Recently by Peter C. Earle: Of Krugman and Diocletian
Nearly a decade ago, poker exploded in popularity. Between television programming, media coverage, and pop culture references to it – in particular, the Texas Hold u2018Em variant – the game became virtually unavoidable. The American Gaming Association estimates that nearly 1 in 5 Americans played poker in 2004, up 50 percent from 2003; also, that nearly 20 percent of those new players had begun to play within the previous two years.
The creation myth associated with the poker boom credits the improbable victory of a prophetically-named Tennessee accountant, Chris Moneymaker, in the 2003 World Series of Poker (WSOP). Other accounts source James McManus's 2003 book Positively Fifth Street and the 1998 poker film Rounders. Still other, more mystical explanations refer to the game's sudden u201Ccultural resonance.u201D
But fads and surges of popularity come and go; these explanations hardly account for why, in a short amount of time, tens of millions of people suddenly flooded into a familiar – indeed, 150 year old – American card game, frenetically expending tens of billions of dollars on it. Nor do they explain why between 2007 and 2008 poker television programs were suddenly cancelled, tournaments saw a drop in participation, and many poker-related businesses scaled back or failed.
Austrian business cycle theory (ABCT) can, however, explain the origins and outcome of the poker bubble as well as its simultaneity with the housing boom, which, as will be demonstrated, are by no means coincidental.
II. Austrian Business Cycle Theory
In unfettered markets, firms coordinate production in response to profit and loss and prices are formed through the interaction of supply and demand. Interest rates, the price paid to rent money in the present, are derived in part from interaction of the supply of money deposited at banks (depositors' savings, to be lent) with loan demand.
A market-determined interest rate is, therefore, a snapshot measure of the naturally prevailing time preference characteristics in an economy, which is to say, a rough quantitative assessment of economic actors' preference for current consumption over future consumption. Because of that, interest rates are watched by producers for cues as to the consumptive propensity of consumers.
When bank credit expands owing to the machinations of central banking, it in turn causes an artificial lowering of interest rates; consequently, the savings rate appears to be higher than it actually is. This distorts the business community's perception of consumer time preference, leading them to begin new projects and invest in longer-term factors of production. An artificial boom begins.
For a time, there is the appearance of prosperity. But when the credit expansion ends, the business expansion undertaken during the boom is revealed as malinvestment, and the bust ensues. Businesses must then liquidate assets, exit lines of business or fold entirely, turning their assets over to creditors, better run or more fortuitous firms. For consumers, the end of the expansion typically involves cutting back on spending, increasing rates of saving, and paying down (or defaulting upon) debt.
III. Credit Expansion and Bubble Inflation: 2003–2004
While ABCT tends to focus on the business effects of central-bank-interest-rate manipulation, the same illusory monetary effects influence consumers; in this case, would-be poker players. As economist Dr. Joseph Salerno explains:
[W]hile the artificially-depressed loan rate encourages business firms to overestimate the present and future availability of investible resources … at the same time it misleads households into a falsely optimistic appraisal of their real income and net worth that stimulates consumption and depresses saving. Although overconsumption is caused directly by what may be called the u201Cwealthu201D or u201Cnet worthu201D effect, it is financed by the increase in money supply.
Between January 2001 and June 2003, the Federal Reserve Bank lowered the Federal Funds Rate from 6.5 percent to 1 percent: first in response to the dot-com collapse, then to forestall potential interruptions of the financial system in the wake of the 9/11 attacks. As early as January 2003, the housing bubble was already expanding. CNN/Money reported that
[n]ew home construction starts rose … to an annual pace of 1.85 million units, the fastest pace in 16 years, according to a Commerce Department report, confounding economists' expectations.
Consumers were also finding their way back to gambling, a sector which had been depressed throughout the 2000–2002 recession. In January of 2003, casino and gambling stocks began to rise noticeably. IGT, a casino service firm, reported that sales rose 70 percent over the same period last year on higher sales to casinos. By March 2003 – even facing the uncertain prospects of an impending US invasion of Iraq – at least one firm was bullish on casino and hotel stocks.
