City of the Bubble

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Las
Vegas is one big bubble. Sin City’s brand name has never been hotter. A channel
surfer can find something on the tube involving Vegas, either fact or fiction,
virtually and appropriately 24/7/365.

Casino
gaming company stocks trade at enormous price/earnings multiples whether the companies
are operating and profitable or just opening its doors as in the case WYNN. Even
the stocks of publicly traded community banks in Las Vegas trade at rich multiples
with the expectation that the economic party upon which these companies depend
will continue forever.

Las
Vegas residents can seemingly be divided into two groups, those who are real estate
investors or developers and those who want to be. Why else would otherwise normally
rational folks line up to hand over $5,000 or $10,000 checks to reserve high-rise
condo units that they don’t know what the eventual price will be or when or whether
or not the project will even be completed.

A
number of recent books have chronicled the financial bubbles of the past as the
real estate and Vegas bubbles continue to expand. Edward Chancellor’s Devil
Take The Hindmost: A History of Financial Speculation
is perhaps the best,
and should be read by anyone urgent to plunk down money on a condo. The stock
market was still ascending when the book was published in 1999. Those who read
it then, reflected on the past, and sold their stocks were saved financial misery
in 2000.

Chancellor
takes the reader on a journey that begins in 1630′s Amsterdam where tulip bulbs
were the can’t miss speculation and ends with the geniuses of Long-Term Capital
Management being bailed out after these Noble-prize winners’ mathematical trading
models failed. The madness of crowds never wanes just the trading vehicles change.
The author quotes financial journalist James Grant, "progress is cumulative
in science and engineering but cyclical in finance."

A historian
by trade, Chancellor’s thoroughness is evident throughout the book that is densely
footnoted with references spanning the entire philosophical spectrum.

Chancellor
deftly chronicles the story of single tulip bulbs in Amsterdam being bid to prices
that would have bought "twenty-seven tons of wheat, fifty tons of rye, four
fat oxen, eight fat pigs, twelve fat sheep, two hogsheads of wine, four tuns of
beer, two tons of butter, three tons of cheese, a bed with linen, a wardrobe of
clothes, and a silver beaker."

Other
famous bubbles such as the South Sea scheme are examined fully as are the lesser
known Canal and Railway manias.

"America’s
vast wilderness invited speculation," Chancellor writes, and the founding
fathers were right in the thick of things. George Washington formed a company
to purchase land in the west, as did Benjamin Franklin and Patrick Henry. Thomas
Jefferson and Alexander Hamilton were also "land jobbers."

The
Civil War period saw intense speculation in stocks, bonds and gold after Congress
passed the Legal Tender Act and greenbacks were printed profusely to pay for the
war.

"The
gold bulls whistled u2018Dixie,’" Chancellor explains, "and the bears sang
u2018John Brown.’"

The
new economic era of America in the 1920′s was a breeding ground for soaring stock
prices as the Federal Reserve created massive amounts of money to finance WWI.
Even the best and brightest believed the new era of prosperity was intact. "Stock
prices have reached what looks like a permanently high plateau," Yale economist
Irving Fisher declared but just a few weeks prior to the October 1929 stock market
crash.

"Gold
represented the antithesis of speculative values," Chancellor rightly acknowledges
in discussion of another era of financial speculation the Bretton Woods collapse
sparked. When Richard Nixon’s closing of the gold window in 1971 severed the last
vestige of dollar convertibility into gold, "money became only a figment
of the imagination, weightless and ethereal. In this new world where all monetary
values were in flux, speculation was destined to play a greater role."

Chancellor
turns from historian to polemicist when discussing modern junk bond and stock
market manias of the 1980′s "decade of greed," fixing the blame on economist
Milton Friedman, Ronald Reagan, Margaret Thatcher, and Michael Milken.

However,
the author’s occasional preaching does not detract from his numerous valuable
insights. "Perhaps more than anything the bubble economy illustrates the
danger that arises when investors believes that market risk is shouldered by the
government rather than themselves," Chancellor wrote about the 1980′s Japanese
market mania and collapse.

Words
to remember the next time a financial commentator contends the Federal Reserve
will not let the housing market collapse.

June
22, 2005

Doug
French [send him mail] is executive
vice president of a Nevada bank and a policy fellow of the Nevada Policy Research
Institute. He is the 2005 recipient of the Murray N. Rothbard Award from the Center
for Libertarian Studies.

Doug
French Archives

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