South Florida lots that sold for $800 at the beginning of the bubble were resold just a few years later, in 1924, for $150,000. Land bought for just $25 in 1896 was selling like hotcakes for $150,000 by 1925.102 Nobody was actually planning on moving into these new, insanely priced houses and condominiums, though. Ninety percent of the buyers had only one plan for their newly acquired and mortgaged property—to resell at a profit. As Allen writes, “few people worried much about the further payments which were to come.”
But then Mother Nature had her say. As could have been predicted (and was by some locals), a hurricane blew through Florida in 1926, killed or injured over two thousand people, and punctured the housing bubble. South Florida imploded.
A 1928 article in The Nation magazine written by Henry S. Villard relayed what postboom Florida looked like: “Dead subdivisions line the highway, their pompous names half-obliterated on crumbling stucco gates. Lonely white-way lights stand guard over miles of cement side-walks, where grass and palmetto take the place of homes that were [soon] to be… Whole sections of outlying subdivisions are composed of unoccupied houses, past which one speeds on broad thoroughfares as if traversing a city in the grip of death.”103
People who got caught up in the frenzy lost everything. Banks and real estate offices that littered the once-vigorous streets of Miami began, one after the other, to go under. In 1925, at the height of the bubble, bank holdings in Miami totaled over $1 billion—and that was back when a dollar was worth nearly thirteen of today’s dollars.104 By 1929, bank holdings had plummeted almost 90 percent to just under $150 million. It turned out real estate prices couldn’t go up forever (a lesson from the 1850s and the 1770s that had been forgotten).
When the Florida housing bubble burst in 1926, the hot money created by Treasury Secretary Andrew Mellon’s tax cuts simply shifted to Wall Street. As Allen wrote, “[The] national speculative fever which had turned their eyes and their cash to the Florida Gold Coast in 1925 was not chilled; it was merely checked. Florida house-lots were a bad bet? Very well, then, said a public still enthralled by the radiant possibilities of Coolidge Prosperity: what else was there to bet on?”
The answer was obvious, as Allen wrote, “Before long a new wave of popular speculation was accumulating momentum. Not in real estate this time; in something quite different. The focus of speculative infection shifted from Flagler Street, Miami, to Broad and Wall Streets, New York. The Big Bull Market was getting under way.”
Predictably, that “Big Bull Market” imploded a few years later, despite Hoover’s assurance that if government just stayed out of the way, everything would magically rebalance itself and prosperity would return. Instead, it was the third act of the three-act play we’ve seen over and over again, from the onset of capital markets to today: boom, bust, Great Depression.
And, almost exactly eighty years after that Great Crash of 1929, it all happened again.
Even Worse than Before
Economist Steve Keen, author of Debunking Economics, defined the “madness” in our banking system as inherent. He told me, “It’s the structure of finance itself. There’s inherent instability in a capitalist system.”105
He explained that capitalism demands a banking system and that that banking system is wired to misbehave, since there’s always an “inherent temptation” to create and sell as much debt as possible—whether it’s in the form of oil derivatives, mortgages, or student loans.
“They will always want to lend more money… the banking sector profits by creating debt,” Keen said.
If the banking sector simply lent money to businesses to fund productive investments and homeowners who could actually afford a home, then, Keen estimates, bank profits would be only 5 to 10 percent of total profits in America.
But with manufacturing decimated from so-called free trade, and no rules on Wall Street, Royalist banksters lunged for a bigger piece of the profit pie. They force-fed the nation more and more debt.
The peak level of debt financing was less than 10 percent of GDP in the 1920s, before the last Great Crash. But between 2000 and 2008, it was 20 percent of GDP—it was a far bigger bubble.
During this time, Wall Street profits as a share of total profits in America were upward of 50 percent. As Keen told me, “That’s not a sign of a healthy economy. That’s a sick economy.”
Another debt bubble, even bigger than the one in the 1920s, was being inflated. Keen told me the bubble had started in 1982.
I asked him why, and he said, “You had such a terrifying experience after the Great Depression and the Second World War. You completely tamed that bad behavior in the financial sector and people’s willingness to take on debt.”
But then people forgot. As Keen said, “If you look at when people started to really take on debt again, it was when the first baby boomer turned eighteen. We lost that memory, and then that same irresponsible behavior that gave us the Roaring Twenties came back.”
While my father’s generation remembered the Great Depression, I was born in 1951 and have no personal recollection of it. As my “boomer” generation took the reins of business in the seventies and eighties, there was no “remembered” sense of the dangers of reckless banking practices or even of reckless personal debt.
And so, in October 2006, history repeated itself when the second Great American Housing Bubble started to burst. It was worse than 1929.
Savvy investors saw the fuse burning. They knew that the housing-fueled Bush Bubble inflated by the Royalists’ assault on financial regulations and Alan Greenspan’s dangerously misdirected stewardship of the market, much like the dot-com-fueled Clinton Bubble, had come to an end and that soon it would move from little-noticed Fed figures into their own backyards—into the guts of Wall Street. The business press subtly informed investors, and giant hedge funds in New York and London began to position themselves for the coming market collapse.
The Financial Times, for example, in a September 27, 2006, article titled “Hedge Funds Hone In on Housing,”106 cited that “growing numbers of hedge funds have placed bets on a slump in the US housing sector in recent weeks.” The article noted that the funds were rapidly buying insurance against a housing crash in order to “be on the winning side of a housing downturn.”
But those insurance bets only made the problem worse. They just shifted ground zero of the now-larger derivative bomb from megabank corporations like Goldman Sachs to mega-insurance corporations like AIG. Both were “Too Big to Fail,” both were drenched in systemic risk, and both were capable of ending the United States as we know it.
We know what happened next—a serious financial panic.
Fittingly, three years after that panic, a June 2011 article in the Financial Times titled “Alfred Hitchcock’s ‘The Bankers’” noted, “The characteristics that make for good traders and investment bankers are pretty much the same as those that define psychopaths.”107
The article goes on to ask about the increasingly vital-to-our-economy psychotic bankers. “Surely only someone with a serious personality disorder could have thought it was a good idea to sell a highly risky financial instrument like a CDO-squared to a naive investor who clearly did not understand the risk?”108