In last night’s third outing of The Ascent of Money we saw Niall Ferguson connecting the disastrous collapse of Enron with the ‘Mississippi Bubble’ of 1719. This was the event that triggered the economic collapse of France and was the beginning of a road that led to the French Revolution. But would it be interesting? Well, yes and no is the answer. Parts of it were interesting while other parts made me lose the will to live.
Ferguson introduced the show by telling us what a joint-stock company was all about and using some not always obvious metaphors, I think I sort of understood the principles involved. He then talked about the often “irrational optimism” in the stock market and compared it to a soap bubble, in that “we never quite know when it’s going to burst.” Well, sticking a finger into a soap bubble will do it but I suppose that’s too obvious.
He then moved onto explaining that in the heart of Venice was “a clue to one of the most astonishing adventures in all financial history”. Well, I have to say, as adventures go, this was a pretty dull one, but – quite literally in Venice – whatever floats your boat I guess.
The tale surrounded John Law of Edinburgh who, Ferguson told us, was the man who invented the stock market bubble and whose remains are interred in a church in Venice. He was apparently “a convicted murderer, a compulsive gambler and a flawed financial genius” who was, indirectly, responsible for the French revolution. Sounds like the CV of many of those charged with controlling the stock market, however, as Ferguson went on – at rather tedious length – to explain, John Law traveled the globe before ultimately causing one of history’s biggest boom and bust eras.
He then went even further back in history to the 1500’s to talk about the transport and marketing of spices by the Dutch which culminated in the formation of the world’s first company. Anyone with a vested interest in growing, collecting and selling these spices pooled resources and split the profits. Unfortunately, Professor Ferguson took what felt like ten years to tell us that.
This all led to the inception of shares; members of the public in all the countries concerned could purchase a share in the company and hence be liable to receive a share of the profit too. Ferguson showed viewers the very first share certificate from this time and talked about it with a reverence and awe that one might expect from a trainspotter who’d just seen a rare train… super-exciting for him, rather Dullsville Arizona for me I’m afraid.
So with the history of the stock market explained, Ferguson went on to talk about how the Dutch East India company had grown exponentially to a point where they had their own army and were subject to the vagaries of “network externalities” which is a phrase that sounded as tedious as it turned out to be and I’m afraid its definition went right over my head.
Now, we were back to John Law who, having escaped from prison, was lying low in Amsterdam watching the doings of the Dutch East India company keenly. He moved to France in the 1700s and established a banking system that for the first time introduced paper money. He also parlayed public debt into a system of shares which effectively dug France out of its economic hole.
Law also became director of what came to be known as the Mississippi Company and shares of said company rocketed. Between France and America, the great unwashed were clamouring to buy shares and so the value of them rose and rose. As is also the wont of those in the upper echelons of financial dealings today, Law developed an ego as large as his company and apparently declared, “I am the economy.”
Law went on in the next ten years to amass a fortune in property and shares, but the next bit again went right over my possibly empty head. It involved an explanation of dodgy dealings, insider trading and something to do with an Italian called Ponzi – no clue if that’s spelled correctly by the way – who historically engineered rip-offs and cons on a large, corporate scale.
I’m not sure if it was the boredom factor that made all this difficult to take in or if it was just difficult to take in, but whatever the reason, by the time we got to discussion of bubbles again, I was hopelessly lost and actually just wanted to go off and blow some… bubbles that is.
It all got slightly more interesting when Ferguson told how Law had developed New Orleans and wanted it populated. Thousands of Germans signed up to go and live in this new place and found that rather than the garden of Eden-esque new home they’d been promised, they were met with swamps, alligators and generally large amounts of unpleasant flora and fauna.
It was I guess like the first package holiday where the brochure looked great but the reality was a bunch of semi-built hotels and absolutely no chance of laying your beach towel down on a sun bed because you’d get eaten by something that crawled out of the swamp.
