South Sea Bubble, by Edward Matthew Ward, hangs in the Tate.

A widespread financial calamity in an election year lends itself more to the scapegoating of Wall Street than to the pursuit of a calm, reflective truth.  After all, the rich and powerful few are an easy target since their numbers are small and society does not deem them to be bearers of legitimate social grievances.

Harry Truman, who left office almost as unpopular as Pres. Bush, jokingly demanded a one-handed economist since all those presented to him offered nuanced explanations of causes and consequences.  Price floors ensured affordability on one hand but reduce the supply on the other hand.  Much of economic thought is a dialectic of trade-offs.  Consequently, economic decisions resemble the moral evaluations of a Utilitarian philosopher: the rightness (or wrongness) of an action depends on its net benefit after accounting for both sides of the equation.

Basic market theory is premised on the freedom of contract and the scarcity of goods and services desired.  Economic transactions require the complicity of more than one party.  When the buyer and seller willingly and knowingly accept a price, a rightful exchange occurs.

Since public opinion (and office-seekers pandering to public opinion) have leveled enough criticism at the masters of Wall Street, I will be among the few voices willing to suggest that it takes two to do the tango mercado.

I came across several writers of the past few weeks referring to Scottish journalist Charles Mackay’s book Extraordinary Popular Delusions and the Madness of Crowds.  This 1841 book recounts numerous popular follies, hoaxes, myths, and deceptions.  The first three chapters are popular among economists for their descriptions of three different early-modern economic bubbles: France’s Mississippi Company (Compagnie du Mississippi), the Netherlands’s Tuplipomania, and Britain’s South Sea Company.

The South Sea Company in Britain issued stock in the early 18th century promising vast riches in trade with the Spanish colonies in South America.  Never mind the fact that Spain, a strict mercantilist empire, had no desire for free trade with European competitors.  Speculators bought the company’s stock and drove the price to unrealistic heights.  The company’s revenues were a pittance compared to its share price, but the temptation of getting rich quick didn’t temper the public appetite one bit.

Finally, the stock price crashed, nearly wrecking the British financial system in its fall.

With the a lecturing tone, Mackay writes:

Public meetings were held in every considerable town of the empire, at which petitions were adopted, praying the vengeance of the Legislature upon the South-Sea directors, who, by their fraudulent practices, had brought the nation to the brink of ruin. Nobody seemed to imagine that the nation itself was as culpable as the South-Sea company. Nobody blamed the credulity and avarice of the people,—the degrading lust of gain, which had swallowed up every nobler quality in the national character, or the infatuation which had made the multitude run their heads with such frantic eagerness into the net held out for them by scheming projectors. These things were never mentioned. The people were a simple, honest, hard-working people, ruined by a gang of robbers, who were to be hanged, drawn, and quartered without mercy.

Likewise, neighborhoods of $800,000 McMansions sprang up in far-flung exurbs and few seriously questioned the true value of these homes, that, in sober times would have likely fetched half the price.  The builders sold at prices that buyers would tolerate and borrowers agreed to lending terms that banks would tolerate.  Never mind that the highly-leveraged houses people were buying were terribly overpriced—when credit is easy and housing prices continue to rise at unrealistic rates, the only restriction is personal caution.

When the housing prices plummeted (falling the fastest where they rose the fastest), one could hear the moans of those unwise buyers, who, not too long ago presumed perpetual price appreciation, threw caution into the wind and signed sales agreements for homes that were fundamentally overpriced.  Now they were stuck with white elephants caged in far-out cul-de-sacs of dubious intrinsic value.

The populist howls could be heard from Captiol Hill and it took little time for Members of Congress to pull out their compasses and point their fingers norteastward at Wall Street.

Aside from cases of predatory lending, the blame of unrealistic housing price inflation rests mutually with lenders and borrowers.  Those who bought houses at unrealistic prices abetted the price increases and did their part to inflate the bubble slightly more with each purchase. Even when the rent-versus-buy formulas clearly pointed in favor of renting, the desire to hitch one’s fortunes to soaring prices overruled better financial judgment.   Mortgage lenders repackaged their loans and passed them on to investors. What did it matter to them if what they were passing on wasn’t as strong as they had claimed? Likewise for borrowers: what would it matter if a house were overpriced if it could be sold quickly at an even more outrageous price?

Careless lending gleefully skipped hand-in-hand with careless borrowing. Now that prices are drifting downward to realistic and sustainable numbers, Mackay’s successors may end up chronicling the opening years of the twenty-first century as a time when the American Dream became reality, and, as many are now learning, a time when that reality was really a dream.