bankrupting midwestern farmers -- 7/15/19
Today's selection -- from A Brief History of Doom by Richard Vague. Enticing borrowers with no-down-payment loans is not something that just happened in the years leading up to the 2008 global financial crisis. The excerpt below tells of a similar scheme in the years leading to America's massive crisis of 1857:
"[To satisfy their voracious need for capital], clever railroad executives devised a financing method known as the railroad farm mortgage. The La Crosse & Milwaukee Railroad owners invented this deceptively simple scheme. They would approach farmers with land near the planned rail line and entice them to purchase shares of the railroad's stock with debt secured by a mortgage on their farms.
|Railroads - A Brief History of Doom by History Making Productions. Click to watch the video.|
"For the farmer the deal seemed like a no-lose proposition. It required not a dime in downpayment and no documentation other than an appraisal by a railroad agent. It foreshadowed the no-down-payment subprime loans of the Great Recession. Dividends on the railroad's stock the farmers bought covered the interest on the loan. The farmer could expect increased land values once the railroad was built and an appreciation in the value of his railroad shares as the company accelerated its operations. But railroads that marketed these schemes were not profitable, and the dividends they paid were unsustainable. It was a catastrophe waiting to happen. ...
"The La Crosse & Milwaukee and Milwaukee & Mississippi Railroads failed later in the summer, the effects reverberating through the financial networks, starting with New York banks that had invested in them. The impact then expanded outward until it reached those unfortunate Wisconsin farmers who had taken out loans collateralized by their farms to buy La Crosse stock at the urging of its agents, and now suddenly found themselves with neither a farm, because it would now be repossessed by the lender, nor railroad stock, since it was worth no more than a few pennies on the dollar."