80% of those who went out died in the first year; again, rather like a package holiday to a resort where food hygiene isn’t top priority. The fabled promised land of Louisiana soon became known as just that, a fable, and shares in Law’s interests began to slide. By the time shares had devalued by 90%, angry investors were going nuts and Law was now the least popular man in France. He did a bunk to Venice, leaving his wife and daughter in France whom he was never to see again.
France was now in deep financial doo-doo again and with most of the country starving to death, a revolution was just around the corner.
Ferguson now moved on to the Wall St crash in the 1930s and described how over three years, a financial crisis of an unprecedented scale rocked America. Making use of his vast repertoire of exuberant analogies, Ferguson talked about herds of bulls and stampedes and changes of wind… I noticed the some wallpaper in my living room was coming off at the top corner.
He then talked to a real American cowboy who explained that when he “gets ascairt” his whole herd senses his fear and reacts accordingly by going berserk or humping each other; at least, that’s what the bulls in that guy’s herd did. This apparently is the same principle as a collapse in stock market trading so if suddenly traders run amok, poo on the floor and start to mount each other, we should worry about our money.
Ferguson pointed out that just like animals and humans, the financial market is a living entity and is prone to the vagaries of emotion such as surprise, depression, grief and so on. I wonder what happens if the stock market gets drunk and sends an unwise email to an ex?
However, I digress. Professor Ferguson then went on to bemoan the fact that the stock market isn’t more like human height; hardly any radical highs or lows, just a steady average height. Quite what height and money have in common I still don’t know, but again, perhaps my blonde hair dye has in fact seeped into my brain rendering me as dumb as a box of frogs…
He drew a very lovely bell shape on a blackboard and liberally sprinkled it with crosses which apparently explained his height-money analogy. He added a fat tail too and a smaller bell. I noticed about then that the peeling wallpaper could in fact be hiding a patch of damp…
We then got onto the subject of Enron whose dodgy dealings were comparable to those of John Law who, remember, sent so many unsuspecting Germans off to New Orleans and printed his own money. Like Law, Enron became a friend and contributor to the government of the time – led by George W Bush – and bought up companies like they were going out of fashion.
Enron had a finger in zillions of pies and its shares continued to increase in value but their dodgy dealings were about to bring them down. For example, in order to make their supply of electricity more valuable, Enron executives conspired with other companies to close down power stations, thereby limiting supply and given the market force rule of supply and demand, the less supply, the greater the demand hence the greater the value of that commodity. In this case, power.
Enron also effectively cooked their books to make it appear that their profit was greater than their loss which was a lie. The company execs offloaded millions of dollars worth of shares and within weeks, Enron was declared bankrupt owing in excess of $38 billion.
Two of the company’s directors were charged with frauds on an unprecedented scale but all the company’s executives came out of the scandal smelling rather less like roses than when they went in, but thanks to a last minute bonus payout, none of them left it paupers.
Enron’s pioneering method of shadily disguising its debts and not declaring them publically has become something that other companies have readily adopted, which Ferguson stated was part of the reason why our global economy is currently in near meltdown. We then saw a Peruvian lady chasing llamas about in a field, and Ferguson reminded us once again that when the bulls are metaphorically stampeding, we’re most likely to get taken for a ride.
It was rather a shame I thought that there was no mention of the metaphorical consequences of a llama crisis though, so I have come up with my own; if all the llamas begin to spit, the world’s financial markets get very wet and sticky and need a very large tissue to wipe away the gelatinous result of this mass llama salivafest. Whaddya think?
With breathtaking footage of the Andes, he then dragged out another metaphor and sagely advised that stock markets trace a line that’s not unlike the peaks of the Andes but, “as an investor, you have to hope that when you come down from the peaks of euphoria, it’ll be on a nice smooth ski slope and not over a sheer cliff”
Wow. Next week, we are to learn about how we might protect ourselves in the world of financial bulls, llamas, sharp slopes and deep pongy swamps… can’t wait to see what analogies and metaphors the good Professor has in store then! Updates on my wallpaper situation will be issued too…