One of my favorite lines, and one that has become something of a mantra for me over the past few years, comes from investor Kyle Bass: "I don't get paid to be an optimist or a pessimist, I get paid to be a realist."
So, on the heels of a presidential debate that I did not watch, I offer up the following. Realistically, my belief has been that Hillary Clinton will win this November. Realistically, I understand that Donald Trump's candidacy is a symptom of the failure of mainstream/establishment politics and the conventional thinking attached to it. So, in unemotionally assessing the lay of the land, whether it is this cycle or the next, I do believe that the status quo can is finally going to hit the wall.
Tuesday, September 27, 2016
Friday, September 16, 2016
The Morons
I read this last week on Geopolitical Futures. Needless to say, I think George Friedman gets it right:
“German Chancellor Angela Merkel said
something interesting yesterday. She said that the voters should not be blamed
for her party’s defeat on Sunday in her home district.
In the chancellor’s words, “scolding the voters achieves nothing.” The
Christian Democratic Union (CDU) came in third in local legislative elections
in Mecklenburg-Western Pomerania, behind the anti-immigration nationalist party
Alternative for Germany. The elections decided nothing major, but were a
measure of how unpopular the CDU and Merkel have become.
In normal election years, the idea of blaming the voters for the outcome of a vote would have been absurd. Under the doctrine of “Vox Populi, Vox Dei” (the voice of the people is the voice of God), which is the foundation of democracy, the people are the judge of politicians, not the other way around. The assertion that the people are the voice of God was a challenge to the idea of the divine right of kings. It was not kings that spoke for God, but the people.
Merkel’s statement makes no sense until you realize that we are now in the age of the “stupid voter.” Mainstream parties have dominated the European and the American political systems for a very long time, and within these parties, certain ideologies, factions and personalities have prevailed, while others have been marginalized.
Parties, ideas and people have been governing for so long that it is assumed that all reasonable people will see their continued governance, with some minor variations, as the will of God. Certain values are taken for granted, as are certain modes of behavior. There is more commonality between the establishment parties than challengers from inside or outside the parties.
These are times of systemic failure. In Europe, the European Union has failed to solve the problems that arose from the 2008 crisis for eight years, and there is no indication that a solution is forthcoming. Nevertheless, the idea that a radical change is needed in how the problem is viewed and how the governing system operates is normally seen as preposterous. The mainstream parties see the problems as manageable. When further problems, such as the immigration issue, are piled on top of existing ones and are handled as maladroitly as that was, it becomes apparent that something is wrong with the governing principles, the dominant parties, the leading individuals and so on.
But while this is becoming visible outside of the establishment parties, the establishment is oblivious that they are failing. In their minds, there have been minor difficulties that need to be worked out over time, and the increasing noise from outside their framework is first a nuisance and then a hindrance to their prudent management of the situation.
As the public becomes more alarmed and frustrated at the inability of the establishment parties to grasp that there is something terribly wrong, two things happen. First, the voters are blamed for their immaturity and there is increasing alarm that the irresponsibility of the public will disrupt the management of the system. Second, leaders arise who share or (in the case of politicians) exploit the increasing fear. The mainstream parties invent the idea that it is these new politicians, inappropriate by tenor and character of governing, who are creating a crisis. This is important: the perception is that the new politicians are creating the crisis, not the other way around.
The response of the mainstream politicians and their supporters to the Brexit vote was a classic example. There has been an increasing social crisis in Britain that neither of the major parties seemed aware of. They assumed that most people would not want major banks to leave London and therefore would vote to remain in the EU. They could not grasp that the majority of Britain had far greater problems, which the City was neglecting and possibly compounding.
The leading parties held the leaders that supported Brexit in contempt. They thought former head of the U.K. Independence Party Nigel Farage, who led the movement to exit the EU, clearly was not suited to govern, nor was former London Mayor Boris Johnson, who also supported the “leave” campaign. They were seen as outsiders to a well-running system. The leading politicians of the mainstream parties did not know or suspect that over half of British voters were appalled at their handling of the European Union question and much else.
The immediate response of these parties was to wonder who these voters were. They knew no one who supported Brexit. The next response was to focus on the lack of sophistication, education and even intelligence of the voters. They never blamed the referendum result on the failure of the EU or themselves. It was the fault of the stupid voters and the dangerous demagogic politicians who led them. Vox Populi, Vox Dei, turned into “I didn’t know there were so many idiots in Britain.”
