The subject of the 1930s Dust Bowl came up and it got me to thinking: say that you’re an Oklahoma Panhandle farmer in 1932, and you have a psychic vision of the coming years. You can’t sell your farm because it’s mortgaged to the bank, but you know there are years coming in which it will be utterly futile to try to bring in a crop. Armed with that knowledge what could you do?
Would the farm loans of the time allow your cashing out your equity in the farm? Could you somehow “sell short” in agriculture futures? Maybe borrow more money from the bank if you can, spend it feeding your family instead of using it to plant, then let them foreclose on your worthless patch of dust? Note that the nation is sliding into the Great Depression, so it isn’t likely that money is easy to come by. Is there any way you could sell some sucker a pig in a poke?
from wiki:
In 1864, in the United States, wheat, corn, cattle, and pigs were widely traded using standard instruments on the Chicago Board of Trade (CBOT), the world’s oldest futures and options exchange. Other food commodities were added to the Commodity Exchange Act and traded through CBOT in the 1930s and 1940s, expanding the list from grains to include rice, mill feeds, butter, eggs, Irish potatoes and soybeans.
Can this be done today? I suppose one could try to reorganize their farm as a corporation and sell stock to naive investors who you hope will be left with worthless shares of a bankrupt farm, but is there a reasonably standard process or market for this, or would everyone pretty well know that you are doing something odd and unusual (and thus might know something they don’t), scaring off investors? One might think that it would be an Insider Trading violation, but presumably you are making your choice based on your own hunch and/or information (e.g. weather forecasts, the smell of the air, etc.) that other people have access to as well.
Can you do something like this with respect to other personal ventures or circumstances? E.g. can I (legally) make money betting that I won’t get in to a doctoral program? How about making money betting that I will lose my job sometime in the next year? Make money betting that I will get AIDS? Health insurance is about compensating me (at least partially) for my health costs - I’m talking about something like getting handed an AIDS diagnosis and laughing all the way to the bank to deposit all the money I made short-selling shares in my health to conspiracy-theorist AIDS naysayers.
Couldn’t you just set yourself up as a limited liability company, re-mortgage the farm to the hilt based on past returns, then have the company set up an income guarantee trust, malpractice insurance, buy you a car, rent you a house and office in town prepaid for 5 years, pay yourself, the wife and the kids major salaries, etc and do all the normal things that company owners do?
Because the farm has been functioning well, there would be no reason for a lender not to allow you to mortgage to the hilt.
When the farm goes belly up, it won’t be in any way attributable to your mismanagement and you get to walk away with several years worth of very good salary, plus the proceeds of the income trust, several years free rent etc.
These sorts of financial shenanigans are normal in the modern world, and I assume have been for 100 years or more. They are normally a bit risky, because if the benefits paid by the company (you) to the manager and staff (you and your family) are high, then it will be investigated when the company goes under. However when every similar business within a thousand miles has gone under, nobody will bother chasing too hard for the money because no judge or jury is likely to find that mismanagement was a major contribution to the failure.
The bank will gladly take the proceeds of the malpractice insurance and walk away. You walk away with 5 years free rent, your family’s salary savings, the car and the proceeds of the trust.
You can do all that quite easily. You can insure yourself for a bajillion dollars for something as unlikely as AIDS for a hundreds bucks a year. The insurance company gladly takes these bets because they contain clauses that you can’t be negligent in a manner that gives you AIDS. So the odds of them having to pay out is minimal and you will end up paying far more into the account then yo ever get back.
Being psychic, you make money because you know that the probability of you getting AIDS is 100%, while the insurance company is working on odds of one in a million.
The idea of running an unsustainable business is the same. Anybody can do that sort of thing any time they like. However normally you’d end up running the farm into the ground over 15 years, losing the farm to the bank despite paying interest for 15 years, and then being held liable because you mismanagement caused the farm to fail when all the neighbours did not.
Being psychic, you can game the system because you know that you can only be expected to pay interest for, say, 3 years, before three drought hits. And you know that when it hits, all farms will go broke at the same time. You know that you can’t be held accountable for a major drought, and nobody can say that you set up a trust finding guaranteeing income in the event of drought knowing that a drought would hit.
[QUOTE=Lumpy;18673260 You can’t sell your farm because it’s mortgaged to the bank[/QUOTE]
Off topic I guess, but you mean “won’t get any money from selling your farm because it’s mortgaged to the bacnk”? ’ Cause people sell mortgaged farms all the time.
Something like that; the main point was that in the hypothetical you can’t cash out and run, unless the bank will buy out your equity, but in 1932 that doesn’t sound likely. Also, I don’t know whether farm mortgages then were often “balloon” mortgages where you only paid the yearly interest and then the principal was due in a lump sum- i.e., you had no equity per se.
You could refinance the farm if you could find someone willing to lend you more than you already owe. But the loans at the time were, so far as I know, full recourse. If you defaulted, the lender could come after your other assets. However, if the farm still had enough equity to borrow against, you could just sell the farm to next aspiring farmer and keep the equity after repaying your loan.
You could sell short agricultural futures but crop failures generally lead to commodity shortages and high prices. Without knowing about commodity prices in the 1930s, I would have assumed that the dust bowl would have caused increased commodity prices. So if you thought that crops failures were imminent, you would probably want to go long on futures. But, in fact, global commodity gluts sometimes caused dropping prices in the U.S. at the same time that local crops were failing. The going long on futures strategy might have caused you to lose money twice as fast.