1791 First Bank of the United States was funded by taxes and supported by Northern merchants, but not Secretary of State Thomas Jefferson and Representative James Madison both of whom believed the South would not benefit.
1816 Second Bank of the United States, charted due to difficulty financing the War of 1812 and inflation, President Andrew Jackson opposed its financier president Nicholas Biddle, 20 year charter ran out.
Panic of 1893 Our First Great Recession was caused by railroad overbuilding, shaky railroad financing causing bank failures and a run on the gold supply, and a policy of using both gold and silver metals as a peg for the U.S. Dollar value.
1920-21 Post War Recession
Government agencies released their controls of businesses,
people raced to buy goods that had been
1929 The Great Depression was a severe worldwide economic depression that began sudden and total collapse of US stock market prices on October 29. Economist still can't agree on a cause.
1981-82 Recession was severe and occurred when the Federal Reserve to began lowering inflation by drastically decreasing the money supply just as bank deregulation allowed them to expand into risky ventures.
1980's and 1990's S&L Crisis saw 747 failures at a cost of $160 billion($125 billion was a government bailout) It was caused by real estate losses from the Tax Reform Act of 1986 and S&L deregulation problems.
2007-2009 Great Recession
began in the US and spread to much of the industrial world.
Some theorize the law has embedded financial crisis into capitalism.
The First Bank of the United States was chartered for 20 years by the United States Congress in 1791. Officially proposed by Alexander Hamilton, Secretary of the Treasury, to the first session of the First Congress in 1790, the concept for the Bank had both its support and origin in and among Northern merchants and more than a few New England state governments.
"The tendency of a national bank is to increase public and private credit. The former gives power to the state for the protection of its rights and interests, and the latter facilitates and extends the operations of commerce amongst individuals." Alexander Hamilton, December, 1790 report to George Washington
Neither Secretary of State Thomas Jefferson nor Representative James Madison had any particular interest in the chartering of the Bank of the United States or a proposed mint. They believed the South would not benefit from either a central mint or bank as these were mostly to the benefit of business interests in the commercial north. They didn't like Hamilton's desire to increase the excise tax on imported and domestic spirits to pay for the bank. Southern congressmen feared the tax burden would fall disproportionately heavily on the South, where, declared Jackson, 'hard liquor was a necessity of life'.
After Hamilton left office in 1795, the new Secretary of the Treasury Oliver Wolcott, Jr. informed Congress that more money was needed. Selling the government's shares of stock in the Bank, or raising taxes was the choice and Congress quickly, above Hamilton objection, agreed. The bank's charter expired in 1811. First Bank of the United States
Red is editor's opinion
Bank of the United States and
JACKSON fights the Bank of the U.S.
Andrew Jackson and the
Bank war - from Tony D'Urso
Second Bank of the United States was
chartered in 1816 resulted
because of the U.S. had
and had difficult financing the
War of 1812.
Subsequently, the credit and borrowing
status of the United States were at
their lowest levels since its founding.
The Bank of the U.S. was in no sense a national bank but rather a privately held banking corporation. The bank's relationship with the federal government that gave it access to substantial profits. Its role as the depository of the federal government's revenues made it a political target of banks chartered by the individual states. partisan politics highlighted the debate over the renewal of the charter.
"The classic statement by Arthur Schlesinger was that the partisan politics during the Jacksonian period was grounded in class conflict. Viewed through the lens of party elite discourse, Schlesinger saw inter-party conflict as a clash between wealthy Whigs and working class Democrats "(Grynaviski) President Andrew Jackson strongly opposed the renewal of its charter, and built his platform for the election of 1832 around doing away with the Second Bank of the United States. Jackson's political target was y the very wealthy Nicholas Biddle, financier, politician, and president of the Bank of the United States. Apart from a general hostility to banking and the belief that specie (gold and/or silver) was the only true money, Jackson's reasons for opposing the renewal of the charter revolved around his belief that bestowing power and responsibility upon a single bank was the cause of inflation and other perceived evils.
