Philadelphia Reflections is a history of the area around Philadelphia, PA
... William Penn's Quaker Colonies.

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Credit Crunch Turning Point, at Eight Months?

Ever since financial markets got jittery in August 2007, pundits generally agreed that things would not settle down before the second half of 2008. That seems to have been a safe thing to predict, but not exactly the same as confidently predicting that things will change for the better in the summer of 2008. Things could, unfortunately, get a lot worse.

Let's try to predict how history will remember these puzzling times. So far, the problem has been an American home real estate matter; America built too many houses, particularly in Florida and the West Coast. Houses were built because they could be sold, so the source of the difficulty was cheap credit for mortgages, and that was in turn traceable to Arabian oil prices and Far Eastern industrial progress. But never mind the cause, the event was a domestic American home mortgage issue, with the rest of the world sort of looking on. Whenever America got its mortgages straightened out, the crisis would be over. The other way history may describe things is far more ominous. Prosperity for the Middle and Far Eastern countries generated more wealth than their primitive banking systems could manage, so they exported it in the form of world inflation. America was pioneering in some innovative credit and investment streamlining, which was not entirely rationalized when it suddenly got toppled by a tsunami of world credit excess. Wall Street and Washington were the actors in stage center, but the underlying problem was a world problem, taking years to correct, and requiring heroic efforts to save it. If it could be saved. Politicians and newsmedia will emphasize any mistakes, but a solution will depend on whether or not we get some bold successes. The second quarter of 2008 will begin to show whether we need to keep cool, or blow the bugle.

To some extent, it was necessary to wait the better part of a year to see how strong our beleaguered institutions would prove to be, how many of the dubious mortgages would actually default, how many of the innovative lending practices would have to be forbidden, or revised. For example, it unnerved many people that so many "subprime" mortgages defaulted in the first year after the house was bought, suggesting that the house purchase was wildly inappropriate. On examination, however, it turned out that overzealous lenders had skipped the normal practice of insisting that money be set aside in escrow for tax and insurance payments. When tax and insurance collectors demanded immediate payment, the borrowers just skipped payments on the mortgage. Lenders will probably avoid this trap in the future, but if not, legal prohibition is fairly simple because it is so obvious. However painful this small problem may prove to be, its correction will be soon forgotten.

The international issues are much more difficult. From August 2007 to April 2008, American interest rates went steadily down; by their standards, they went down a lot. Many hot money investors took this as a sign that America was going to pay off its debts by deliberately provoking inflation; European countries have done this for centuries, even including England under Sir Stafford Cripps. That's why the gnomes of Switzerland keep vaults full of gold, and the oil moguls of OPEC have learned to keep their oil in the ground. Indian women bought more gold bracelets to jangle around, and the Australian markets went through the roof. Two governors of the Federal Reserve, including Philadelphia's own, voted against lowering interest rates "at this time". Paul Volcker, who once smashed the economy in order to smash inflation, hasn't spoken out yet, but simply trotting him out to a banquet is sufficiently vocal testimony at this stage of matters. No one has yet mentioned the hyper inflation episode of the Weimar Republic, but that episode was so catastrophic no one has to mention it in Germany or Austria; everybody remembers. As a matter of fact, the Europeans are so concerned to show the euro is strong, it is actually excessively strong and will surely be moderated. Our strongest ally in this Kabuki dance has been China, but a few rash words about Taiwan would test that severely. Are we trying to inflate away our mortgage debts -- absolutely not. Will we be able to prevent a serious recession by "stimulating" the economy -- it remains to be seen.

And finally, will wars, elections, blunders or general jitteriness force us all into a general rearrangement of the currency systems of the whole world, another Bretton Woods Conference let's say? No, of course not. But it wouldn't hurt to have the graduate students in Economics departments perform a few theoretical exercises, just for the practice of it.

Plays and Players, Haddonfield Version

First, an anecdote from my own lurid past. When I went there, Yale was an all-male institution with one exception, the Drama School. It's true that Shakspere had boys play the part of women in his plays, but Yale evidently felt that was going unnecessarily far, and had thus let the nose of the female camel get under the all-male tent. Meanwhile, I had discovered that a course in Advanced Chemical Engineering was carrying my amateur interest in chemistry sets a long ways too far, and after two weeks, I wanted out of it. Out!

The Dean was sympathetic until I answered what I wanted to transfer into -- a course at the Drama School. Somehow, he felt that was immensely amusing, one he hadn't heard before. But, finding my grade average satisfactory, he gave a big wink and signed the paper. I didn't pretend to be offended, but I did pretend to be solemn. The experience subsequently served me very well, since that class of girls went down to Broadway at the same time I went down to New York to medical school. Almost none of my mostly all-male class of medical students knew any girls in New York, but by comparison I knew lots. It made me very popular with both groups.

