Ed Quillen: Colorado History 101 might help Wall Street
September 24, 2008
Trying to understand recent events on Wall Street might be a full-time job of late, but from here, it appears that the law of gravity remains in effect. That is, what goes up must come down. In this case, it was housing prices.Boom and bust its a cycle we know well in Colorado, for as far back as its possible to trace our economic history.Granted, we cant go back all that far. For all we know, though, Spruce House at Mesa Verde was abandoned by people who couldnt keep up with their payments on subprime loans from Anasazi Savings & Loan, which had bundled the mortgages for Kokopelli Investment Group, which used them for security on a leveraged swap with Chaco Canyon Partners, which got overextended after shorting on turquoise futures.But the Ancient Ones likely had more sense than that. So we turn to Colorados first adventure in world commerce: the beaver-pelt trade. In the 1820s and 30s, the pelts fetched good money in England and France, and trappers worked their way through the American West. Supply diminished as they came close to exterminating Americas largest rodent. In response to high prices, European hat fashions switched to silk. The boom collapsed.This is a good illustration of the commodity price cycle. You start with something for which there is a demand i.e., beaver felt. Entrepreneurs attempt to meet that demand, and grab the cheap and easy stuff first. Supply diminishes as the commodity becomes harder to find, so prices rise; the foolish believe the price will rise forever. Consumers respond by cutting demand or by substitution in this case, silk for felt. The commodity price plummets.Move on to the late 1870s, when the mines of Leadville, soon followed by Aspen and the San Juan camps, started producing tons of silver more than anybody had any use for. The price dropped. The federal government stepped in with a bailout, the Sherman Silver Purchase Act of 1890, which required the U.S. Treasury to buy 4.5 million ounces of silver every month. For reasons too complex to explain here, this led to a decline in the countrys gold reserves and a possible collapse of the international finance system, so the act was repealed. Colorados economy pretty much collapsed in the nationwide Panic of 1893.Remember our energy boom of the late 1970s? Lots of people figured the price of crude oil would just keep going up and up indefinitely. Exxon announced it would spend billions to produce fuel from oil shale, and our Western Slope saw a major boom.But demand dropped as Americans drove less and bought more efficient vehicles. High prices encouraged more oil development, which increased supply just as demand declined. The price of crude oil dropped from $38 a barrel in 1979 to $10 in 1983, and Exxon pulled the plug on its big oil-shale plans.Now theres the Wall Street mess. All these smart investors seemed to assume that house prices would rise eternally. So if a borrower couldnt make the payments on a $200,000 house, who cared? Foreclose and sell it for $300,000 in an ever-rising market, which made the paper on this house better than gold, right?Except there came a day when nobody would pay $300,000 for that house, and it all started to crumble. Same old commodity curve demand creates over-supply leading to lower prices followed by collapse.Its Colorado History 101. Alas, the Wall Street wizards seem to have skipped that class.
Ed Quillen is a writer in Salida, Colo., where he produces regular op-ed columns for The Denver Post and publishes Colorado Central, a small regional monthly magazine.