The Second Bank of the United States thrived from the tax revenue that the federal government regularly deposited. Jackson struck at this vital source of funds in 1833 by instructing his Secretary of the Treasury to deposit federal tax revenues in state banks, soon nicknamed "pet banks" because of their loyalty to Jackson's party. The Second Bank of the United States was left with little money and, in 1836, its charter expired and turned into an ordinary bank. Five years later, the former Second Bank of the United States went bankrupt. Click
Panic of 1819 was the first major
in the United States. It occurred because
the Embargo Act and War of 1812
widespread foreclosures, bank failures,
unemployment, and a slump in agriculture
and manufacturing. Economists who adhere
suggest that the Panic of 1819 was the
early Republic's first experience with
the boom-bust cycles common to all
economists view the nationwide
that resulted from the Panic of 1819 as
the first failure of
Proposed remedies included increase of
(largely proposed by
manufacturing interests), reduction of
tariffs (largely proposed by
who believed free trade would stimulate
the economy and increase demand),
monetary expansion; i.e., restriction or
suspension of specie payment, rigid
enforcement of specie payment,
restriction of bank credit, direct
relief of debtors, public works
proposals, stricter enforcement of
Panic of 1837
was a financial crisis caused
burst in 1837 NY City when every bank
began to accept payment only in
policy of both the previous
administration of Andrew Jackson and
recently elected current administration
of Martin Van Buren, were blamed as
well as bank excesses. Within
two months the losses from bank failures
in New York alone aggregated nearly $100
million. "Out of 850 banks in the United
States, 343 closed entirely, 62 failed
partially, and the system of State banks
received a shock from which it never
fully recovered." The publishing
industry was particularly hurt by the
ensuing depression. According to most
accounts, the economy did not recover
Most economists also agree that there
was a brief recovery from 1838 to 1839,
which then ended as the Bank of England
and Dutch creditors raised interest
However, economic historian
Peter Temin has argued that, when
corrected for deflation, the economy
actually grew after 1838.
was brought on
mostly by the people's over-consumption
of goods from Europe to such an extent
that the Union's
was drained off, overbuilding by
competing railroads, and rampant land
speculation in the west.. The
recession ended a period of prosperity
and speculation that had followed the
(1846-1848) and the discovery of gold in
California. Gold poured into
the economy causing inflated.
After a large increase in state banks in
the early 1850's, by July 1856, state
banks began to lend far more money than
they could back up in
even as deposits began to fall. The
panic began with a loss of confidence in
an Ohio bank, spread as railroads
failed, and fears that the US Federal
Government would be unable to pay
More than 5,000 American businesses
failed, the stock market declined
by 66% compared with inflation, and
unemployment resulted in urban protests.
bank holiday was declared in England and
New York to avert runs on those
Tariff Act of 1857
reduced the average tariff
rate to about 20%. Written by
Southerners and supported by most
economic interests nationwide, except
for sheep farmers and some Pennsylvania
iron companies, it had the effect of
removing the tariff issue as a major
source of North-South contention. The
South was much less hard-hit than other
regions, because of the stability of the
market. No recovery was evident in the
northern parts of the United States for
a year and a half, and the full impact
did not dissipate until the
American Civil War.
began when the he
post civil war rail road boom ended and
the passage of the
Coinage Act of 1873, which
took the United off a bimetallic (gold
and silver) money standard. The
immediate effect was to depress silver
prices which hurt Western mining
interests, who labeled the Act "The
Crime of '73." It also reduced the
money supply raising interest rates
and hurting farmers and other large
resulting outcry created the fear of an
unstable money supply and investor
shunned bonds and other long-term
obligations. This lack of confidence in
bonds slowed the
railroad boom and exacerbated the
economic situation. For example, Jay
Cooke & Company, a major component
of the United States banking
establishment, cancelled plans for a
second transcontinental railroad as two
major funding sources disappeared.
In 1873 he was unable to market several
million dollars in
bonds and lost out on a $300 million
government loan as reports circulated
that his firm's credit was worthless.
The firm declared
in September of 1873.