It thus develops that I had the courage recently to accompany to a theater party in Haddonfield, a lady who had spent twenty-five years on the stage. The play was Cole Porter's Anything Goes, put on by the Haddonfield Plays and Players, a group celebrating its 75th year of productions. You seldom see musical comedies anymore, because the large cast and orchestra requirements are pushed by Union rules to huge expense which a professional group cannot safely risk, and amateur groups mostly cannot enlist a large enough audience to support. In addition to the orchestra, stage hands and administration, I counted thirty members of the cast up on the stage for the big chorus numbers. There might have been a hundred in the audience to pay the bills. This wasn't the only play of the season, there will be five I understand, so the performers have to be quick studies, which generally means considerable experience. Even with what therefore must have been a short time to rehearse, this group was good, really, really good. The lady by my side remarked these people must be semi-professionals, at least. I didn't think so, so she demanded a playbill to see. Sure enough, semi-pro.

All of which may seem a round-about way to get to an observation about the current theater revival in Philadelphia. There are at least fifty new amateur theater groups scattered throughout our region, filled with "kids" having a wonderful time playing Shakspere, Albee, Shaw and whatever. At cast parties, almost none of them expresses any interest in going to Broadway or Hollywood; they are mostly software engineers or similar. Since the Philadelphia revival of interest in performing arts is so striking, it has led to ruminations about why the theater similarly flowered in Elizabethan London, at a time when there were only two theaters in Paris, by comparison. Perhaps this parallel has something to teach us about the hidden social impact of Sir Thomas Gresham and dual coinage, or Sir Francis Drake and the Armada.

But maybe, I realize for the first time, there is a flight in our direction, from New York City.

Philosophy Means Science in Philadelphia

American Philsophical Society Seal

In the age of the Enlightenment, science was called natural philosophy; that accounts for the present custom of awarding PhD. degrees in chemistry and botany. The sort of thing which interested Ralph Waldo Emerson was called moral philosophy, and you will have to visit some other place than the A.P.S. if that is what interests you. Roy E. Goodman is presently the Curator of Printed Material (some would say he was chief librarian) at the American Philosophical Society, founded in 1743 by Benjamin Franklin who was clearly the most eminent scientist of his day, having discovered and explained the nature of electricity.

Roy E. Goodman

Roy Goodman is descended from cowboys and rodeo stars, but in spite of that he gave an entertaining talk recently at the Right Angle Club about this society devoted to useful knowledge, this oldest publishing house and scholarly society in America, once the home of the U.S. Patent Office, and scientific library and museum. They have many rare items in their collection, but the unifying theme is not rarity, but curiosity. You might say some of the items reflect the whimsy of Franklin, but it would be more fair to say it is an enduring monument to Franklin's universal curiosity about all things.

Nobel Prize Medal

There are about 900 members of APS, about 800 of them Americans, about 100 of them winners of a Nobel Prize. Let's just make a little list of a very few notables in the past and present membership. Start with the first four Presidents of the United States, add Alexander Hamilton and Lafayette, David Rittenhouse and Francis Hopkinson and you get the idea that Founding Fathers got in early. Robert Fulton, Lewis and Clark, Alexander Humboldt, John Marshall were early members, and more recent ones were Madame Curie, Ruth Patrick, Margaret Mead, and Louis Pasteur. The idea of the Society seems to have come from John Bartram, who suggested it to Franklin because he knew Franklin got things done. In later years, Jonathan Rhoads for years loomed over the organization as its president, no doubt making it willingly jump through his hoop.

R.A.F. Penrose Jr.

There is so much to say about APS it might be better to end on a curious note rather than be comprehensive. A member of the rich patrician Penrose family which included the famous political boss Senator Boies Penrose, was R.A.F. Penrose, Jr, a geologist who developed huge copper mines in Utah. He obviously exploited the commodity asset class during his life, but sold all mining stock in the nineteen twenties and bought government bonds before the 1929 stock crash. When Penrose died in 1931 in the depths of the depression, he left $4 million each to the APS and the American Geological Society, with the specification that it only be invested in common stock. For those who are untutored in investing matters, let it be said that the temper of the times was that no one but a fool would buy common stock in 1931. In retrospect, it can now be seen that if someone had the courage to buy any common stock at all at the time, he would have later become immensely rich. Penrose of course did not live to gloat over his achievement, but suffice it to say the APS now owns four large buildings near Independence Hall, and does not seem to be hard up for funds. Since 2009 looks likely to resemble 1931 in its financial climate, there may be useful knowledge, there.

www.Philadelphia-Reflections.com/blog/1537.htm

The Rise and Fall of Life Insurance

Hammura

Life insurance was a comparatively late arrival on the insurance scene, and grew out of experience with maritime risk pooling. The first life insurance company was the Presbyterian Ministers Fund, a Philadelphia institution if there ever was one. Only ministers could be insured by this fund, however, and the Insurance Company of North America seems to have been the first company to sell life insurance to all comers. Even the Presbyterians would have to admit that limiting the risks to a particular occupation skirted the present tendency to regard "adverse risk de-selection" as a no-no, excluding as it undoubtedly did, women and blacks. On the other hand, the concept was totally new; no insurance at all would have been attempted if it had been impossible to limit the risk.