Disproving the u201CMoneymaker Theoryu201D behind the start of the poker boom, registration for the 2003 WSOP was 33 percent higher than in 2002, and three times the 12-percent average year-over-year increase experienced over the previous 10 years. Clearly, by the time the first hand was dealt in the 2003 World Series of Poker – weeks before Moneymaker's victory and fame – Fed policies resulting in the ready availability of money were already creating armies of newly-minted poker players.
By August 2003, poker clubs in Miami had increased their hours, and the Atlantic City Sands reopened its shuttered poker room. Throughout the gaming community there were comments about u201Clots of new facesu201D appearing around poker tables. By the end of the year, it was reported that in 2003
[t]he U.S. economy … expanded … at the fastest pace in nearly two decades, even as it was losing jobs [emphasis added]. The Commerce Department reported yesterday that the economy grew at a roaring 7.2 percent annual rate in the July–September period. … It was the highest growth rate since the first quarter of 1984.
IV. Cashing In: 2004–2005
Owing to the popularity of the Texas Hold u2018Em variant of the game, the term u201Call-inu201D soon became painfully ubiquitous in all walks of life. Increased popularity brought legitimization and a scientific patina to a game that had spent most of its life played in the back of saloons and around kitchen tables. Registration for the u201CMain Eventu201D of the 2004 World Series of Poker exploded to 207 percent over the previous year, with a $5 million first place prize – twice that of the year before.
New magazines specifically devoted to poker suddenly appeared on newsstands. Publishers specializing in gambling books found themselves having to expand warehousing and printing facilities:
Poker's upsurge in popularity has been a jackpot for the publishing industry. New York City-based Cardoza Publishing is reporting a tenfold increase in sales for its poker-related titles and USA Today estimates that 60 poker books will make print this year. … [Another poker firm] sold 45,000 books [in 2002], most of which retailed for $30 apiece. u201CWe think we'll hit 500,000 this year.u201D
The longstanding u201CBible of Poker,u201D Doyle Brunson's 1979 book Super System, saw a second edition arrive in 2004. In August of 2004, World Poker Tour Entertainment (WPTE) went public at $8/share, raising $34 million. The 2004 holiday season became known as u201CThe Poker Christmasu201D as u201COfficial World Poker Touru201D sets became the top gift in America:
You might find one if you just happen to be there when the merchandizers bring out a new palette. … u201CSam's cannot keep the Official WPT product in stock. The minute the stores put it out, it's gone,u201D said Scott King, Vice President of Sales and Marketing for U.S. Playing Card Company. … From Hawaii to Florida, Sam's Clubs are reporting the same phenomena.
Retailers dutifully responded to the explosion of interest, with poker chips and related products being carried in chains as diverse as Academy Sports and Outdoors, Albertson's, Associated Grocers, Costco, CVS/Pharmacy, Discovery Stores, Hallmark Stores, Kroger, Lewis Drug, Nordstrom, Rite Aid, Shoprite, and Wal-Mart.
After holding the Fed Funds rate at 1.00 percent for one year, in June of 2004 the Fed embarked upon a slow tightening campaign, first raising the Fed Funds rate from 1.00 percent to 1.25 percent. After a series of quarter-point raises over the rest of the year, the rate stood at 2.25 percent; twice the low of June 2003, but still far below historical averages going back several decades.
Fed Funds (avg)
Real personal Consumption (chg prev yr)
Subprime (per new mortgages)
WSOP prize pool
WPT prize pool
V. Feeding Frenzy: 2005–2006
By 2005, the poker boom took on characteristics of a speculative bubble: in the World Series of Poker, the avalanche of entrants outstripped the capacity of the traditional venue, requiring expanded facilities. Although not the subject of this analysis, the online poker market also exhibited sympathetically explosive growth with total revenues reaching $2.4B, up from $1B the previous year and $365M two years earlier.
