...A Short Narrative of Three Centuries of Regulatory CyclesPutting on the academic hat: The bubble had run its course by July 1721 (all time high one year earlier, July 1720), it was not "riding high" in 1725:
Roll back the clock to 1725, when the South Sea Bubble was riding high in England. It was one of the earliest well documented stock market bubbles. Political elites cheered for the stock market mania— until it crashed. The political backlash was substantial, and many members of parliament were thrown in jail. England inherited from the South Sea Bubble backlash the ‘Bubble Act,’ an oppressive law that placed a tremendous hurdle on companies going public. The Act remained in place for a full century. It was then repealed at the peak of the next big bubble, in 1825. The repeal is well documented as being the result of lobbying and influence peddling. The response to the ensuing crash and banking crisis transformed and modernized financial markets in England....
Secondly, the Bubble Act was passed during the mania, June 11, 1720, just before the third subscription and the ultimate top-tick in the forward market (because the transfer books were closed there was no spot price).
The Bubble Act forced any new companies to apply for a Royal Charter and was actually enacted as an impediment to new joint-stock companies that might compete for capital the South Sea directors thought should rightfully go to their venture.
The Act did not stop the formation of companies, you just had to be connected enough with the royals or the court denizens to get the official okey-dokey.
The author of this piece is probably confusing the Bubble Act with Barnard's Act, more on that after the jump.
From The University of Chicago's ProMarket blog:
[Note: The post below was first published at VoxEU.org with the title “Regulatory Cycles: Revisiting the Political Economy of Financial Crises.”]Back in early 2017, while the stock market was breaking records, the new administration in the US made promises to significantly roll back the recently implemented regulations under the Dodd-Frank Act. We have seen the move toward deregulation take shape on various fronts. By most accounts, new regulatory appointees have signaled a shift toward a softer approach to financial regulation. On the legislative front, after a failed attempt by the House of Representatives to erase core financial regulations under the DFA, the Senate has voted last week on a bill that would offer regulatory relief to small and mid-sized banks.
Over the last two decades, the US has gone through a regulatory cycle. The financial sector was deregulated during the boom spanning the late-1990s to mid-2000s, and then re-regulated following the 2008 crash (e.g. Goldstein 2009). Currently, it appears that the regulatory pendulum is swinging the other way. In a recent paper, I examine the political economy of financial policy during ten of the most infamous financial booms and busts since the 18th century (Dagher 2018). I rely on a wealth of scholarship on each episode to show that procyclical regulations are a recurring feature since the early days of finance and across countries. Financial booms—and risk-taking during these episodes—were often amplified by political regulatory stimuli, credit subsidies, and an increasing light-touch approach to financial supervision. Financial crises led to a massive regulatory backlash, which sometimes suffocated finance. The regulatory response can be best understood in the context of the political ramifications of such crises.
The large literature on the 2008 Global Crisis tends to focus on identifying the regulatory failures that led to the crash. I argue that it is equally important to understand the roots of these regulatory failures, and that politics is usually at the heart of the story.
A Short Narrative of Three Centuries of Regulatory Cycles
Roll back the clock to 1725, when the South Sea Bubble was riding high in England. It was one of the earliest well documented stock market bubbles. Political elites cheered for the stock market mania— until it crashed. The political backlash was substantial, and many members of parliament were thrown in jail. England inherited from the South Sea Bubble backlash the ‘Bubble Act,’ an oppressive law that placed a tremendous hurdle on companies going public. The Act remained in place for a full century. It was then repealed at the peak of the next big bubble, in 1825. The repeal is well documented as being the result of lobbying and influence peddling. The response to the ensuing crash and banking crisis transformed and modernized financial markets in England.
To those familiar with the financial history of the US this might ring a bell or two. The market euphoria in the late 1920s came at the heels of a period of deregulation, inaction by regulatory agencies, and rising subsidies to the housing sector. President Hoover at the time took a dim view of federal regulations and supervision, and appointed regulators that shared this view. The 1929 crash and the ensuing Great Depression led to a major rethinking of the role of government, resulting in an impressive comeback by the Democrats in Congress. The New Deal reshaped the financial landscape in the US and imposed stricter regulations and supervision. The Glass-Steagall Act of 1933 separated commercial and investment banking in order to protect depositors. The Act remained in effect for much of the remaining 20th century, but was then repealed in 1999 at the height of a stupendous stock market boom. During the 1990s, securities laws were also eased by Congress, but they were then tightened under the Sarbanes-Oxley law a few years later, after the Dot-Com crash – a short-lived regulatory cycle confined to the securities market. But deregulation and a light touch approach in the banking sector continued and intensified in the midst of a tremendous housing boom. The credit boom benefited from government subsidies and sponsorship under both the Clinton and Bush administrations. Two years after its crash in 2008, President Obama signed into law the Dodd-Frank Act, the most significant regulatory overhaul since the New Deal.
These regulatory cycles can be observed across time and countries....MUCH MORE
Back to the Bubble, been down this road before. Here's 2009's "Murphy A. (2009) The smartest boys in the alley, early derivatives on the London stock market":
On Thursday I was pulling some links together on the British experience regulating derivatives after the South Sea Bubble of 1720. Lo and behold what pops up this morning but a link via Alphaville to the Economic History blog. Just one quibble, Dr. Murphy states that Barnard's Act* was dated 1737, I'd swear that my memory puts it earlier.
[just how old are you? -ed]
From the Economic History blog:
Murphy, Anne L. (2009) Trading options before Black-Scholes: a study of the market in late seventeenth-century London. Economic History Review, 62/1: 8-30.
The ledger of the financial broker Charles Blunt contains the details of some 1,500 transactions realized between 1692 and 1695, about a third of which regard the then novel trade in equity options (p.9). The technique had arisen in the 1620s in the commodity market and was proving very useful in the decade following the Glorious Revolution, when some 100 joint-stock companies were floated in London (p.10). During the boom of the early 1690s, it is likely that “several thousand derivatives were transacted each year”.
Four out of five options traded were calls (i.e. the right to pursue a share at any time during a given period, usually 6 months) and at-the-money (i.e. for the price of the share at the time of the agreement). “It is likely that they were transacted to take advantage of an anticipated price move associated with a specific future event” (p.12). Most of Charles Bunt’s clients were not professionals, for them using a broker was the only way to find a buyer. However many of these amateurs did in fact engage in option trading....MORE
HT: FT AlphavilleIf interested see also "Prop Trading the South Sea Bubble: Hoare's Bank 1720":
*Barnard's Act, which outlawed the use of options and forwards to purchase stock, was enacted in 1734 and due to sunset in 1737. Instead it was made perpetual and not repealed until 1860.
*From deep in the link-vault comes a tiny treasure, an analysis of Hoare's trading during the South Sea bubble (62 page PDF):
Riding the South Sea Bubble
By PETER TEMIN AND HANS-JOACHIM VOTH
By PETER TEMIN AND HANS-JOACHIM VOTH
This paper presents a case study of a well-informed investor in the South Sea bubble. We argue that Hoare’s Bank, a fledgling West End London bank, knew that a bubble was in progress and nonetheless invested in the stock: it was profitable to “ride the bubble.” Using a unique dataset on daily trades, we show that this sophisticated investor was not constrained by such institutional factors as restrictions on short sales or agency problems....MORE