The failure of the Jay Cooke bank, followed quickly by that of Henry Clews, set off a chain reaction of bank failures and temporarily closed the New York stock market on September 20 for 10 days. Factories began to lay off workers and the effects of the panic were quickly felt in New York, more slowly in Chicago, Virginia City, Nevada and San Francisco. Of the country's 364 railroads, 89 went bankrupt. A total of 18,000 businesses failed between 1873 and 1875. Unemployment reached 14% by 1876. Construction work halted, wages were cut, real estate values fell and corporate profits vanished. See Panic of 1873
Panic of 1893 was a serious economic depression in the United States because of railroad overbuilding and shaky railroad financing which set off a series of bank failures. Compounding market overbuilding and a railroad bubble was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US Dollar value.
1896 the Cross of Gold speech
Panic of 1907, known as the 1907 Bankers' Panic, was a financial crisis that occurred when the New York Stock Exchange fell close to 50% from its peak the previous year. There were runs on banks and trust companies. Many state and local banks and businesses entered into bankruptcy. New York City bank liquidity problems, loss of confidence among depositor, exacerbated by unregulated side bets at bucket shops caused the panic. The crisis was Triggered by the failed attempt in October 1907 to corner the market on stock of the United Copper Company, lending banks suffered runs that later spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbockers Trust Company—New York City's third-largest trust. The collapse of the Knickerbockers spread fear throughout the city's trusts as regional banks withdrew reserves from New York City banks. Panic extended across the nation as vast numbers of people withdrew deposits from their regional banks. Industrial production dropped further than after any bank run before then, while 1907 saw the second-highest volume of bankruptcies to that date. Production fell by 11%, imports by 26%, while unemployment rose to 8% from under 3%. Immigration dropped to 750,000 people in 1909, from 1.2 million two years earlier. The panic may have deepened if not for the intervention of financier J. P. Morgan, who pledged large sums of his own money, and convinced other New York bankers to do the same, to shore up the banking system. At the time, the United States did not have a central bank to inject liquidity back into the market. By November the financial contagion had largely ended, yet a further crisis emerged when a large brokerage firm borrowed heavily using the stock of Tennessee Coal, Iron and Railroad Company (TC&I) as collateral. Collapse of TC&I's stock price was averted by an emergency takeover by Morgan's U.S. Steel Corporation—a move approved by anti-monopolist president Theodore Roosevelt. A commission investigation lead to the Federal Reserve System.
Consider by some as a
mistakes in Federal Reserve policy
as a key factor in the crisis. In
response to post–World War I
Federal Reserve Bank of New York
began raising interest rates
sharply. In December 1919 the rate
was raised from 4.75% to 5%. A month
later it was raised to 6%, and in
June 1920 it was raised to 7% (the
highest interest rates of any period
except the 1970s and early 1980s).
1929 Second Great Depression
was a severe worldwide economic
depression that began sudden and total
collapse of US stock market prices on
October 29. As for causes, historians
emphasize structural factors like
massive bank failures and the stock
market crash, while economists point to
monetary factors such as actions by the
US Federal Reserve that contracted the
money supply, and Britain's decision to
return to the Gold Standard at pre-World
War I parities (US$4.86:£1).
Demand-driven causes include Keynesian economics, the breakdown of international trade, and Institutional Economists who point to under consumption, an over-investment economic bubble, malfeasance by bankers and industrialists, and incompetence by government officials.
Monetarists believe what started as an ordinary recession was made worse by significant policy mistakes by monetary authorities (especially the Federal Reserve which shrink the money supply which greatly exacerbated the economic situation).
Recovery began in the spring of 1933 with unemployment at 25%. However, the U.S. did not return to 1929 GNP for over a decade and still had an unemployment rate of about 15% in 1940, and entry into WWII brought unemployment under 10%.
was severe and occurred when the
Federal Reserve to began lowering
inflation by drastically lowered the
money supply. In the wake of
1973 oil crisis
began to afflict the economy of the
Banks had a tough time as a recent wave of deregulation had phased out a number of restrictions on banks' financial practices, broadened their lending powers, and raised the deposit insurance limit from $40,000 to $100,000 (raising the problem of moral hazard). Banks rushed into real estate lending, speculative lending, and other ventures just as the economy soured. In 1982 Congress further deregulated banks as well as savings and loans letting banks offer money market accounts in an attempt to encourage deposit in-flows, removed additional statutory restrictions in real estate lending, and relaxed loans-to-one-borrower limits. This encouraged a rapid expansion in real estate lending at a time when the real estate market was collapsing, increased the unhealthy competition between banks and savings and loans, and encouraged overbuilding of branch banks.
