Tuesday, April 24, 2012

Washington Irving on The Financial Meltdown

Thanks to Richard Fisher, President of the Dallas Fed for pointing me to Washington Irving's poetic and extremely insightful drawing of the psychological forces that lead us into financial bubbles and busts :

"Every now and then the world is visited by one of those delusive seasons, when the 'credit system' expands to full luxuriance: everyone trusts everybody; a bad debt is a thing unheard of; the broad way is certain and plain and open; and men...dash forth boldly from the facility of borrowing.

Promissory notes, interchanged between scheming individuals, are liberally discounted in the banks....Everyone talks in [huge amounts]; nothing is heard but gigantic operations in trade; great purchases and sales of real property, and immense sums [are] made at every transfer. All, to be sure, as yet exists in promise; but the believer in promises calculates the aggregate as solid capital...

Speculative and dreaming...men...relate their dreams and projects to the ignorant and credulous, dazzle them with golden visions and set them maddening after shadows.  The example of one stimulates another; speculation rises on speculation; bubble rises on bubble...

Speculation casts contempt on all the sober realities...It renders [the financier] a magician, and the [stock] exchange a region of enchantment...No 'operation' is thought worthy of attention that does not double or treble the investment.

No business is worth following that does not promise an immediate fortune...Could this delusion always last, life....would indeed be a golden dream; but the [delusion] is short as it is brilliant."

From: "The Crayon Papers," by Washington Irving about the Mississippi Bubble fiasco of 1719.

No economist could ever say it better!

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