PartyPoker.com, a leading Web site, is host for about 32 hands of poker play per second, according to a British securities filing by its parent company, PartyGaming. In 2005, that amounted to about $1,454 wagered per second, or $45 billion for the year.
To determinedly acquisitive poker fans, endless peripherals were marketed, ranging from poker-themed clothing and u201CBobbleheadsu201D of famous professional card players to u201Cpoker vitamins.u201D A debate arose: first over whether poker is a u201Csport,u201D and then – with some evidently deciding that it is – whether and in what form it might be featured in the Olympics. The u201CPoker Domeu201D was invented, offering more fast-paced action and promising a twist of the familiar game u201Con triple espresso.u201D
The 2006 WSOP appears to mark the peak of the poker craze, with a 56 percent increase in players over the previous year (8,773 – a tenfold jump since Moneymaker's win three years earlier) and a main event prize totaling $12 million. A familiar shibboleth of late boom phases was trotted out: u201Cit's different this time.u201D One poker business owner commented, “I don't know why the boom would die out … you've got a million 20-year-olds sitting there watching and waiting to come to Vegas.”
VI. The Bubble Bursts: 2006–2007
Why do tighter money policies ultimately cause apparent booms to go bust? Because business activities which are created out of money supply growth – which is to say, not out of savings generated from productive commercial undertakings – are exposed as unsustainable when the flow of created money disappears. A cluster of error ensues.
From June of 2004 through June of 2006, the Federal Reserve raised the Fed Funds rate from 1 percent to 5.25 percent. By December 2006, media outlets began reporting that mortgage delinquency and foreclosure rates were increasing markedly, and that u201Cearly signs of credit distressu201D in subprime securities were evident. By general consensus, the housing bubble appears to have burst in 2007. When in that year, as Dr. Salerno continues,
housing prices, corporate profits, and the stock market plunged. … The capital gains accumulated since the mid-1990s were revealed to be an illusion … [and] household net worth declined by $13 trillion, or 20 percent, … a figure exceeding the sum of the combined annual GDP of Germany, Japan, and the U.K. … This brought the overconsumption frenzy … to a screeching halt.
Industry onlookers sensed a decline in poker's popularity in late 2006, but the change in sentiment was made clear when registrations for the 2007 World Series of Poker were revealed:
This year's WSOP Main Event received 6,358 entrants, a 40 percent decrease since 2006. As such, the prize will be respectively small as well, now estimated between $8.25 and $8.75 million – more than $3 million lower than last year.
Later that summer, the trend continued with a gaming analyst commenting that poker “figures (for July and August) [were] nowhere near the double-digit increases … in recent years.u201D No less than five poker television series stopped broadcasting in the 2006–2008 time period.
And, the most conspicuous publicly traded symbol of poker's fortunes began to bear hallmarks of a classic u201Cbubble stocku201D:
[I]nvestors do not appear convinced that the World Poker Tour's owner is telling a growth story. Even though WPT's revenue grew to $18 million last year from about $4.3 million in 2003, the company is unprofitable and its stock price closed at $6.86 yesterday, exactly where it was shortly after the company went public in the summer of 2004.
Fed Funds (avg)
Real personal Consumption (chg prev yr)
Subprime (per new mortgages)
WSOP prize pool
WPT prize pool
VII. Liquidation of Malinvestment: 2007–2009
When a boom is revealed to have been illusory, as Rothbard wrote in America's Great Depression,
[w]asteful projects … must either be abandoned or used as best they can be. Inefficient firms, buoyed up by the artificial boom, must be liquidated or have their debts scaled down or be turned over to their creditors.
Casinos and poker rooms are businesses like any other, allocating resources in anticipation of customer preferences and measuring their success in profit and loss. For a brick-and-mortar gaming enterprise, usage of floor space is a key factor in determining profit since profitability comes from allocating space to the most popular, profitable games. For this reason, the business side of the poker bubble fulfills the Austrian prediction. Rothbard continued:
Prices … must fall, particularly in the higher orders of production – this includes capital goods, land, and wage rates. … Not only prices of particular machines must fall, but also the prices of whole aggregates of capital, e.g., stock market and real estate values.
