Saturday, December 27, 2008

Land Speculation

Land speculation is a fabulous way to create wealth. In our nation's history, thousands, if not, millions used this technique to improve their family fortunes. Some of the richest men in our country made their money by purchasing land. Over the years, it is the one thing that seems to go up consistently.

Excessive investment is what creates the problems. We saw this with the dot com bubble in the early part of the 2000s. Everyone was putting money into a tech company in belief they would receive a huge return. For years, many people did. Alas, the day eventually came where the party ended. The crash hurt thousands of people who lost millions (or billions) of dollars. The easy money was over.

That brings me back to real estate. Land speculation led to the run up in prices. People were buying a property and mortgaging it to the max. They did this to buy more properties. Everything is fine as long as the values keep increasing. However, when they stop, people find themselves overexposed. Suddenly, millions of people find themselves unable to pay their mortgages. Banks are forced to foreclose which leads to a fast drop in the real estate prices. In short, everyone's property is worth less. This inevitably leads to a deep recession that affects the entire country.

Recent events might lead you to believe that I am referring to the time between 2003-2006. Actually, the situation I described occurred in the 1830s. At that time, the land was being sold by the government. In 1824, it raised $4.9 million. By the end of 1836, it rose to $24.9 million. This enabled the government to get out of debt and realize a $20 million surplus. Alas, the party had to end. The result was a crash in 1937 that led to an economic recession that lasted a number of years.

Many believe that President Andrew Jackson the cause since he issued the Specie Circular which made people buy land with gold or silver. Obviously, this cut out the speculators altogether. Without them, prices turned downward instantly since there were no buyers. However, the events the last few years show that Jackson only forced the inevitable. The boom could not continue at the same pace. Like this century, it had to burst at some point. Today, like in 1837, we are feeling the effects of this quick run up.

Remember this idea the next time you hear our leaders blaming each other for the situation. Also, you will now have the ammunition to laugh at any idea that the government is going to fix this problem. They were not able to fix the recession in 1837, nor were they able to get us out of the Great Depression. The only thing the government can do is pile up more debt to throw money at the problem. Building infrastructure might seem like a worthwhile venture, yet Roosevelt proved it does little for the economy.

The commonality between the land speculation of the 1830s and the real estate boom of the 2000s is that the government was asleep when it occurred. In the 1830s, the government was the one selling the land. It was their greed which caused them to allow things to continue. Increasing the supply would slow the process while avoiding a huge price run up. This time, the leaders at the Treasury, Fed, Congress, and White House mostly ignored the problem until it was too late. A lack of monitoring of the banks led to them making bad loans that were destined to go bad. The government only compounded this problem by passing legislation forcing the banks to make subprime loans. In reality, this is what started the entire mess to begin with.

So there it is. Two examples spread over hundreds of years where the government was a large reason for an economic recession. Did they learn from history? Of course not. The government is worse than any alcoholic or drug addict. Those people believe "this time will be different". Every new Congress or Administration believes it will be different with them at the helm. It is not. Therefore, since a massive investment in public works did not work for Roosevelt, why does Obama believe it will work for him. Have another drink Barack.

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