In 1984, Continental Illinois National Bank, the nation's seventh-largest bank failed and, federal regulators were willing to let the bank fail in order to reduce moral hazard and encourage safer practices but Congress and the press felt Continental Illinois was "too big to fail." and a $4.5 billion rescue package resulted.
Unemployment gradually improved from 10.8% in Dec of 1982 to 7.2% in November of 1984 Inflation fell from 10.3% in 1981 to 3.2% in 1983. http://en.wikipedia.org/wiki/Early_1980s_recession
1980s and 1990s S&L crisis
was the failure of 747 S&Ls aka
thrifts that cost about
billion, of which about $125 billion was
paid for by a US government bailout.
Causes included the
Tax Reform Act of 1986
removed many real estate tax shelters
thus decreasing real estate values tied
to said shelters,
which gave them many of the capabilities
of banks, without the same regulations
as banks, the "moral
hazard" of insuring already troubled
institutions who in order to improve
liquidity, made unsound real
on riskier assets, particularly land and
mismatch" at S & L's, who having made
long-term loans at a fixed rate, found
themselves borrowing at an ever
increasing rate and needing riskier
loans to cover these higher rates.
See 1. Causes of the savings and loan crisis 2. Lessons from 1987 stock market crash Historical Insights Into Banking Competition 3. The bankers that define the decades: Jamie Dimon, JPMorgan Chase ( Euromoney )
The Great Recession of
by the collapse of a specific kind
of derivative, the mortgage-backed
which were protected from regulation
by some federal regulators who
believed the free market could
manage itself. The Austrian School
of economics blamed "easy"
credit-based money caused an
unsustainable economic boom. Others
blame the extremely indebted US
economy. The failure rates of
subprime mortgages were the first
symptom of a credit boom tuned to
bust and of a real estate shock.
These low-quality mortgages acted
as an accelerant to the fire that
spread through the entire financial
system. The latter had become
fragile as a result of several factors
that are unique to this crisis: the
transfer of assets from the balance
sheets of banks to the markets, the
creation of complex and opaque
assets, the failure of ratings
agencies to properly assess the risk
of such assets, and the application
of fair value accounting. To these
novel factors, one must add the now
standard failure of regulators and
supervisors in spotting and
correcting the emerging weaknesses.
By October 2009, the unemployment
rate had risen from 4.9% to 10.1%.
In March 2009, Blackstone Group CEO
Stephen Schwarmzman said that up to
45% of global (stock
market) wealth had been
destroyed in little less than a year
and a half. Home prices, which
didn't move much between 1990 and
1997, dropped dramatically,
have come back some, and are
about twice their 1997(1990)
Some Question Federal Reserve Expanding Monetary Base
Central Bankers believe today’s roughly 2% real GDP growth rate to be inline with long term potential and still they expand the monetary base to close a 0.4% shortfall in PCE inflation. This process may end the way it did last time when we had the "Great Inflation." Or maybe our inaccurate inflation measures is understating today’s true inflation rate and maybe the low inflation has not been an impediment to growth. Nearly the entire 19th century saw rapid technological advancement, industrialization, and economic growth despite mostly outright deflation. The high growth 1950s and 1960s also witnessed lower inflation than today.
Law Coding and
the Financial Crisis
Legal System Design foster
1. Legal Privilege Attributes Conferred on Financial Assets
Priority: rank order, asset A is
stronger than asset B
Durability: a hierarchical ranking limiting counterclaims
Convertibility: securing past gains by assigning or flipping to
a safer asset
Universality: extending attributes to space:
Allow Securitization using Complex Financial Instruments:
Credit Default Swaps
Collateral Debt Obligations
Asset Backed Securities
3. Modern Legal Institutions
After the 2008-9 financial crisis
formed a group to analyzed what happened. They soon found lawyers had
missed "the" basic construction block, the required condition
to globalize our modern financial system, to make contracts enforceable. "
Backing of state power was the essential building block of the endless supply of legally created complex financial commitment. To makes agreement enforceable required the institutionalization of a centralized means of coercion.
