W. Eric Martin: Tiptoeing Through the Mortgage Crisis

Editor’s note: Dale Yu is busy with work and taking time off from his column this week (and possibly next week). In his place, I’m getting off my duff and posting a column of my own.

Scott Nicholson’s Tulipmania 1637 was supposed to debut from JKLM Games at Spiel 08, but production issues, followed by interest from other publishers in releasing the game in different languages, have delayed the game until December 2008. In case you’re not familiar with Tulipmania 1637, here’s a description from BGN’s Spiel 08 preview:

You’re a speculator in mid-17th century Netherlands who is trying to make a killing in the tulip market before that market dies off. The tulip craze that took hold in 1637-1638 is perhaps the first “bubble” market, one in which rapid inflation – with tulips selling for hundreds of times their (objective) worth – led people to believe that prices would rise forever. Since we don’t live in a tulip-based economy, you can conclude that their reasoning was faulty. The market crashed, wiping out the holdings of hundreds of amateur investors.

Your goal in Tulipmania 1637 is to be the one who bests takes advantage of the rubes (i.e. the other players), pumping up prices on different breeds, then dumping them before the market tanks.

Despite the lessons of history, the U.S. economy has been going through its own version of tulipmania over the past decade, with housing prices skyrocketing at unbelievable rates. My wife and I purchased our first house in 2000 for $165,000 and sold it five years later for $300,000. Yes, we had made some improvements to that house, but nothing that justified the near doubling of its price. That area of southeastern Massachusetts remained the same sleepy bedroom community that it was when we moved in, with no influx of retail or high tech businesses. The real difference was national, not local, as people moved their investments from tech stocks to real estate in the wake of the 2001 recession.

The 2008 U.S. presidential election saw the mortgage issue, and the subsequent collapse of various investment banks, raised in shorthanded ways through references to “Wall Street greed,” but naturally the issue is far more complicated than that, starting with the public buying things they can’t afford and the interest rates being lowered from 2000 to 2004 in the wake to the 9-11 attacks to encourage economic activity. Wall Street firms shoveled money to borrowers who wanted to purchase bigger and better houses in order to flip them to other buyers who would also be borrowing hundreds of thousands of dollars. In a fantastic article on Portfolio.com, Michael Lewis, author of Liar’s Poker, interviews analysts and accountants who were raising warning flags about the landmines being created by all this borrowing and spending. An excerpt:

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” [Ivy] Zelman, [housing-market analyst at Credit Suisse], says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. And then you coupled that with the buyers. They weren’t real buyers. They were speculators.”

“Wall Street greed” comes into play at this point. Rather than deny speculators the funds needed to pull the slot machine handle, they ponied up the funds, then converted these mortgages into bonds that others could purchase, thereby selling off much of the risk that comes from giving billions of dollars to people who might not be able to pay you back. Without that risk to hold you back, you don’t care who gets the money because you’re off the hook. Another excerpt from Lewis:

Long Beach Financial was moving money out the door as fast as it could, few questions asked, in loans built to self-destruct. It specialized in asking homeowners with bad credit and no proof of income to put no money down and defer interest payments for as long as possible. In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000.

The trickiest part of the lending fiasco was that investment banks were taking their loans – which would be rated AAA, AA, A and BBB, based on the borrowers ability to repay them – and repacking those BBB loans as trusts, with the subsequent trusts again being recarved into AAA, AA, A and BBB subdivisions. Thus the riskiest loans were being transformed into investments that looked solid – gilding the wilted lily, as it were.

What does all this mortgage history have to do with games? Well, let’s go back to Tulipmania and my first impression of the game based on one playing of the prototype:

If I had to compare Tulipmania to any other game, I’d choose Modern Art. As with that classic auction game by Reiner Knizia, Tulipmania is nothing but auctions and players initially won’t have a clue as to what they’re doing because you need to have a feel for the tulip market: how much this bulb should be worth, how far it will rise before it tanks, who’s investing in what and how much they care about what happens to the price both at this moment and down the road.

In your first play, you’re flying blind with no idea of how the market works and what the long-term consequences of your sales and purchases will mean. You can define “good” and “bad” prices at auctions only with a bit of experience.

Scott Nicholson (on left) is amused by the novices’ game play

What’s more, the price of a bulb can jump erratically depending on what others do. Each player has a set of role cards, as it were, and they each secretly choose one during an auction. Someone can win, which increases the price, or they can reveal an investor and jack the price up several levels at once. Maybe everyone will pass, and the one player who wants to tank the tulip will get to do so. The money is largely a closed system, as in Knizia’s Traumfabrik, so you have some idea of what people could possibly pay, but currency is injected at certain points to shake things up.

If you hate Modern Art and other auction-heavy games, stay far away; as for those who like that type of game, I’m curious to see their take on something that’s so similar, yet different.

Tulipmania encapsulates the mortgage crisis on a small scale. No one knows what they’re doing, not even the players of the game! With experience you’ll likely have some idea of which strings to pull when, but you’re still relying on the whims of the other investors in your tiny market. They hold the keys to your fate as much as you do, and all you can do to come out on top is read their intentions better than they can read yours. Screw or be screwed.

In his “Teaching Game Design” blog, Ian Schreiber asks, “Who is the Thomas Kinkade of game design?” He also presents the question in an SAT format:

Painting : Thomas Kinkade :: Game Design : ???

While playing this game at home, you’re invited to expand the topic in new directions: Who is the Bob Dylan of game design? Who is the Scarlett Johansson?

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