from West Africa to the Spanish colonies in the Americas. The scheme was set up by the Lord Treasurer, Robert Harley, to help service the massive deficits run up during the war, whereby holders of short-term government debt were convinced to take shares in the new company.

Only two years in London, Handel was called upon to produce the necessary commemorative music for the religious service to mark the end of the war and the signing of the treaty; his so-called Utrecht Te Deum was duly performed in St. Paul's Cathedral in July of 1713 in all its triumphal splendor. But the work's sublime pronouncements of righteousness and chaste welcome of manifest destiny masked the dark secret that a brutal enterprise carried out "beyond the seas" propped up the military-commercial complex at home.

Thus Handel launched the South Sea Bubble with his trademark trumpet blasts and racing strings that never stopped accompanying the work of Empire, from his own time and into the 20th century. The seemingly sincere expressions of individual thanks delivered by the soloists and the collective rapture of mighty choruses borne aloft on wings of magisterial counterpoint into St. Paul's famous dome: these were the eternal sounds of peace and prosperity for a chosen people. And these sublime divine reverberations only confirmed for the numerous South Sea speculators attending the service that God, too, was a shareholder.

In its all-consuming reach, the South Sea craze resembled the heady days of the winter of 1636-7 when tulip futures were available in virtually every Dutch tavern in the land, and the early fall of 1929 when taxi drivers and maids were watching the ticker tape as eagerly as company presidents.

It would have been surprising if Handel hadn't gotten into the act, too. He invested relatively early in South Sea stock, probably around 1716, and fortuitously sold in 1718, well ahead of the crash of August 1720, though also before the ten-fold increase that inflated the bubble over the first half of the year, when the frenzy swept across the entire nation and all its classes.

While Handel escaped the financial carnage, his patron during the 1710s, James Brydges (Marquess of Canarvon and later Duke of Chandos) did not. Brydges had accumulated his vast wealth as paymaster-general in the War of the Spanish Succession, and then became a significant investor in the South Sea Company. Confidently treading the well-worn insiders' path that leads from a killing in war to an even bigger killing in peace, Brydges now turned to exploiting the very war debt he had helped balloon.

It was at Canons, Brydge's princely house in Edgware on the then-outskirts of London, that Handel's lovely pastoral entertainment Acis and Galatea was performed in 1718 at the height of good times. The music smiles with much that is tranquil and pleasant, but trouble soon strides into the story in the form of a monocular giant, who, spurned by Galatea, kills her lover, the shepherd Acis. I like to hear in this evocation of death lurking in arcadia a portent of the crash to come: the mascot of shattered share prices should not be the brute bear, but the one-eyed, two-legged, skull-smashing phallus, Polyphemus bellowing Handel's "I rage, I melt, I burn."

When the South Sea bubble burst Brydges was ruined, hanging tenuously on to his house and status by marrying into a dowry of 40,000 pounds sterling. But Brydge's heir inherited only debt, and soon after the Duke's death in 1744, the magnificent Canons was demolished.

It strikes me as unwittingly fitting that the Harvard Business School is home to the South Sea Bubble Collection. The riot of engravings and hilarious songs spawned by the crisis can be trawled through on-line at great length. The home-page greets visitors with the words "Sunk in Lucre's Sordid Charms"-a motto which could just as well apply to the up-and-coming schemers of Harvard Business School as to the South Sea speculators of yore.

At the time of the 1720 crash the great lords of England were organizing another stock company: the Royal Academy of Music, which was to bring Italian opera back to Londonafter a short hiatus. In spite of the financial difficulties faced by many of its aristocratic shareholders, the enterprise went ahead, with Handel at its artistic helm. Opera was expensive, star singers most of all. Yet the Italian greats were imported at vast cost, and the aftermath of the bubble proved to be opera's greatest period in London. The retrenchments pursued by the Metropolitan Opera House after the 1929 crash, when outraged singers were asked to take a ten percent pay cut, were never inflicted on Handel's post-bubble casts.

But this too was a kind of madness: the great leading man Senesino, the castrato who premiered the title role of Handel's Giulio Cesare among many other important parts, returned to Italy after his long London sojourn and built a lavish mansion with his takings. Over the doorway was inscribed "this house was built on the folly of the English."

Though the movie musical fed a mass market far different than that of Italian opera in early 18th-century London, the appeal of opulent entertainment even, or perhaps especially, during economic downturns unites Handel and Busby Berkeley, whose career was born with the Great Depression and flourished over its course.

