Our cocaine epidemic may bring a crash worse than any on Wall Street

SHOULD anyone care if people were stupid enough to pay inflated prices for property in recent years? Sure, this provided employment in the construction industry and that provided extra tax revenue.

The country never had it so good and the Government squandered millions with abandon.

It all seems so reminiscent of the Wall Street stock market crash in the 1920s. What happened there did not seem so bad to many people at the time. It was only in the following years, when the Great Depression set in, that society had to face the real crisis.

The greatest problem was the loss of confidence. President Herbert Hoover recognised that drastic action was needed, but the Democrats were not prepared to do anything until Franklin D Roosevelt took over for fear the Republicans would get the credit.

Roosevelt pushed through a rash of legislation during his first 100 days at the White House in 1933. In his inaugural address he famously said “the only thing we have to fear is fear itself”. That fear really led to a kind of paralysis. Governments toppled around the globe.

America had still not extricated itself from the Great Depression by the outbreak of the Second World War. It is therefore critical that confidence in government should not be so undermined again that it becomes virtually paralysed.

The dramatic $700 billion rescue plan proposed by President George W Bush has already run into trouble.

Greedy men were paying themselves fantastic bonuses, but now the businesses they were running are in trouble and there are many who do not agree the American people should just pick up the tab.

If huge businesses are liquidated, a great many totally innocent people could lose their life savings. They were not greedy — they were just trusting because they had faith in the system. That faith must be preserved, but to hell with the gougers.

The issue in the coming days will be whether the people in charge have learned enough to avoid the same things happening again.

We are going to hear a lot about the greedy people who paid themselves handsome bonuses on the basis of supposed profits that were little more than notional.

If somebody owns a big company and its stock keeps going up, it may seem like the person is fabulously wealthy. If he tries to sell all his stock at once, the price is likely to tumble so, in the end, the real worth is what people are willing to pay for the stock at the given time.

Part of what happened on Wall Street in 1929 was that people were allowed to buy stock on a 10% margin. That meant they only paid 10% for the stock they supposedly owned, and they owed the other 90%. When prices went up, their profits increased tenfold on paper. Those were phantom profits until the stock was actually sold.

In the Roaring Twenties when stocks were soaring, it seemed like a licence to print money. But it was a recipe for disaster. Once the value of the stock fell by 10% the purchaser was called on to pay the other 90%, or the stock was sold off and those speculators were wiped out.

That stock was dumped on the market and this sent prices into a free-fall. People who borrowed money from banks to buy stock were not in a position to repay those loans. A rumour would start that a particular bank was in trouble and people demanded their money.

Some banks that were really solvent collapsed because they could not recall their loans fast enough to meet the demands of panic-stricken customers who were terrified of losing their life savings. That is why confidence is so important.

The stockbrokers in the 1920s allowed people to buy stocks at inflated prices with just a 10% down payment. In recent years the banks extended 100% credit for people to purchase property at inflated prices. It was madness.

The Government here sought to avoid a run on our banks by guaranteeing everyone’s deposits up to €100,000. That means the vast majority of people will not have to worry if there is a run on any of our banks, at least so long as there is confidence in our system of government.

We obviously had our heads in the sand in relation to the danger of runaway credit for too long. But we are have been incubating social problems over the past three years that could be every bit as dangerous as that reckless game of fantasy finance that the banks were playing with the property markets.

This week there was a frightening report of the cocaine problems of nine out of 10 young people attending the country’s only residential drug treatment centre for adolescents. These teenagers were spending €3,500 a month on cocaine.

How many teenagers are earning so much that they can pay €42,000 a year for cocaine? Most of the young people are the children of professionals who were so busy working that they did not realise what their children were doing.

In effect, the parents unwittingly provided the seed capital for their children to buy the cocaine in the first place. Once they get hooked on it, they begin dealing to support their habit. The problem has been spreading on the same basis as pyramid selling.

As long as they can find others to buy the drug, they can support their habit relatively easily, but what will happen when their market dries up? These people are effectively slaves to the drug and they are going to get the money one way or another.

Ultimately they will steal to fund their habit, which means they will each have to steal either the money or goods worth at least three times the necessary value, which means they will each have to steal up to €126,000 worth of goods a year.

IN MANY towns and cities there are people driving around in 2008 vehicles who do not have the visible means of support to purchase them. Are they funded by cocaine money? These people are acting as the role models for gullible youngsters.

Society has not had to face the problem yet because those people are still able to fund their habit by selling cocaine to other gullible people.

The cocaine epidemic is incubating a frightening problem. And we are living in a fool’s paradise if we think that this can continue without horrific consequences.

The director of the addiction centre treating the young people said alcohol was the real gateway drug for those addicted teenagers.

For too long people have been refusing to recognise that alcohol is a dangerous, addictive drug. So should we ban it? They tried that with the introduction of prohibition in the United States in 1920. The end result was a disaster. They not only failed to block alcohol, they fuelled the growth of the gang culture and organised crime. We have, in fact, been doing the same thing in this country with our drug policies in recent years.

We need to wake up to the problem before we find ourselves in a social crisis to match the global financial crisis of recent days.