The same can be said for the reaction of mainstream parties to Donald Trump. The United States is having a significant social crisis, where the middle and, most important, the lower-middle classes are incapable of living the kinds of lives that had become standard for these classes since World War II. The major parties had presided over this crisis. Mitt Romney spoke of 47 percent of Americans as moochers. President Barack Obama spoke of the problem but proposed only the same solutions that created this situation. Neither party could grasp that a massive political explosion was coming.
As with Brexit, the leading politicians did not realize that the situation was out of hand. The one thing a politician should understand is the mood of the people. But the politicians in Europe and the United States had not only lost touch with them, but regarded them, as Romney and former British Prime Minister David Cameron did, as the problem.
In a democracy, when politicians are oblivious to what is happening around them and a massive social crisis is well underway, the consequences are utterly predictable. First, the public knows full well there is a serious problem. Second, they know the establishment doesn’t care. Third, they know the political system is the only recourse. And finally, personalities arise to lead them against the establishment.
The establishment looks at these new leaders as bizarre and doomed to fail. These leaders, unlike the establishment, are aware of the social crisis and the contempt the establishment is held in. They do everything they can to appear utterly different than establishment politicians. The establishment believes this will lead to the downfall of the new politicians. They are totally unaware of how offensive their mode of government and even mode of speech has become.
This does not mean that the new politicians will win. It does mean that a schism has opened up in society and that spending money on television ads won’t heal it. Regardless of who wins the election, a vast percentage of voters see the establishment parties and even the state as their enemies. And the underlying reason is that the establishment parties have no intention to address, or plan for addressing, the core problem, which is that the system is in crisis.
In Europe, the economic condition is tolerable for the upper half of society but not the lower half. The same is increasingly true in the United States. On top of this stress is the perception that the countries’ leaders are more concerned with fairness to immigrants than fairness to citizens. If this is true, the politicians must do something about it. If it is not true, then politicians must reshape public thinking.
But the “stupid voter syndrome” is now evident in Europe and the U.S. There is deep contempt for the Trump voter, the Brexit voter and now the anti-CDU voter. The common sense of citizenship has been torn on both sides. The anti-establishment voters hurl contempt at the establishment. The establishment hurls it back. This is why Merkel’s statement that we shouldn’t blame the voters is so extraordinary. First, she isn’t blaming them. Second, and most fascinating, she is acknowledging that the voters might be blamed.
This is a systemic crisis. It is how major social problems are managed politically. Half still support the mainstream. Half support the upstart. The establishment can’t conceive of the upstart winning. The upstart doesn’t always win. But as the Brexit vote showed, sometimes it does. And then members of the establishment are shocked, realizing they don’t know anyone with views that oppose their own. And that is the core of the problem.”
In normal election years, the idea of blaming the voters for the outcome of a vote would have been absurd. Under the doctrine of “Vox Populi, Vox Dei” (the voice of the people is the voice of God), which is the foundation of democracy, the people are the judge of politicians, not the other way around. The assertion that the people are the voice of God was a challenge to the idea of the divine right of kings. It was not kings that spoke for God, but the people.
Merkel’s statement makes no sense until you realize that we are now in the age of the “stupid voter.” Mainstream parties have dominated the European and the American political systems for a very long time, and within these parties, certain ideologies, factions and personalities have prevailed, while others have been marginalized.
Parties, ideas and people have been governing for so long that it is assumed that all reasonable people will see their continued governance, with some minor variations, as the will of God. Certain values are taken for granted, as are certain modes of behavior. There is more commonality between the establishment parties than challengers from inside or outside the parties.
These are times of systemic failure. In Europe, the European Union has failed to solve the problems that arose from the 2008 crisis for eight years, and there is no indication that a solution is forthcoming. Nevertheless, the idea that a radical change is needed in how the problem is viewed and how the governing system operates is normally seen as preposterous. The mainstream parties see the problems as manageable. When further problems, such as the immigration issue, are piled on top of existing ones and are handled as maladroitly as that was, it becomes apparent that something is wrong with the governing principles, the dominant parties, the leading individuals and so on.
But while this is becoming visible outside of the establishment parties, the establishment is oblivious that they are failing. In their minds, there have been minor difficulties that need to be worked out over time, and the increasing noise from outside their framework is first a nuisance and then a hindrance to their prudent management of the situation.
