1/ The cause of the Panic of 1907 was overconfidence expressed in overleveraging and shady activities, after a long period of huge genuine productivity gains in the US economy. I see similarities with this #Bitcoin Panic.
wiki.mises.org/wiki/Panic_of_…
2/ The public looked at the 1907 panic disparagingly, believing that it revealed how rotten things had gotten on Wall Street. The caption under this "rotten finance" cartoon reads: "All the Street's men can't put Humpty back again", referring to the loss in market confidence.
3/ And this contemporary cartoon suggests that the 1907 Panic was a good thing, spewing "common honesty" in the air like Vesuvius spewed her ashes over Pompeii, causing all the finance grifters to flee far away.
4/ Another cartoon personifies the US financial industry as an ailing man who is healing up with the help of "Rockefeller Remedy" and "Morgan Mixture", referring to the Wall Street titans who helped the contagion from spreading further.
5/ In the crypto space, we're already hearing a similar story. Consider these rumors about Sam Bankman-Fried having stepped in to stem contagion:
6/ The perception in the press was that the government needed to intervene to prevent this from happening again. Here you see President Roosevelt as an angry mother, giving "flim-flam finance" an austere wash with "honesty soap".
7/ The imagery here is even more explicit, giving an idea of how hurt the investing public felt about the failure of long trusted institutions like the Knickerbocker Trust Company. Check out the "small investor", gleefully inspecting the sharpness of his axe.
8/ Notwithstanding all the financial and political drama, the US stock market almost completely recovered in 1.5 years. (Compare that to the Great Depression, which, despite and frankly because of heavy government interventionism, lasted 10 years.)
9/ The political wheels were already turning though. It took a mere six years from between this crisis and the creation of the US Federal Reserve. The very first words of its enactment immediately referred back to the Panic of 1907. fraser.stlouisfed.org/files/docs/pub…
10/ This helps us understand how the Federal Reserve initially was a very popular idea with the public. The promise was to prevent The Panic of 1907 from ever happening again.
11/ Of course, there are limits to the analogy between this bitcoin crash and the Panic of 1907. For one, the bitcoin economy is still very small and younger skewing and so the amount of people affected is more limited.
12/ Still, it's exactly this kind of panic that can encourage misguided interventionism. The creation of central banking was counterproductive in the long run, as it encouraged banks to take huge risks & caused economic gigantism due to credit expansion, bailouts and inflation.
13/ Today we are lucky to have:
- History as a guide (a central bank of bitcoin would be a terrible idea)
- Bitcoin's powerful auditability and smart contract features
- Existing securities & criminal justice laws and a mature court system with many precedents
14/ Let's use this crisis as an opportunity to:
- support bitcoin proof-of-reserve & collaborative custody initiatives
- come up with better methods to screen for fraudulent or overly risky financial schemes
- be kind to the victims of this crash (bitcoin is murky for outsiders)
15/ The main reason I'm not advocating for sweeping political intervention, is that this crisis is nothing new in the world of finance. In fact it's simply a modern version of an age old cycle: growth => greed => leverage => panic => prudence => more growth.
16/ Remember Madoff. Would you give him a bailout? Financial panics are forest fires which exterminate unsustainable and fraudulent financial schemes.
They are inevitable & needed, and suppressing them only leads to bigger (systemic) crises down the road.
17/ In sum, let's use the Bitcoin Panic of 2022 as an opportunity to double down on our values:
- build tools that help individuals achieve real financial autonomy
- support software & biz with a track record of integrity
- educate ppl about financial responsibility & prudence
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