While the relationship between music and markets is a complicated one, the correspondences between them are far from random. It is not only the fortuitous eruption of the zeitgeist that accounts, for example, for the appearance John Philip Sousa's most famous march Stars and Stripes Forever in the same year as the Panic of 1896, which brought with it an acute Depression. On the same day that William Jennings Bryan delivered his Cross of Gold speech at the Democratic National Convention in Chicago in July of 1896, a spontaneous display of flag-waving broke out in the New York stock exchange. The long-time broker, H. R. Halsted, who later died of food poisoning, procured what the New York Times account called "a large American flag." As Halsted began marching around the boardroom, "instantly cheers for the flag arose, and fully 150 brokers fell into line behind the standard bearer and marched around the room three times. Mingled with frequent cheering there were cries of 'Give us sound money!' 'Down with populism!' "The American flag against the red!' Down with the Anarchists!' &c." (How different is the present-day attitude on the floor of the exchange each time soft-money comes sluicing in!) The more recent hoorahs at the above-mentioned demise of Eliot Spitzer pale by comparison.An alliance of monied Democrats and Republicans still familiar to us formed quickly:"Members of the Bankers and Brokers' Republican Campaign Club had a large supply of McKinley buttons, and they found plenty of Democratic brokers willing to wear them." Even trading was halted for the enactment this outpouring of fiscal responsibility and nationalist sentiment.

Is not the proper music for these 19th-century brokers in lock-step Sousa's celebrated march, just as it could well have been for the draping of the huge stars-and-stripes across the Exchange after September 11, the brightly colored, super-thin, anti-terror prophylactic that still sheathes the erect columns of the building's neo-classical facade? Composed in a year of financial disaster, Sousa's greatest hit is the patriotic hymn of unbridled capitalism; whether urged on by macho trombones or absurdly cheery piccolos, this America marches unwaveringly towards a brighter future, if not brighter for everyone, then certainly for the captains of industry and their faithful lieutenants.

In contrast to music historians and festival organizers, who habitually capitalize on anniversaries, market watchers steer a wide course around such commemorations, since they inevitably direct thoughts towards the cyclic nature of markets and the unavoidable crash around the corner. Thus the Panic of 1907, when stock prices dropped by 50 per cent, received hardly a nod during its turbulent hundredth anniversary year.

But looking back musically, we can still see a bright orange cone marking this deep pothole in America's golden pavements. Composed in the wake of the Panic, Scott Joplin's Wall Street Rag appeared in 1909 when confidence in the markets had been largely restore. The unbridled, if blinkered, gung-ho of Sousa gives way to a good deal of doubt. Joplin was also adept at playing the patriotic card; the cover of his Nonpareil rag of 1907 shows Uncle Sam unfurling an American flag. But Wall Street registers a much wider range of emotion, even fears, though it, too, never makes claims for great profundity.

The epigrammatic opening of Joplin's Wall Street is cast in "Very Slow March Time" rather than the "Slow March Time" of so many of the composer's other two-steps and rags. It's as if the poised brightness of these other pieces has been transformed into a dirge; indeed the cover of Wall Street looks down towards Trinity Church, and the dark-suited mob assembled in front of the Stock Exchange looks as if it has gathered for a funeral. (The brisk tempo of the allegedly original Joplin piano roll, recorded on a modern instrument and released last year by Editions Milan Music, must be wrong; as he did on many of his printed scores, Joplin enjoined the buyers of his music in the starkest terms not to rush: "Do not play this piece fast. It is never right to play Ragtime fast!")

The rag's opening section, "Panic in Wall Street" depicts the "Brokers feeling melancholy."Nowadays, no one would think to ascribe such an introspective, contemplative state to momentarily impoverished Wall Streeters forlornly nursing their martinis and patting their suit pocket to check for the reserves of pharmaceutical cocaine. But it is precisely Joplin's elegant handling of this rarefied sentiment that sends a classy strain of tubercular European salon music wafting over the manic, money hungry stone and asphalt caverns of New York's financial district. There is a subtlety here that Sousa had no time or talent for.