As the public becomes more alarmed and frustrated at the inability of the establishment parties to grasp that there is something terribly wrong, two things happen. First, the voters are blamed for their immaturity and there is increasing alarm that the irresponsibility of the public will disrupt the management of the system. Second, leaders arise who share or (in the case of politicians) exploit the increasing fear. The mainstream parties invent the idea that it is these new politicians, inappropriate by tenor and character of governing, who are creating a crisis. This is important: the perception is that the new politicians are creating the crisis, not the other way around.
The response of the mainstream politicians and their supporters to the Brexit vote was a classic example. There has been an increasing social crisis in Britain that neither of the major parties seemed aware of. They assumed that most people would not want major banks to leave London and therefore would vote to remain in the EU. They could not grasp that the majority of Britain had far greater problems, which the City was neglecting and possibly compounding.
The leading parties held the leaders that supported Brexit in contempt. They thought former head of the U.K. Independence Party Nigel Farage, who led the movement to exit the EU, clearly was not suited to govern, nor was former London Mayor Boris Johnson, who also supported the “leave” campaign. They were seen as outsiders to a well-running system. The leading politicians of the mainstream parties did not know or suspect that over half of British voters were appalled at their handling of the European Union question and much else.
The immediate response of these parties was to wonder who these voters were. They knew no one who supported Brexit. The next response was to focus on the lack of sophistication, education and even intelligence of the voters. They never blamed the referendum result on the failure of the EU or themselves. It was the fault of the stupid voters and the dangerous demagogic politicians who led them. Vox Populi, Vox Dei, turned into “I didn’t know there were so many idiots in Britain.”
The same can be said for the reaction of mainstream parties to Donald Trump. The United States is having a significant social crisis, where the middle and, most important, the lower-middle classes are incapable of living the kinds of lives that had become standard for these classes since World War II. The major parties had presided over this crisis. Mitt Romney spoke of 47 percent of Americans as moochers. President Barack Obama spoke of the problem but proposed only the same solutions that created this situation. Neither party could grasp that a massive political explosion was coming.
As with Brexit, the leading politicians did not realize that the situation was out of hand. The one thing a politician should understand is the mood of the people. But the politicians in Europe and the United States had not only lost touch with them, but regarded them, as Romney and former British Prime Minister David Cameron did, as the problem.
In a democracy, when politicians are oblivious to what is happening around them and a massive social crisis is well underway, the consequences are utterly predictable. First, the public knows full well there is a serious problem. Second, they know the establishment doesn’t care. Third, they know the political system is the only recourse. And finally, personalities arise to lead them against the establishment.
The establishment looks at these new leaders as bizarre and doomed to fail. These leaders, unlike the establishment, are aware of the social crisis and the contempt the establishment is held in. They do everything they can to appear utterly different than establishment politicians. The establishment believes this will lead to the downfall of the new politicians. They are totally unaware of how offensive their mode of government and even mode of speech has become.
This does not mean that the new politicians will win. It does mean that a schism has opened up in society and that spending money on television ads won’t heal it. Regardless of who wins the election, a vast percentage of voters see the establishment parties and even the state as their enemies. And the underlying reason is that the establishment parties have no intention to address, or plan for addressing, the core problem, which is that the system is in crisis.
In Europe, the economic condition is tolerable for the upper half of society but not the lower half. The same is increasingly true in the United States. On top of this stress is the perception that the countries’ leaders are more concerned with fairness to immigrants than fairness to citizens. If this is true, the politicians must do something about it. If it is not true, then politicians must reshape public thinking.
But the “stupid voter syndrome” is now evident in Europe and the U.S. There is deep contempt for the Trump voter, the Brexit voter and now the anti-CDU voter. The common sense of citizenship has been torn on both sides. The anti-establishment voters hurl contempt at the establishment. The establishment hurls it back. This is why Merkel’s statement that we shouldn’t blame the voters is so extraordinary. First, she isn’t blaming them. Second, and most fascinating, she is acknowledging that the voters might be blamed.
This is a systemic crisis. It is how major social problems are managed politically. Half still support the mainstream. Half support the upstart. The establishment can’t conceive of the upstart winning. The upstart doesn’t always win. But as the Brexit vote showed, sometimes it does. And then members of the establishment are shocked, realizing they don’t know anyone with views that oppose their own. And that is the core of the problem.”
Friday, September 2, 2016
Summer Reading
A few more books to close out the summer:
The Most Dangerous Trade -- The subtitle is How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions and the author is Richard Teitelbaum (2015). With each chapter dedicated to one of the most famous and successful short sellers, it confirms the notion that this type of investing is truly trench warfare, describing the need to do forensic accounting and withstanding the heat of being labelled as the bad guy of the Wall Street universe (which means truly being the scum of the universe to most).
