Sunday, 7 February 2016

Capital III, Chapter 26 - Part 3

There is another way in which this financial crisis of 1847 is similar to 2008. In 1847, many of the banks and financial institutions did have large amounts of capital, which could have been mobilised to provide them with the liquidity required during a credit crunch, but, in order to do so, it was necessary to liquidate those assets. In 1847, it was not possible to liquidate assets in time.

“The previously mentioned Charles Turner testifies:

"Some houses had large means, but not available. The whole of their capital was locked up in estates in the Mauritius, or indigo factories, or sugar factories. Having incurred liabilities to the extent of £500,000 or £600,000 they had no available assets to pay their bills, and eventually it proved that to pay their bills they were entirely dependent upon their credit" (p. 81).” (p 416)

But, liquidating assets, at a time of financial panic is neither easy nor usually advisable, if it can be avoided. It is not easy, for the simple reason that everyone else lacks liquidity too, and so there is a dearth of available and capable buyers. And, because there are few buyers, and an increased number of sellers, each trying to obtain liquidity, the process turns into a fire-sale, with asset prices that have frequently been inflated into a bubble, collapsing to levels usually at rock bottom.

Again, this is an almost identical situation to that of 2008, other than in 1847, at least some of the assets that were held, such as the estates in Mauritius, were at least real physical assets, whereas in 2008, many of the assets held by the banks and financial institutions were in the form of purely fictitious, and highly inflated paper.

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