The states is deeply involved in the creation of
legal privilege at every level of all markets. How private
parties use the coercive power to organize their private affairs and
bank on enforceability is instrumental to understanding the
financial crisis. State power allows the creation of assets
with priority rights that are universally enforceable against my
contracting parties against anybody whether or not they knew
about the arrangement or were party to the contract. Land and debt
are presently of interest though
Katharina's book also covers farms, and
know-how assets. All four can be coded as capital using the
legal institutions of:
An Application: Land
Land, a piece of dirt, a field, ... began having a property right during in the 16th century Feudal England. Land use was such that when noble landlords were not using the land, commoners had use to hunt, fish, farm... . Then the landlord built hedges and fences to keep commoners out. The two parties battled in the fields and courts for centuries. Eventually, land owners won with better lawyers who had better arguments and more resources plus more clout. Reasons given they had been there first (seniority) and they were nobleman who always had more rights. Commoners were not allowed to act collectively because they were not an organization. Eventually the law awarded exclusive priority to the landlords.
The law had created a priority right which allowing landlords to get the mortgages needed to commercialize the land. Sheep herding expanded to produce wool for the developing garment industry. Cash crops became a possibility. This need for growth capital created creditors with security mortgages.
During difficult times and to prevent client loss of their to creditor, Feudal lawyers created the 12th century entail. It was a kind of trust which made the land legally owned by children, grand children ... The owner, with only temporary control could not lose the land. As expected, legal battles became the norm. Eventually, an existing precedent was applied which limiting secured creditor rights to half the property and never to the family mansion.
Protection of a property rights had been socialized. Think late 20th century bank bailouts. The law had created a durability right. This protection, with all its confusion, lasted until a major 1870 financially caused agricultural depression forced 1881 legal changes. The life tenant, usually the eldest son, became the true owner. Land lost its legally created durability. This limited the accumulation of wealth.
Sale and commercialization of the land had created convertibility.
In protecting land owners from trespass, the law created universality.
The seniority argument did not work for new world English settlers because the natives had seniority. Property rights would not be based on the seniority because it belonged to indigenous Indian residents. Instead, because settlers who had discovered and improved the land, they were granted the common law property right. The English court flipped by applying the 1881 English common law in American with the 1732 with the debt recover act. It treated the life tenant as owner and responsible for the debt to English landlords.
The plantation with slaves could now be sold at auction to satisfy creditors. Not until 1925 did England complete property rights.
Property rights development was a political process and not always the same in countries A and B. But this flipping could cause problems. To sustain the authority, legitimacy, and trust law requires application continuity and consistence.Legal Power Structure
In medieval England, the legal power structure consisted of lawyers who were mostly noblemen and relegiouse leaders. Eventually the business class would join and eventually dominated.
This power structure "frames" the law. Over time, property rights associated with land could be transposed. Think moved like in sold.
Being politically desirable, this right was backed by the state, think king. It was declared legal and defended by state coercion.
Think Obama declaring that the priority rights of secured creditors would be ignored and the Union pensions would be first to receive bailout funds.
Think auto bailout. Think Trump blackballing those who do not cooperate with the United States policy
Economists believed that markets existed outside a legal framework. The law helps and supports market structure but is not essential. Rational actors make contract with no explanation required and markets insure efficient outcome. When this failed, the cause was behavior, psychology, animal spirits.
In-depth analysis of credit default swap, collateralized debt obligation, asset backed securities... revealed that everyone trying to enforce these contracts were not irrational when they all try to sell at the same time and brought down the financial system. Many answered "well that is how the law" works."
The framework of law/economics needs to be scrutinized by the academy.