Once Upon A Time in Russia -- The subtitle is The Rise of the Oligarchs and the author is Ben Mezrich (2015). A somewhat fictionalized version of true events, it takes the reader to the emergence of the oligarchs after the fall of the Soviet Union, focusing on the story of Boris Berezovsky and Roman Abramovich. A tale in which there is tremendous wealth and ambition, but few characters who could be characterized as good guys.
The Most Dangerous Trade -- The subtitle is How Short Sellers Uncover Fraud, Keep Markets Honest, and Make and Lose Billions and the author is Richard Teitelbaum (2015). With each chapter dedicated to one of the most famous and successful short sellers, it confirms the notion that this type of investing is truly trench warfare, describing the need to do forensic accounting and withstanding the heat of being labelled as the bad guy of the Wall Street universe (which means truly being the scum of the universe to most).
Once Upon A Time in Russia -- The subtitle is The Rise of the Oligarchs and the author is Ben Mezrich (2015). A somewhat fictionalized version of true events, it takes the reader to the emergence of the oligarchs after the fall of the Soviet Union, focusing on the story of Boris Berezovsky and Roman Abramovich. A tale in which there is tremendous wealth and ambition, but few characters who could be characterized as good guys.
Thursday, September 1, 2016
Rational Thinking
When it comes to understanding what's going on in the world -- and, by that, I mean the real facts and actual implications, rather than what the mainstream media normally feeds everyone -- there are a handful of subscription sites that I tune in to. For geopolitical thinking and insight, I read Stratfor and Geopolitical Futures (which was formed in the past year by the original founder of Stratfor). For finance, economics and the like, I still tune in to Bill Fleckenstein, but I also really enjoy Real Vision TV. It is a website that produces long form interviews with some of the smartest, and sometimes obscure, names in that universe. It provides a forum, versus financial television, where ideas can be fleshed and not everything is driven by catchy soundbites.
With that prelude out of the way, a very recent interview on Real Vision was conducted by Grant Williams (a co-founder of the site) with David Dredge of Fortress Investment Group. Really interesting stuff, with a few specific points that resonated and brought home the pickle that the world is in.
First off, in the context of the great boogie man, deflation, it was pointed out that over the past 40 years, there have been endless tweaks to the calculation of core inflation. And the subjects both observed that none of those alterations have ever led to a higher print. So, if the answer (as preached by central bankers and mainstream economists) to our woes really is inflation, why does it seem that over and over again, the attempt is made to refine its definition so as to bring it down.
Secondly, in a discussion about Japan, but really an insight that applies everywhere, Mr. Dredge noted that there is growing talk of helicopter money as the next step in dealing with the country's financial issues. And, really, what that evolution speaks to is an admission that monetary policy has done all that it can and it is time to turn to fiscal policy. And, out of that, the skeptical thinker should have two questions for the Japanese central banker or New York Times "economist" who is a proponent:
(1) Japan has run large fiscal deficits year after year after year since it's economy turned in the late 1980s. Are we really saying that just a little more of that is really going to make a difference?
(2) Helicopter money implies more debt on the BOJ balance sheet, more government debt, and higher fiscal deficits. If putting more assets on the BOJ balance sheet and running deficits really was the answer, especially in the case of Japan, shouldn't we have whipped this problem a long time ago?
Anyway, that's the type of stuff that allows you to see the world as it is, and not how others would tell you to see it out of convenience. Highly recommended.
With that prelude out of the way, a very recent interview on Real Vision was conducted by Grant Williams (a co-founder of the site) with David Dredge of Fortress Investment Group. Really interesting stuff, with a few specific points that resonated and brought home the pickle that the world is in.
First off, in the context of the great boogie man, deflation, it was pointed out that over the past 40 years, there have been endless tweaks to the calculation of core inflation. And the subjects both observed that none of those alterations have ever led to a higher print. So, if the answer (as preached by central bankers and mainstream economists) to our woes really is inflation, why does it seem that over and over again, the attempt is made to refine its definition so as to bring it down.
