Devil Take the Hindmost: A History of Financial Speculation

As you contemplate the rise and rise of China's planned economy, consider this passage from an anonymous bank official:"We intended first to boost the stock and property markets. Supported by this safety net - rising markets - export-oriented industries were supposed to reshape themselves so they could adapt to a domestic-led economy. This step was then supposed to bring about an enormous growth of assets over every economic segment, followed by an increase of investment in plant and equipment. In the end, loosened monetary policy would boost real economic growth."Sounds about right, doesn't it? There's just one catch....The official being quoted is not a Chinese central banker circa 2011. He is a BOJ (Bank of Japan) official circa 1988.And we know what came soon after for the Land of the Rising Sun - a toppling weight of speculative mania collapse, coupled with a truly spectacular misallocation of resources and the dead weight of "zombie banks," that hobbled Japan's economy for decades running.The above quotation is one of the many cited in the excellent "Devil Take the Hindmost: A History of Financial Speculation" by Edward Chancellor.Having first read "Devil Take" many years ago, but never having reviewed it, we were inspired by recent events in China to pull it down from the bookshelf and reexamine the chapter on Japan.The similarities - China now, Japan then - are notable.Japan in the late 1980s, like China now, was a booming command and control economy. Officials at the all powerful Ministry of Trade and Industry (MITI) and Ministry of Finance, via the power of back channels, chose how to steer "Japan Inc." at will.Further evoking China, Chancellor observed of the Japan bubble that "speculative mania is often a symptom of hubris," with great manias tending to occur "when the economic balance of power is shifting from one nation to another."As Chancellor describes the late 1980s scene,"America was on the run. While Japan had its trade surpluses, America faced growing trade deficits. The Reagan administration also produced enormous budget deficits that were only sustained by the willingness of Japanese investors to sink their country's trade surplus into U.S. Treasury bonds..."As Yogi Berra might quip, re Japan vs. China, it's "Deja Vu All Over Again."Or perhaps "Nobody invests there anymore, it's too overbought."Those timely parallels aside, "Devil Take" is an engrossing book that traces the roots of financial speculation all the way back to Roman times. Thanks to Chancellor we learn the Latin meaning of the word speculator: It originally applied to sentries, whose job it was to "look out" (speculare) for trouble. Ancient Rome's financial players, on the other hand, were known as "quaestors," or seekers.And the quaestors had much to seek. Chancellor reveals that two millennia ago there were joint stock companies with thousands of employees (slaves), public accounts, and even joint shareholder meetings with differing classes of company shares. One wonders if there could have been rough-hewn J.P. Morgans and Jesse Livermores of the Roman age.Human nature was certainly the same. As Petronius Arbiter wrote of the Rebublic's final years,"...filthy usury and the handling of money had caught the common people in a double whirlpool, and destroyed them... the madness spread through their limbs, and trouble bayed and hounded them down like some disease sown in the dumb flesh."Thus beginning with ancient Rome and the origins of financial speculation, Chancellor then takes an erudite journey through the forgotten touchpoints of speculative mania history - from "stockjobbing" in the London boom of the 1690s, to John Law and the South-Sea Mississippi Scheme, to the "Fool's Gold" of the 1820s and the Railway Mania of 1845.The book then covers speculation in the Gilded Age, and rounds out the 20th century with a look at the crash of `29 and the go-go 1980s (via cowboy capitalism and, last but not least, Japan).Needless to say, pollyanna permabulls will not much like this book. But for those with a natural contrarian streak and an acquired taste for the "dark side" (i.e. going short), "Devil Take the Hindmost" is a delicious and informative romp.The lessons of speculative mania are clearly a warning to unrestrained bulls, but they hold an important message for bears too: Manias can be quite dangerous, fatal even, for those who stand in their path without yielding.The persistently recurring nature of the episodes Chancellor describes - and the ability of froth to reach incredible heights - is great testimony to the old J.M. Keynes warning: "The market can remain irrational longer than you can remain solvent."

