Panic of 1819, Redux

There is a nifty little book by Alan Axelrod and Charles Phillips called “What Every American Should Know About American History” (now in at least its third edition) that gives a page or two of historical facts per event. Included is a summary of the events surrounding the Panic of 1819.

Interestingly, the stated causes for the crisis were that “[t]he government incurred heavy debts during the war” which “battered the economy,” there was wild real estate speculation and there were “overextended investments in manufacturing,” which, combined with “the collapse of foreign markets for American goods,” threatened the collapse of those manufacturers. Banks failed and paper money lost value. Credit dried up with lack of confidence.

Sound familiar? Today we have a war racking up heavy debt. We hade wild speculation on housing prices or, if not wild speculation, at least wildly unrealistic expectations of ever-increasing prices. We have an auto industry that cannot adequately compete due to a collapsing global market for it products. We have overextended investment in the mortgage industry that saw its market for sub-prime loans collapse.

In 1819, to address the crisis, states started passing legislation to provide relief to debtors, legislation that was arguably unconstitutional. While our current crisis bailout also has provisions providing relief to home mortgage debtors (also possibly unconstitutional), it is likely that this relief is as much a mirage as it was in 1819. The solution in 1819 ultimately was the chartering of the Second Bank of the United States which took a hard line on existing debt payments, so much so that it was called "the Monster" and it was said that “The bank was saved but the people were ruined.” Likewise today, it seems unlikely that the Treasury can prop up the value of all the mortgage backed securities it is buying if it gives much relief to debtors.