Astute commenters and emailers responded to a previous post by pointing out that financial panics where individual actions generate systemic risk have been with us for a long time. People in particular mentioned the panic of 1825, so I went and looked it up. The wikipedia entry begins, "The Panic of 1825 was a stock market crash that started in the Bank of England arising in part out of speculative investments in Latin America, including in the fabled imaginary country of Poyais."
Wait, so the Bank of England nearly collapsed because of people investing in an imaginary country? Well, yeah, it looks like that's basically what happened.
Wow fascinating story. I love that MacGregor was finally done in not by government regulators, but by other people catching on enough that thy offered even CHEAPER investments in Poyais.
Yeah, the potential for fictional country arbitrage was just waiting to be realized.
See this fascinating sidebar to history at Brad Delong's. EM Forester owed his financial independence to a key player in the Panic of 1825
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