The interest now in this 12-year-old book is that it was written 12 years ago. "Devil Take the Hindmost" could stand for a critique of the Reaganomics-created financial panic of 2008 with the change of a few names.You were warned. In 1999, the easy-to-read Edward Chancellor was writing about bonds "known as 'toxic waste' by the traders who handled them. They have been described as 'among the most speculative instruments ever offered to American investors' " by the trenchant Martin Mayer in "Nightmare on Wall Street: Salomon Brothers and the Corruption of the Market Place." That was published in 1993.So, you see, despite what you have been told since October 2008 by the shills for deregulation, the Community Reinvestment Act had nothing to do with it, ACORN did not cause it, government meddling with market forces was the not behind the crash. These bonds were virtually unregulated, and the derivative swaps they supposedly "supported" were totally unregulated. No government had any idea even how many of them were out there ($55 trillion, more or less, as it turned out).Talk about 20-20 foresight!The book needs to be read in context. Top financial advisers like Alan Greenspan and Larry Summers, not to mention a raft of Nobel Prize-winning economists, said that hyperspeculation, debt, exotic instruments and international flows of hot money were good, because they increased liquidity and spread risk. Greenspan went so far as to say that government need not trouble itself to observe these markets because "counterparty surveillance" would ensure that most borrowers were good risks.A look at earlier episodes, which Chancellor had done for them already, would have caused any sane person to call for the men in white coats.It would not be hard to find examples of speculation that go back even before the invention of money. Clay tablets from Sumeria show shady mortgage deals at the dawn of history, not different in any important respect from what Countrywide or Wamu were doing. But Chancellor specifies "financial" speculation, the kind enabled and loved, for a while, by organized exchange markets.He glances at the tulip mania, which was a little early to be a true financial speculation, and gets into his stride with the "projectors" on the London Exchange in the 1690s. This was about the earliest example of a free financial market and it promptly did what free financial markets are designed to do: It crashed.Although Chancellor has excellent background explanations, citing some of the best formal studies, of why markets crash, even a child can see why they do. Financial markets are like a game of musical chairs. When the music stops, as it always must, then someone is left without a seat.But if everybody is leveraged, which tends closer and closer to being the case as a boom runs to climax, then not just one chair is taken away, but all the chairs, and everybody falls down.Chancellor's book was written and largely inspired by the collapse of Long-term Capital Management, a fund advised by two Nobelists and fabulously remunerative for a time. LTCM was leveraged to a level that is anybody's guess but maybe 100 to 1.More recently, the investment house that started the latest rout of Wall Street, Bear Stearns, was leveraged around 40 to 1. Some of the other houses may have been leveraged even more. It's hard to tell. They are not transparent even when their managers are honest, and their managers are not often honest.In any event, it is plain to see that if one man leverages himself 100 to 1, while the rest of the market stays at some more prudent level, say 10 to 1, then one of two things will happen: Our plunger, call him Wantrocks, will make a lot more money in an expanding market than anybody else, and all the little pissant journalists who swarm Wall Street will write stories for the Wall Street Journal or Investors Business Daily about what a genius he is.If he winds up his operation and takes his winnings, he will go down as a Wall Street legend. The more usual result is that Wantrocks goes bust. Most "wolves of Wall Street" play till they are busted, and the more you are leveraged, the sooner you are busted.If you are leveraged 100 to 1, your sector has to contract by only one percent to wipe you out.Now, what happens if almost everybody is leveraged 40 or 50 or 100 to 1? Let's say 50, to be conservative. The market contracts by 2 percent. Everybody is busted. That's what happened in late 2008.And the reason for that is not far to seek. From the late 1930s until the late 1980s, there weren't any financial panics. It wasn't that the markets were dull. There were booms, the "go-go years" of the '60s etc. After each contraction - the business cycle is as reliable as if not quite as regular as the cycle of the seasons - the losers were shaken out and the economy continued its splendid expansion.Once the Reaganites (or Friedmanites, or Randians or Miseans or whoever you want to blame for the intellectual rot) got in, there was promptly a financial panic in the savings and loan sector, which had been - wait for it! -- deregulated.What prevented general panic for six decades was the Glass-Steagall Act and related New Deal circuit-breaking safeguards. G-S mandated two kinds of banks: risk banks, the Wall Street wolves; and safe banks, the kind you or I put our paychecks in. Hot money was mostly attracted to the risk banks, so that when some idiot ruined a bank, which happened from time to time, all the other banks weren't ruined as well.The antiregulatory, free market forces hated this. They wanted all banks to rise and fall together, believing that all would rise forever. As Chancellor's review of railway manias in the 1840s, loans to Argentina in the 1890s (he could have but did not mention French loans to Russian railways about the same time) and Coolidge "prosperity" should have informed them, markets go down as well as up.None of this was a secret in 1999, although aside from Charles Kindleberger, there were not a lot of competent authors writing accessible books about bubbles. (Kindleberger's "Manias, Panics and Crashes," as readable an economics text as has ever been penned, was simultaneously a pathbreaking theoretical work that is referred to by all competent economists: That is, you never heard Sen. Phil Gramm mention it; Gramm being a self-proclaimed - he was credentialed - economic maven and the chief political sponsor of the murder of Glass-Steagall.)There has been a spate of books in the past three years about financial markets, many of them excellent and some of them even enjoyable to read if you did not lose any money in the crash (as I did not; as a New Dealer, I saw it coming). It will be well worth your time to reach back and also read this older volume.

This book is a time machine. If you could go back in time and learn a few lessons from these wild speculations and if you can spot them and smell them today, and hence stay away from them, then this book was and is worth it. If you participate in the markets then take a few minutes to read along, so you can have some historical context. After all, for hundreds of years and even today, we are constantly looking for opportunities of wealth - many too good to be true. At first, I could not understand the title of the book. However, within a few pages, I understood that I need to keep the devil away, otherwise, it will take me - even if I am the very last one. Best wishes.

Great book - I highly recommend for personal growth

Perfect to calm your nerves if you are new to investments.

Informa de maravilla en clave de humor sobre las calamidades que se han ido generando a través del mundo financiero desde sus albores y de cómo nada ha cambiado. Lectura imprescindible. Debería ser obligatorio en las escuelas y no las tonterías que les imponen los gobiernos progresistas y nacionalistas a las indefensas nuevas generaciones con el beneplácito internacional. Es así.

Loved this book. Excellent overview on the history of money & credit.If you only read one book on financial speculation, thisshould be it. Peter Rabson.

Bellissimo libro che narra la storia economica con un taglio diverso dal solito e che risulta estremamente intrigante