Secondly, in a discussion about Japan, but really an insight that applies everywhere, Mr. Dredge noted that there is growing talk of helicopter money as the next step in dealing with the country's financial issues. And, really, what that evolution speaks to is an admission that monetary policy has done all that it can and it is time to turn to fiscal policy. And, out of that, the skeptical thinker should have two questions for the Japanese central banker or New York Times "economist" who is a proponent:
(1) Japan has run large fiscal deficits year after year after year since it's economy turned in the late 1980s. Are we really saying that just a little more of that is really going to make a difference?
(2) Helicopter money implies more debt on the BOJ balance sheet, more government debt, and higher fiscal deficits. If putting more assets on the BOJ balance sheet and running deficits really was the answer, especially in the case of Japan, shouldn't we have whipped this problem a long time ago?
Anyway, that's the type of stuff that allows you to see the world as it is, and not how others would tell you to see it out of convenience. Highly recommended.
Election Season
Something that drives certain members of my family crazy is that I no longer vote. I don’t feel represented by any of the candidates who get run out every couple of years, and I also live in a state where my particular vote carries very little weight.
In the current election cycle, though, something else that irks those same relatives is that I am not utterly appalled every time that the name “Trump” is brought up. Don’t misconstrue what I’m saying – he most definitely is not the candidate who will bring me out of my voting doldrums. But, at the same time, I appreciate that he signifies something more than politics as usual, a proverbial shift away from the establishment.
All of this brings me to a recent conversation that I had with a friend on the topic of this election. And how my view is that Trump is not the right candidate, but he symbolizes a change in this country that likely will be realized in future elections.
Apropos of that anecdote, I was reading an article by George Friedman on the website Geopolitical Futures and saw the following:
“Whatever happens to Trump, he has in my mind laid out – in one speech and leaving much out – a foreign policy that is likely to be implemented by some future president, if not himself. The ideas of free trade as an absolute principle, of oversight by international organizations and of open-ended military alliances, are now over 60 years old. It is a set of doctrines created when the world was a very different place. It is unlikely to be sustainable as a doctrine for much longer. This is not isolationism. It is a more flexible involvement with the world.”
That sounds about right.
In the current election cycle, though, something else that irks those same relatives is that I am not utterly appalled every time that the name “Trump” is brought up. Don’t misconstrue what I’m saying – he most definitely is not the candidate who will bring me out of my voting doldrums. But, at the same time, I appreciate that he signifies something more than politics as usual, a proverbial shift away from the establishment.
All of this brings me to a recent conversation that I had with a friend on the topic of this election. And how my view is that Trump is not the right candidate, but he symbolizes a change in this country that likely will be realized in future elections.
Apropos of that anecdote, I was reading an article by George Friedman on the website Geopolitical Futures and saw the following:
“Whatever happens to Trump, he has in my mind laid out – in one speech and leaving much out – a foreign policy that is likely to be implemented by some future president, if not himself. The ideas of free trade as an absolute principle, of oversight by international organizations and of open-ended military alliances, are now over 60 years old. It is a set of doctrines created when the world was a very different place. It is unlikely to be sustainable as a doctrine for much longer. This is not isolationism. It is a more flexible involvement with the world.”
That sounds about right.
Friday, August 26, 2016
In Europe's Shadow
The subtitle is Two Cold Wars and a Thirty-Year Journey Through Romania and Beyond and the author is Robert Kaplan (2016).
It is very much a travelogue and trip down memory lane for the author, who first visited Romania (and surrounding countries) in the midst of the Cold War. His visit again in 2013 and 2014, as the situation in Ukraine was heating up, confirming the existence of an ongoing dispute between East and West that did not truly dissipate just because the Berlin Wall came down. This region is simply the center point for that tug of war.
It is very much a travelogue and trip down memory lane for the author, who first visited Romania (and surrounding countries) in the midst of the Cold War. His visit again in 2013 and 2014, as the situation in Ukraine was heating up, confirming the existence of an ongoing dispute between East and West that did not truly dissipate just because the Berlin Wall came down. This region is simply the center point for that tug of war.
Monday, August 1, 2016
Legislating Instability
The subtitle is Adam Smith, Free Banking, and the Financial Crisis of 1772 and the author is Tyler Beck Goodspeed (2016).
Adam Smith is the dupe in this read. As a Scot, but also as a critic of unregulated banking, certain events in his own backyard challenged his theory and supported a tale of how a system of finance can be self-correcting when left to its own devices. The focal point is Scotland and how, in the midst of over a half-century of robust economic growth, its banking system did not sway too hard despite a fixed exchange rate, large external debts, large capital account deficits, and generally volatile political and economic times across the Continent.
