Thursday, 4 February 2016

Capital III, Chapter 25 - Part 8

The consequence of all this swindling, to obtain credit, to speculate in railway shares, is very similar to the swindling that took place in the run up to the financial crisis in 2008. In 2008, credit was obtained on the basis of selling mortgage backed securities, which in turn were based on the fraudulent sale of mortgages to people who could not afford the houses they were being persuaded to buy. A similar thing happened in Britain in the 1980's, with council tenants being persuaded to take on mortgages to buy their council house. Once interest rates rose, thousands found they could not afford these mortgages and lost their homes. The effect, in both cases, was to create a fictitious demand for houses that created a property bubble that then burst.

In 1847, loans were made against bills of exchange for commodities that had not been sold. On the basis of these loans, not only was a speculative bubble blown up in railway shares, but the fictitious demand for commodities also caused commodity prices to be higher than they would have been, and loans were also made against these inflated prices.

““I believe if it had not been for the accommodation thus granted, and principally by the Liverpool banks, cotton would never have been so high last year as it was by 1½ d. or 2d. a pound."” (p 411)

The consequence in 1847, was that as soon as interest rates rose, as a result of the action of the Bank of England, the speculative bubble in railway shares burst. But, also, as the process of extending credit to pay for past credit was brought to a halt, it became obvious that the value of the trade on which loans had been made was itself fictitious.

In the same way, in 2008, it became obvious that the value of property against which mortgages had been given was wholly fictitious, and when it was no longer possible to keep inflating the bubble by extending further credit, collateralised on those fictitious property values, not only did the financial bubble, blown up on all of the financial derivatives, established on the back of those mortgages, burst, but the value of the property itself collapsed.

That was not just a phenomenon restricted to the US. The US was simply the first place where that happened. But, the same speculative frenzy and swindles existed wherever privately owned residential property, as opposed to rental properties, formed a significant part of the housing sector. So, the same bubbles and swindles existed in Ireland, Spain, Britain etc., and the final collapse of those bubbles and swindles was only delayed by the actions of states and central banks in 2008-9.

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