Asset Based Lending
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BirdsEye Viewtulip mania
Nearly 400 years ago the Dutch government gathered to resolve a pressing issue: the tulip sector collapsed. "I don't know what kind of angry spirit called up from hell... Our descendants doubtless will laugh at the human insanity of our age, that in our times the tulip flowers have been so revered", wrote someone in 1648. Dutch tulips were the first speculative asset of the modern world to see prices skyrocket and then utterly collapse. This was the very first financial crisis in recorded history. Anne Goldgar wrote a book in 2007, "Tulipmania," and Business Insider summarized it for us. My son Paul brought it to my attention. The subject and its treatment were so enlightening I feel compelled to share those with you, with minor editorial comments.
An ambassador to the Ottoman Empire noticed tulips, native to Central Asia, blooming all over Constantinople. In the late 1500s he sent some bulbs to a friend in Holland. Folks were already avid collectors during those ages, focusing on sea shells, and there was a robust futures trade in Amsterdam which was established in 1602. And tulips caught on. They were different from all other flowers known in Europe at that time. Their appearance became a status item, which coincided with the rise of the newly independent trade fortunes. The new merchant class displayed and validated its success by erecting grand estates surrounded by flower gardens, and the crown jewel was the tulip. It offered tremendous varieties in addition to being beautiful, which brought about serious competitions.
Intense rivalries sprang up, such that, "friends were not friends in this profession, on the contrary, no one was looking those days for anything other than profit," as a contemporary writer commented. By 1630 several tulip brokerages had opened; the profits were staggering and too compelling for enterprising individuals to stay on the sidelines. Even when the actual trade of tulips remained closely held, the trade reputation became the talk of the nation. Everyone was fascinated by this sudden vision of profitability. One popular bulb type went from 125 florins in 112/31/1636 to 1,500 florins a mere two months later. Then, on February 5th, the trade climaxed in an auction where some bulbs were sold for over 5,000 florins.
And then the selloff began, no one knows why. One theory is that it all started with a deal that went bad in Haarlem there was also evidence that supply outpaced demand. Small-timers began growing their own tulips.
Overnight, the obligations for that season's bulbs became worthless, bringing down buyers, seller, insurers, brokers& The decline was so precipitous that on April 27 the federal States-General was forced to intervene. However, his intervention, the issuance of a weak proclamation leaving it up to local magistrates to figure things out, did not work. A stalemate ensued which was resolved only when cities began forming independent commissions to settle the disputes. Most contracts were canceled and a 3.5% fee was charged to the debtors.
Two interesting post-crisis facts:
The greatest damage wasn't to the economy but to the society, who lost its values. "What is worse than cheating or being false? Let us know ourselves as liars all," someone wrote. What was wrong with Tulip Mania wasn't the riches or commerce, but setting aside a society based on trust, seeking "inconstant wealth before honor."
We obviously haven't learned our lesson. By mid 1720s, Europe was awash with schemes to make money, and those still persist. As I say, "You can't regulate greed." We can try, but all it takes is a relatively small group of people who wants to get rich quick to start a bubble, often fueled by unscrupulous individuals who are all too happy to help the greedy build their dreams while fleecing them of their money.
Could Tulip Mania happen again today? I believe it can and will. It takes a shift in human nature to prevent it from happening, not regulation. I'm concerned that Bitcoin might be a modern-day example of Tulip Mania. This new currency, hotter than hot, has no intrinsic value. It has no fiat behind it, nor any fundamental value. There are no economies underneath it to offer support. It appears that the main value is created by the scarcity factor, which in itself is suspect (all too reminiscent of Beanie Babies). The currency's acceptance as a quasi-barter instrument along the Silk Road doesn't give me much comfort either. I keep asking the question: what is the need Bitcoin fills that other currencies do not? The only vaguely legitimate answer is a more efficient way to avoid foreign currency exchange fees. Otherwise, the value proposition escapes me.
What Tulip Mania taught us is, it's not about the object at stake (tulips, stocks, houses, diamonds, Birkin bags, whatever). It's about greed and winning.
PS On Wednesday, December 18th, Bitcoin price tumbled over 50%, from a high of $1,200 to $550, after China's largest exchange for the virtual currency said it would stop accepting Yuan deposits. The currency has been on the slide since earlier this month when the People's Bank of China said it would not allow financial institutions to sell, trade or store Bitcoins, which it does not consider to be a real currency.