In spite of this principle, the actual liquidation process of the poker bubble is difficult to spot; as opposed to common manifestations of that process – selling equipment and bankruptcies – in casinos it can be as simple as removing poker tables, changing hours of operation, and reconfiguring bonuses/playing options:
[A]t least one local resort has quit trying to offer the game. Earlier this month, the Las Vegas Hilton closed its 2-year-old 11-table poker room. Spokesman Ira David Sternberg said casino executives who had anticipated more play on a daily basis plan for u201Ca better use of the room.u201D In other words: mostly likely slot machines.
Another casino, Excalibur,
shut down its poker room Sunday night at midnight and is in the process of installing … electronic poker tables … in an effort to provide a jolt to a poker room that has been u201Con the decline from a customer base (standpoint)u201D for the last three years. u201CIn 2005, poker was going gangbusters and everybody added rooms,u201D [a manager] explained … The staff at the Excalibur before Sunday's shutdown was around 50 people – 40 of them dealers. The new electronic poker room will be staffed by just 18 “poker hosts.”
But perhaps the best example of the liquidation of nonproductive poker gaming assets was when, in April 2008, an exasperated financial media finally asked,
Can anything resuscitate the rapidly withering stock of the World Poker Tour? The stock, WPTE (listed on the Nasdaq), is currently trading at just $1.53. This gives the entire company a valuation of $31.35 million dollars. Just three years ago, the stock was trading north of $20 and had a valuation in excess of $400 million dollars.
By the fall of 2008 the stock had fallen to $0.56/share before recovering, and in late summer 2009 it was announced that
WPT Enterprises, otherwise known as World Poker Tour … plans to sell its assets to British online-gaming group PartyGaming for $12.3 million … well below [a] $29.50-a-share offer [valuing the company at nearly $700 million] … in July 2005.
The cessation of projects in Atlantic City, N.J., took on both physical and financial market dimensions:
Casino construction has been shelved. Bonds of Trump Entertainment Resorts Inc., which owns three Atlantic City casinos, trade at as little as 12.25 cents on the dollar on concern the company can't make interest payments. … Three signs pitch a $2.5 billion Pinnacle Entertainment Inc. casino-hotel project, which the Las Vegas-based company put on hold earlier this year. Another planned $5 billion Atlantic City resort was canceled in October by MGM Mirage, the Las Vegas-based casino company.
The 2003 to 2007 poker boom is deftly explained by application of the Austrian business cycle theory, displaying all the hallmarks of a central-banking-induced boom and bust cycle. And far less romantically than Horatio Alger tales of novice gamblers breaking big in Vegas, the ultimate responsibility for the poker boom lies with the Federal Reserve System.
 Joseph T. Salerno, u201CA Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,u201D Quarterly Journal of Austrian Economics, Vol. 15, No. 1 (2012): 9.
 Average increase from 1992 to 2002: 1993(9.45%) + 1994(21.82%) + 1995(1.87%) + 1996(8.06%) + 1997(5.76%) + 1998(12.18%) + 1999(12.29%) + 2000(30.28%) + 2001(19.73%) + 2002(2.94%)/10 = 12.4%. Increase from 2002 to 2003: 32.9%.
 u201CTexas Hold-u2018em Card Game is All the Rage,u201D Yakuma Herald-Republic, Nov. 16, 2003.
 u201CEconomy Growth Rate Biggest Since 1984,u201D Pittsburgh Post-Gazette, Oct. 31, 2003.
 A partial list of the adopted uses of the phrase u201Call inu201D during this time period includes but is not limited to the titles of several books, adopted mottos of several sports teams, two films, half a dozen television episodes, several musical endeavors, and the rallying cry of at least one insufferable motivational speaker.
 In a brief scene wrought with several layers of synchronicity, the main event of the 2005 World Series of Poker ended with heads up play between Joe Hachem (the ultimate victor) and Steve Dannenmann, both involved in mortgage lending in their lives outside of poker.
 Salerno, pp. 32–33.