The next section of the rag moves from these shapely Chopinesque chromatic inflections and gracefully sliding parallel figures to the rollicking right-hand chords and thundering bass octaves of "Good times coming." I'll bet Joplin had Sousa in his ears for this. Soon enough, of course, "Good times have come" and Joplin focuses his musical material in the middle-range of the piano, where the breathless repetitions gather a locomotive's momentum.

The rag closes with financial worries chased away. Now even the greedy have time for entertainment. Re-enriched, Wall Street can let itself have fun again: "Listening to the strains of genuine negro ragtime, brokers forget their cares."The left hand romps along as the right hand ascends to the top of its compass, like the surging Dow. The carefree and poor, as if unaffected by the cycles of the market, and never burdened by the heavy responsibilities of steering the economy, offer up their carefree song for the celebration of the financiers. Thus Joplin feeds the myth: what's good for Wall Street is good for America.

But this final section is ambiguous. The rag does not embrace the system without some qualms. "Genuine negro ragtime" invokes a notion of authenticity -- of noble savagery -- that the high-collaredbrokers can never attain: the dividends of pleasure only music can pay are never taxable.

Yes, Joplin wanted to make a buck, too. In 1899, He negotiated a royalty of a cent per copy of Maple Leaf Rag, a deal that brought him some $360 a year for the rest of his life. His publisher made a lot more money, but Joplin did all right himself. The outburst of negro joy after a black period in the markets wants to make us believe that way down at the bottom of the economic heap someone will always be singing and dancing,

As a whole, too, Wall Street does what Wall Street wants: it consoles in bad times and rejoices in good. In spite of the superficial attempt to convey social unity across class and race, however, the surreal concluding tableau of Joplin's Wall Street, with its the wealthy whites dancing in front of the stock exchange to joyful black music, cannot fully divert our ears and eyes from the more fundamental, and still operative, truth conveyed by this final image:the negroes have the rags, the brokers the riches.

Tulips & Windhandel
By Silvia Wadhwa
It's tulips all over again, isn't it?

Lemme explain ...

Here we are in the grip of this latest financial market crisis, trying to dig ourselves out from underneath the slippery remnants of yet another burst speculative bubble, checking for scabs and bruises AND trying to diagnose the disaster.

Well, trying to find somebody to put the finger point at. The rating agencies were to blame, the reckless mortgage salesmen, careless mortgage banks, too-much-in-love-with-sophisticated-financial-gadgets investment bankers, Alan Easy-Money Greenspan ... the list goes on and on. And, fair enough, some of the blame can be thrown at any of these parties. But that doesn't really get to the heart of the matter now, does it?

I tell you what caused this AND any other financial market bubbles, crisis, fracas, since the dawn of time: Religiously speaking, one of the deadly sins - GREED. Plain and simple greed. Or, as Karl Marx wrote in his DAS KAPITAL: "All nations with a capitalist mode of production are seized periodically by a feverish attempt to make money without the mediation of the process of production."

Do I see some upright capitalists cringe at the mention of Marx? - Well, let me quote an ex-Bundesbank President with a similar statement. "The exponential expansion of financial markets, just from the multiplication of financial revenue with less and less underlying business that's anchored in industrial or any production will cause increasing friction and ultimately lead to crisis scenarios", ex-Bundesbank President Helmut Schlesinger put it succintly way back in the eighties, when the so-called Big Bang had just ... well, banged.

Remember - IF you are old enough - this was just a few years after the Drysdale affair. The Drysdale affair of 1982 ... It was almost MY first brush with financial fracas. I was in my last year in university in London and read about it all with jaw-dropping fascination.

For those of you who don't remember: In a nutshell ... A handful of middle-management executives from prominent brokerage firms supposedly went into business for themselves in the purchase and sale of government securities. This tiny handful of executives, on their own presumably, were able to raise $5 million of capital to start their firm a paltry sum when measured against the government securities market estimated at the time to have roughly more than $500 billion.

In a brief period of not more than a few months, this small group of middle-management executives was able to generate -- that is get as customers -- people who would be able to build up the portfolios of Drysdale Government Securities to the tune of $4.5 billion!

By what means could a small group like this, with such a paltry sum of money -- $5 million -- so quickly earned the confidence of any big securities dealers so as to be entrusted with $4.5 billion? Would anybody know what was really happening or how and by what hocus pocus the interest on this vast sum of $4.5 billion was regularly paid? Nobody, of course would really know, had not the Drysdale firm suddenly been unable to pay the $270 million of interest on this billion-fold portfolio.

