Devil Take the Hindmost - history repeats

We have been here and seen this bubble cycle many times before. In his 1999 book, Devil Take the Hindmost, Edward Chancellor documents the long history of financial speculation. Early in the book he quotes John Stuart Mill. Writing in the 1800's, Mill wrote:

"Some accident which excites expectations of rising prices... sets speculation at work...In certain states of the public mind, such examples of rapid increase of fortune call forth numerous imitators, and speculation not only goes much beyond what is justified by the original grounds for expecting a rise in price, but extends itself to articles in which there never was any such ground; these however, rise like the rest as soon as speculation sets in. At periods of this kind, a great extension of credit takes place."

Chancellor goes on to write this short description of the behaviors of bubble cycles, many of which which are playing out today:

"The governments failure to regulate or supervise the new stock market and its stimulation of a lottery "fever" were key factors in the genesis and development of the 1690's boom. This was supplemented by the venality of members of Parliament who were more interested in profiting personally from the stock market than in opposing its excesses. As we shall see, a combination of laissez-fair and political corruption is a common feature of later manias - the most notable example being the Japanese "bubble economy" of the 1980's. When the boom ended and was followed by an economic crisis, the political situation changed. The selfish and shortsighted behavior of stockjobbers and promoters suggested a limit to the economic role of self-interest, and laissez-faire was replaced by regulation of both trade and the stock market.. Other manias have also been followed by a wave of popular, if rather hypocritical, revulsion against "greed."

After the crisis of 1696, stockjobbers became a symbol for the avarice of society at large, just as the "moneylenders" (President Franklin D. Roosevelt's phrase) were castigated in the 1930's"

For the long term investor it is important to understand that the history of capital markets is filled with incidents that are similar to the one we are living through. It is not different this time. Rather, it appears to be consistent with the historical record.

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