Insurance has spread to many other topics, but it remains true that life insurance has one central unique feature. It is absolutely certain that the customer will die, the policy will be cashed in, and the only uncertainty is when it will happen. After a while it became evident that premiums would be collected until the final date, and could be invested until it happens. When the pool of customers gets large enough, there is almost perfect predictability about the average age at death, so the bigger the company the safer it should be.

There is one great flaw in this system, lying in the fact that the person who buys the policy and receives the assurances will not be around to complain about any failures of those assurances at the time the policy is cashed in. The growth of life insurance was therefore slow until the Civil War suddenly convinced people there were unpredictable risks around. Unfortunately, abuses of the system by fly-by-night companies in the last half of the Nineteenth Century led to heavy government regulation of the industry. Philadelphia's reputation for integrity rapidly expanded its dominance of insurance, but could not prevent the heavy hand of regulation from holding it down, particularly after the Populist movement came to recognize the strategic power of the state Insurance Commissioner. The commissioner was originally charged with seeing that an insurance company did not go bankrupt by charging low-ball prices, but in time that mandate gradually changed to holding down the premiums. In the insurance capital of the country, stockholder returns and executive salaries gradually went from too fat to too thin. Insurance companies, one by one, moved to other states or at least to other counties. It is now possible to wander through the abandoned executive suites on the top floors of the former insurance palaces, and feel as though you were at Luxor, wandering through the abandoned Egyptian temples of Karnak.

To be fair about it, it is also possible to have a real estate agent take you through the former estates of life insurance entrepreneurs whose business practices amply justified a regulatory over-reaction. Plenty of old retired lawyers will be glad to tell you of the times they wrote new insurance laws for their insurance client, who just forwarded them to Harrisburg for enactment -- before the Second World War. But the destruction of the industry does no one any good, and it is surely fair to say that excessive profits were the lesser of the two evils.

Setting the regulatory risk to one side, the life expectancy of Americans has dramatically lengthened in the past century, nearly eight years in the past fifty years. Such unpredictable reduction of risk ought to lead to increased profitability for the insurer, but it also leads to a shift to less profitable term insurance. The young buyer can see a period of several decades of dependent children, followed by a long period of life when the death of the client is a less tragic future. Indeed, living too long becomes a concern, outliving the accumulated savings. When the investment manager of the company is faced with a choice of more safety or greater investment return, he must produce a mixture of the two, an impossible assignment. And so, insurance business drops off as clients wander away toward more glowing promises, or at least toward promises unconstrained by the growls of a consumer-driven insurance commissioner. During the Great Depression of the 1930s, only two life insurance companies went bankrupt, so at least the old way of running these companies produced safety. But the 1930s now seem a long time ago.

Radioactive River Bend

Gold Cert

A mile or two south of Pottstown, the Schuylkill River encounters a rocky ridge several hundred feet high, and makes a bend around it. The first Treasurer of the United States, Michael Hillegas, built a colonial mansion on the point of the bend, and it has been lovingly restored and preserved by a noted Philadelphia surgeon and his wife. Alexander Hamilton, the first Secretary of the Treasury under the Constitution, has his picture on a ten-dollar bill. So it is appropriate that Hillegas, the first Treasurer under the Articles of Confederation, had his picture on many versions of a ten-dollar gold note, back in the days when the American dollar was as good as gold. River Bend Farm is not only colonial, charming and maintained in mint condition, it is tucked away between the bend in the river and the high ridge to one side, giving it seclusion and privacy.

Unfortunately, a high ridge near a river is also an ideal place to build a nuclear power plant, and that's where the Limerick plant now looms up, glowing at night, and making humming noises all day. There's a limited-access highway from Philadelphia to Reading which swoops up the valley, and the two high cooling towers of Limerick dominate in the landscape for twenty miles. Because of the river bend, you aim straight for those towers for a long time before you swerve off, and the view is much like that from the bomber cockpit of the final scene in the movie "Dr. Strangelove". It gets your attention, but it's kind of tough on real estate values. In spite of all sorts of official resources, everybody knows about Three-Miles Island, and Chernobyl.

So, in 1981, everybody was ready to go into orbit when a worker at the nuclear plant named Watrus showed up for work, and set off all manner of clanging alarms from the radioactivity detectors. Panic and pandemonium for weeks, until a remarkable phenomenon was discovered. Watrus wasn't radioactive from the nuclear plant at all, but from having his work clothes laundered in his own basement. It slowly developed that radon gas seeps through the ground in many places in the United States, particularly over rocky ground. The gas rises into the basement of houses and gets trapped there. The more tightly the storm windows are applied and the more carefully sealed the seams of the house, the harder it is for the radon to escape. The Pennsylvania Dutchmen who live around Limerick are still a little skeptical of this story, and are not inclined to live any closer to the power plant than they have to. They are just as much in favor of oil self-sufficiency as any one else, but still, no one likes the idea of getting fried.

The big winners from all this are the people with radiation detectors, who go around the country testing people's basements for radon, for a fee. But unless you are willing to go live on the Sahara Desert, it isn't easy to see what you are going to do about it.