Monday, March 21, 2011

When will they ever learn?

I read history for fun. (Sounds like going to autopsies for fun, doesn't it?) Lately I've been struck by the fact that the repeating pattern of market bubble-and-crash which causes suffering for individuals and instability for governments and societies still repeats when looked at up close, in greater detail: There is a first phase in which enormous credit is extended to allow large numbers of borrowers who aren't really credit-worthy, and a second phase when the creditors press on the debtors to pay debts which they just don't have the money to pay. Since each insolvent debtor has several creditors who are themselves overextended debtors, the collapse turns into a chain reaction.

When I first read the late Roger Duchêne's biography of Madame de Sévigné about ten years ago, I hardly noticed the following passage, and it left nary a trace in memory. But when I reread the book a few weeks ago, I was stunned. I had already decided to add it to the Internet's collection of bits and pieces about bubbles and crashes when I read a recent installment of the ongoing argument about how much money it is worthwhile to spend to try to bail out Greece.

From Roger Duchêne, Madame de Sévigné, ou, La chance d'être femme, Fayard, 1982, pp. 431-432. The off-the-cuff translation is my own.

The financial difficulties on which she spent so much time at the end of her life were not hers alone. As she explained in reference to Charles' unrealized intentions, there was a crisis of credit. Mme de Sévigné certainly made a mistake in not renewing the leases of her farmers, La Jarie at Buron and La Maison at Bourbilly; she thought that they weren't paying her enough. These bourgeois, who had been doing well for at least three generations, lived on the income from their farms: by taking their farms away from them, she ruined them, and their possessions were seized. Since she wasn't their only creditor, she ended up losing a lot, and her later tenants ended up paying her no better than their predecessors. The mechanism was similar to the defaults of the treasurers of Brittany and Provence. The king, pressed to obtain the money he needed, started to apply a tight policy and cancelled the large sums which the treasurers habitually invested. Suddenly pushed into deficit, they soon lost their credit-worthiness, and the whole structure collapsed, at the expense of the private investors who had lent to them. If not for the defaults of these complacent investors, the Grignans and Sévignés would have been better positioned.


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