The secret sauce was seemingly a system of truly free banking, where there were not high barriers to entry, and therefore new competitors could enter the fray and market discipline would ferret out the characteristics that did not work. In the period from 1716 to 1845, the Scottish banking system was generally able to withstand the forces around it and remain as resilient as any in the world. The significant exception was the great crisis of 1772 – a moment in time where Adam Smith spoke up and largely represented a view that misdiagnosed the problems and called for changes that had ultimately caused the problems in the first place.
Specifically, a systemically important institution, Douglas, Heron & Co., failed under the weight of a London-based bank going under. With hindsight, Smith and others suggested that the problems might have been avoided with usury laws, bans on small denominations, and a prohibition of contingent liability banknotes – except that all those ideas were part of the Scottish Bank Act of 1765, the first regulations on the banking system. Largely a result of lobbying by the very largest Scottish institutions, the legislation raised the barriers to entry, reduced competition, and allowed the existing participants to grow in scale. As they say, the numbers don’t lie – and following the Bank Act’s introduction, over the next 7 years, the average starting capital for a bank grew nine-fold, the number of partners in an institution grew six-fold, and, most tellingly, the number of bank failures in that period was more than ten times the total between 1716 and 1765, even though leverage levels were actually lower (that last almost contradictory data point stemmed from lower profitability due to higher reserve requirements, which triggered a move towards riskier loan portfolios to compensate). In other words, as the scale of the individual players increased, so too did the fragility of the overall system.
And a crisis they got. Ultimately, the saving grace was another feature of free banking that preceded the changes in 1765 – joint and several liability for the partners of these firms. In the end, creditors and depositors were paid back because the shareholders had liability beyond just the value of their interests in the banks. The unlimited liability mechanism was prevented from serving its full utility a bit with the increased scale of the banks, as they became too large and cumbersome to properly monitor – but this feature nevertheless allowed the Scottish economy to recover fairly quickly, as the resulting credit crunch did not go on interminably – mostly because, in a certain sense, the partners of failed institutions served as the lender of last resort.
Adam Smith is the dupe in this read. As a Scot, but also as a critic of unregulated banking, certain events in his own backyard challenged his theory and supported a tale of how a system of finance can be self-correcting when left to its own devices. The focal point is Scotland and how, in the midst of over a half-century of robust economic growth, its banking system did not sway too hard despite a fixed exchange rate, large external debts, large capital account deficits, and generally volatile political and economic times across the Continent.
The secret sauce was seemingly a system of truly free banking, where there were not high barriers to entry, and therefore new competitors could enter the fray and market discipline would ferret out the characteristics that did not work. In the period from 1716 to 1845, the Scottish banking system was generally able to withstand the forces around it and remain as resilient as any in the world. The significant exception was the great crisis of 1772 – a moment in time where Adam Smith spoke up and largely represented a view that misdiagnosed the problems and called for changes that had ultimately caused the problems in the first place.
Specifically, a systemically important institution, Douglas, Heron & Co., failed under the weight of a London-based bank going under. With hindsight, Smith and others suggested that the problems might have been avoided with usury laws, bans on small denominations, and a prohibition of contingent liability banknotes – except that all those ideas were part of the Scottish Bank Act of 1765, the first regulations on the banking system. Largely a result of lobbying by the very largest Scottish institutions, the legislation raised the barriers to entry, reduced competition, and allowed the existing participants to grow in scale. As they say, the numbers don’t lie – and following the Bank Act’s introduction, over the next 7 years, the average starting capital for a bank grew nine-fold, the number of partners in an institution grew six-fold, and, most tellingly, the number of bank failures in that period was more than ten times the total between 1716 and 1765, even though leverage levels were actually lower (that last almost contradictory data point stemmed from lower profitability due to higher reserve requirements, which triggered a move towards riskier loan portfolios to compensate). In other words, as the scale of the individual players increased, so too did the fragility of the overall system.
And a crisis they got. Ultimately, the saving grace was another feature of free banking that preceded the changes in 1765 – joint and several liability for the partners of these firms. In the end, creditors and depositors were paid back because the shareholders had liability beyond just the value of their interests in the banks. The unlimited liability mechanism was prevented from serving its full utility a bit with the increased scale of the banks, as they became too large and cumbersome to properly monitor – but this feature nevertheless allowed the Scottish economy to recover fairly quickly, as the resulting credit crunch did not go on interminably – mostly because, in a certain sense, the partners of failed institutions served as the lender of last resort.
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