The Risk That Built America
Speculation isn’t a bug in America’s economic code, but a crucial component part of the engine, writes Andrew Ross Sorkin.
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Good morning, Andrew here. I’m in Los Angeles today on a book tour for “1929.” As I was writing the book, there was always an essay I wanted to write about a counterintuitive thought that’ had been rattling around in my head for years. I imagine it may prove to be an unpopular idea to some of you and perhaps be applauded by others. I find myself usually preaching caution; the essay below is slightly counter to that. I hope it provides some food for thought — the things I enjoy reading most are the ones that make me think, sometimes a bit uncomfortably. Please let me know what you think. (Was this newsletter forwarded to you? Sign up here.)
Speculation as engine
When people speak of the 1929 crash, they often speak of sin, greed, hubris, irrational exuberance. They talk about bucket shops and stock pools, ticker tape and margin calls. At the heart of their indignation, always, is speculation.
The popular narrative of that era goes like this: America lost its head, bet its future on the roulette wheel of Wall Street and paid the price with blood and bread lines. It’s a neat morality play, and it isn’t wrong.
Still, it misses something essential: Speculation didn’t destroy America. Speculation built America.
That may sound heretical, especially since we’ve just emerged from previous speculative manias — the GameStop trading frenzy, crypto, NFT absurdities, SPACs gone awry — only to end up in one of the potentially biggest in decades, the A.I. boom.
My point is not that investors should embrace the latest whims of the market without caution or guardrails. But if we’re honest, speculation isn’t some bug in America’s economic code. It’s a crucial component part of the engine. And it always has been.
I’ve spent nearly a decade studying the crash for my new book, “1929: The Greatest Crash in Wall Street History — and How it Shattered a Nation.” The men (and they were mostly men) of the era understood this viscerally. Charles Mitchell of the National City Bank, the most powerful financier of his era, believed that democratizing investment was essential to national progress. John J. Raskob, who masterminded the Empire State Building, was famous for saying that every American could become rich by investing $15 a week in stocks. They believed American capitalism was entering a new phase, powered by the masses.
They were wrong about many things: how much leverage was safe; how markets behave under stress; what happens when charlatans, including some running these institutions, manipulate the system.
But they weren’t wrong about the importance of speculation.
Speculation is often caricatured as gambling. But at its core, it is belief plus risk. It is the act of investing capital in a highly uncertain outcome, hoping for reward.
That means more than just buying meme stocks. It encompasses building skyscrapers, funding R&D, writing books, shooting movies and, yes, building or backing start-ups that might fail.
There is no innovation without speculation. No electric vehicles, no Covid vaccines, no OpenAI. No Amazon, Tesla, SpaceX or Moderna. No railroads in the 19th century or internet in the 21st. Every one of those started with a bet — sometimes one that seemed absurd at the time.
That doesn’t mean speculation is always virtuous. It can be reckless. It can be fraudulent. And when too many people speculate with borrowed money or in environments with no transparency, it can be catastrophic. That was what happened in 1929.
And it’s why, after 1929, we didn’t abandon speculation. We regulated it. The creation of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, margin rules, disclosure requirements — these weren’t meant to stop risk-taking. They were designed to make it less toxic. They’ve mostly worked. (Though yes, they could still be improved upon.) The American Century followed.
Risk and reward are closely tied. So are speculation and disappointment. You don’t get one without the other.
The men of 1929 had a brash, sometimes dangerous optimism. They believed in building, and they wanted everyone in. This optimism, on its own, wasn’t the problem.
The lesson of 1929 is not “don’t speculate.” The lesson is: Speculate responsibly.
IN CASE YOU MISSED IT
Credit worries whipsawed the markets. Shares in Zions Bancorp and Western Alliance Bancorp plunged on Thursday — only to rebound yesterday — after the regional lenders disclosed their exposure to what they said was fraud by borrowers. The banks didn’t lose much, but it ignited fears of a potential wider pullback in a yearslong credit boom. Jamie Dimon, the C.E.O. of JPMorgan Chase, summed up the concern, warning: “When you see one cockroach, there are probably more.”
President Trump appeared to backtrack on China-focused tariffs. The president told Fox Business Network yesterday that his latest threat of 100 percent tariffs on China was “not sustainable,” comments that soothed investors’ concerns. Still, negotiations between the nations appear deadlocked as a November deadline looms to prevent bruising tariffs from going into effect. All eyes will be on a potential meeting between Trump and President Xi Jinping of China later this month in South Korea.
Salesforce came under fire for pitching ICE. The Times obtained screenshots of internal documents and communications about the company’s proposal to use its artificial intelligence tools to help Immigration and Customs Enforcement staff up. (Salesforce also contracted with ICE during the Obama and Biden administrations.) That added to furor over comments Marc Benioff, its C.E.O., made in support of the national guard deploying in San Francisco, which prompted the venture capitalist Ron Conway to resign from the board of Salesforce’s philanthropic arm. (Benioff has since apologized.)