In California the crisis began with a loan mortgage originated by New Century. They collected a bunch of mortgages and sold them wholesale to a New York located City Group subprime mortgage subsidiary. They put the mortgages into a trust which got the cash flow from mortgage payments irrespective of the City Group's and her subsidiaries finances. JP Morgan with be the trustee for this City Group trust and vice versa.
This securitization began in the 1970's after the 1968 Federal Housing Act allowed government sponsored entities, Fannie Mai in particular, to securitize (group and sell) securitized mortgages.
She had guaranteed mortgages and now while she could not to originate mortgages, she could buy them on the secondary market, package them, and sell the package.
This securitization diversifies the risk, lowering interest rates, and increases mortgage availability. Freddie and Ginnie just put the mortgages into a pile and sold equal portions.
Private companies soon followed but they created trenches (slices) with different priority rights. Seniors got cash in first and were last to incur a loss. Juniors tranches were second, third ...in the middle. People knew this and bought based on risk aversion.
Guaranteed pensions might always buy senior trenches. Fannie also bought only senior securitized debt. In the book example, City often bought the junior trenches because hoping to make a high profit with a private placement. But, this was a mass market operation with little demand for the real junior stuff which was too risky for A and not risky enough for B.
To produce buyers City set up a shell corporation located in the Carmen Island tax haven sell mortgages tranches. They went so far as to create a co issuer in Delaware to allow buyers with foreign purchase limitations to join the fun
This shell solicited funds to invest in low level trenches from different sellers to diversify risk They could then rate some as senior even though they consisted of all junior CDO to begin with. If you still get stuck with some trenches you just bundled them into another CDO, consisted of all defaulted trenches, a CDO squared. If some of these default, bundle them into a CDO cubed.
Globalization has evolved the legal sphere of private
actors who can now pick and choose from two legal systems of
England , New York state, and for corporate law you can add
Delaware. Most financial assets are coded in one of the
legal systems and are managed by the top 100 law firms. All
have angel Saxon names, many merged with European and
Japanese firms and all are located in NY.
Private individuals can easily avail themselves of State Power to enhance mostly their own private wealth with little concern for the public good. The easier we make it to opt-out of domestic legal system, the more tension we create, Think East Asia with china wanting more import to make control vertical from the top rather than horizontal, from the participants.
Lawyers of these firms are masters of the financial code which is designed not for economic efficiency but to control, about power.
Foreign courts provide vindication to protect property interests. This interferes with the ability of a society to seek and govern because some actors choose to opt-out of their home legal/tax system. This vindication sometime can apply to our domestic courts. This process first affected financial assets, then intellectual property, Ownership of data could be next.
A balanced approached related to all assets is required. We need a balance between private autonomy with the prerogative of legislature-lawmakers-and more generally. We have to question our bias toward private autonomy and for those who opt-out of our legal system, we should consider limiting the scope of enforceability.
Specifically, we have to limit the
flexibility of coding that occurs outside the legislature and increasing
outside the courts. A better public regulatory framework is not enough.
Over many years we have learned that controlling the code modules make
it easy to bypass regulation.
The concept of numerus clausus is the concept of property law which limits the number of types of right that the courts will acknowledge as having the character of "property." It should be used to limit co-opting out of local law by those who completely ignore the public good. Think avoiding taxes for private gain.
We should not blindly guarantee the "enforceability of private rights," the punch bowl. We might and we might not. We could disregard your corporate identity. Think we will tax you regardless of your Cayman Island location.
Example: When banks do not check the income and sustainability of mortgage payments, these mortgages may not be enforceable. Credibility requires enfacement by the state. Do not give the lawyers the legal certainty they so desire. Originally, land was given the property right because owners would internalize cost. This has not happen. Think self enforcement limiting pollution.
When judges created feudal English common law, they made political decisions which was not neutral allocation of rights when vindicating the claims of A or B. In doing so they refashioned the rights of capital again and again. This continues today after the financial crisis where a herd mentality was anything but rational, many economists became behaviorist.. But today we have a Legislature to make laws that consider the common public good
Insurable interest required for
financial activities like selling short.
2) Flash trading made illegal
3) All activities involved with financial markets be taxes as short or long term investments.
Average ratio to GDP of unsecured and mortgage bank credit refinancing?