A few weekend emergency sessions of the Fed with prominent bankers from Chase Manhattan and Manufacturers Hanover Trust (all you spring chickens out there: these were giants of global banking at the time ... alas, long vanished), there were rescue packages and bailouts ... and the banking system was saved - of sorts. Does THAT sound familiar?
Then, too, there was much (blame) soul-searching and little real change. Oh, AND a great deal of perpetual reassurance that there was definitely NO systemic problem. Now, that DEFINITELY sounds familiar.

Mind you, in a refreshingly frank letter to the Times published May 31st, 1982 a certain Albert Gaylor Hart, professor emeritus of economics at Columbia University, had a few damning questions and conclusions.

"If the U.S. money market were successful in any public spirited sense, how could it permit Drysdale Government Securities within months of its birth to build up a portfolio of $4.5 billion, and to generate interest flows so large as to give scope for a loss of $270 million all on a capital of $5 million?" Prof. Hart asked candidly and he continued, "I fear that this market is judged to be successful not on a record of integrity and responsibility but on the strength of its showing a huge volume of dealings, dealings which nobody fully understands but which enable some people to siphon off large gains from financial manipulations." - Uhmmmmm .... Yes! Spot on.

And: "The intimate involvement of major banks in the Drysdale fiasco illustrates the permeation of our financial system by get-rich-quick ambitions and by creative accounting," he concluded.

Now replace Drysdale by SUBPRIME .... and? Yep, bullseye. Or LTCM. Or E-commerce. Or .... tulips for that matter ...

Remember Tulip-mania in the year of our Lord 1637? ... Well, not personally, of course. Or at least not, unless you are MinHeer Jan van Goven or one of his contemporaries who were among the financial casualties of the tulip market bubble at the time.

No one quite knows WHY tulips suddenly became all the rage in the Low Countries and from, there in the rest of Europe in the 1620s ... just like nobody quite could predict that the internet would suddenly take off and that IPods would sell like hot cakes. But by 1635, a sale of 40 tulip bulbs for 100,000 florins was recorded. And the Semper Augustus, the most famous of the bulbs, went for 6,000 florins in Haarlem one fine day.

By 1636, tulips were traded on the stock exchanges of numerous Dutch towns and cities. Some traders sold tulip bulbs that had only just been planted or those they intended to plant (in effect, tulip futures contracts). This phenomenon was dubbed Windhandel, or "wind trade", and took place mostly in the taverns of small towns using an arcane slate system to indicate bid prices.

Well, we all know what happened ... Came February 1637, tulip traders could no longer get inflated prices for their bulbs, and they began to sell. The bubble burst ... as bubbles do. Suddenly, the coveted bulbs could be had for 100 florins or less and then for virtually nothing.
Does THAT sound familiar? ... Replace TULIP by Asset Backed Security, Conduit or Structure Investment Vehicle and? ... Yep, it's tulips all over again. Tulips and Windhandel.

But - do we, do the markets learn? - Nope.

And why? - How did Prof. Hart put it so succinctly? - "Get-rich-quick schemes". Or, in one word: Greed.


Anonymous said...

I always enjoy hearing the story again! Ah, those tulips. Sorta like the Gospel reading on Christmas Eve. It just never gets old, and even gets better with age.

Funny thing is: Try telling the tulips story during the height of any particular bubble expansion du jour, and you're labeled a tinfoil-hat conspiracy theorist. Not to mention unpatriotic. It works every time!

Some things never change.

Anonymous said...

Well, it wasn't just *any* tulips, in general, that fetched the very highest prices on the market. It was the so-called "broken tulip." These exotic tulips were striped and splashed with wild patterns never seen before. Breeders and traders traded them without ever really understanding what it was that made them what they were. Unfortunately, these tulips owed their flamboyance to aphid-vectored viruses which forced the plant each season into ever-more gaudy mutations until the stress eventually killed it.

Pretty appropriate analogy, I guess.

Anonymous said...

Ahh, yes. Music.

It fits.

Now it's rap representing the US.

. said...

Will Monday be the beginning of the end for airlines? Four bankruptcies, one very suspicious outage, and now this? It's a CNN link, made tiny for your viewing pleasure ...

Ilargi said...


Debt Rattle April 11:
Ilargi: Put down April 10 as the day the US airline industry started to unravel for real. Bankruptcies will come fast and furious now.