More big deals: The U.S. Chamber of Commerce sued the Trump administration over the new $100,000 fee for H-1B visas. Big banks reported strong results for the third quarter. OpenAI will design chips with Broadcom. And the carmaker Stellantis said it would invest $13 billion to bolster its manufacturing in the U.S.
A new look at the oldest financial asset
Unlike most financial assets, land doesn’t move, depreciate or multiply.
Those unique qualities make it ideal collateral, and explain why it has become the linchpin of the global financial system, writes Mike Bird, the Wall Street editor for The Economist, in his upcoming book, “The Land Trap.”
Bird talked with DealBook’s Sarah Kessler about how land drives booms, busts and inequality around the world. The interview has been condensed and edited.
What is a land trap?
If land prices are really high, there is an extraordinary danger whether they go up or down.
If they go up, to some extent that’s good. It means things are probably going quite well for the city. But it exacerbates inequality. Rents go up. Lots of people are getting a fairly large windfall they did nothing in particular to deserve.
If land prices go down, that releases some of the inequality. But the vast majority of credit issued by banks is secured against land in the form of mortgages. And you can get these really damaging, devastating financial crises.
How did the Great Depression help set this sort of trap in the U. S.?
It put a sort of rocket booster on the interest of the federal government to incentivize homeownership, land ownership.
I think it would have been very hard to explain to a policymaker in the middle of the Great Depression that, in the future, house prices would be too high in some parts of the country. But I do think the roots of the problem partly lie in that endless stream of subsidies and assistance and promotion of homeownership, which has made it very advantageous to own land as an asset relative to a lot of others.
A lot of people have a really strong interest in the value of their homes going up, understandably. But everyone also wants to achieve easy access to home ownership.
You can’t have both of these things.
You write that the U.S. is relatively less constrained by land, partly because of robust capital markets that offer other options for financing and investments. That’s much less true in China, which, you write, largely borrowed the roots of its housing market problems from Hong Kong. What made both Hong Kong and China so vulnerable?
The Hong Kong government owns all of the land in Hong Kong. And it has since it was founded as a crown colony in the British Empire. It was a very useful way of financing things for the British Empire because it meant the colonies didn’t need subsidizing from London.
This was copied wholesale by Chinese cities in the late 1980s and then even more aggressively in the 1990s as their main way of financing themselves.
And the problems that you see in Hong Kong are, to some extent, the problems you see emerging in China, with extraordinary real estate prices and with everything hooked up very considerably to land prices — because the local governments struggled to finance themselves without being able to make these land deals.
You set up a contrast between Hong Kong and Singapore, which inherited similar land financing systems from their time as British colonies. One has some of the most expensive housing in the world, and the other some of the most affordable. Why?
Lee Kuan Yew, the first Prime Minister of Singapore, passed something called the Land Acquisition Act, which effectively allowed the Singaporean government to buy privately held land at massively cut down rates.
What they do with that land is provide homes. If you’re a Singaporean citizen, you can buy one of these homes at extraordinarily low interest rates. If you are on a low income, you get a grant to cover the deposit. You can’t own multiple homes and rent some of them out, which prevents a lot of competition.
It’s not a market in housing, as Westerners would understand it, and it’s not social housing, as Westerners would understand it. People can sell and exchange the homes, but they’ve ended up with a system that promoted homeownership in an extraordinary way.
The idea of a “single tax,” which gained traction in the late 19th century, before homeownership was widespread, aimed to stunt speculation by taxing land at 100 percent of its rental value, but exempting anything the owner did to improve the land. That route, like the Singaporean model, doesn’t seem feasible in today’s developed economies. What is there to learn from those examples?
Developing countries that really haven’t started to access the value of their land can probably learn quite a lot from Singapore.
In the long term, while the “single tax” is very likely not going to fly in countries where 60 percent of people or more own their own homes, we will have to seriously think about how to tilt the tax system in a number of developed economies more toward land, because it’s a huge opportunity as well as a more egalitarian one. It would probably be through increasing property taxes with various credits and discounts for the buildings actually on top of them.
It can’t be done very easily, which is why it’s a trap.
Quiz: Silver surge
Silver futures reached record prices for the first time since 1980 on Monday (and retreated on Friday). The precious metal has surged in recent weeks just like it’s more expensive cousin, gold, but the market dynamics are different.
As with gold, investors are seeking silver as a safe haven. As tensions between the U.S. and China grow, interest rates fall and some worry about U.S. credit quality. But silver also has more practical uses than gold. While the safe haven aspect seems to be driving the recent silver rally, said Philip Newman, the managing director of the precious metals consultancy Metals Focus, “industrial demand has added pressure in terms of the availability of silver.”
Your challenge: Sort the following uses for silver from the one that created the most demand in 2024 to the one that created the least demand, according to estimates by Metals Focus for the The Silver Institute, an industry group.
A. Photovoltaics (used in solar panels)
B. All other electrical and electronics
C. Photography
D. Jewelry
E. Silverware
F. Coins and bars
Quiz answer: B, D, A, F, E, C.
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Andrew Ross Sorkin is a columnist and the founder of DealBook, the flagship business and policy newsletter at The Times and an annual conference.