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Manias, Panics, and Crashes, Fifth Edition is an engaging and entertaining account of the way that mismanagement of money and credit has led to financial explosions over the centuries. Covering such topics as the history and anatomy of crises, speculative manias, and the lender of last resort, this book puts the turbulence of the financial world in perspective. The updated fifth edition expands upon each chapter, and includes two new chapters focusing on significant financial crises of the last fifteen years.
An update of his classic 1978 history of financial crises to include the October 1987 New York Stock Exchange meltdown and the continuing debt crisis.
Noted economist Charles P. Kindleberger wrote MANIAS back in 1978 and has been updating it ever since. It's a case study of all the great financial disasters of the last few hundred years. From the Dutch Tulipmania of 1637 -- in which tulip bulbs were eventually valued more than gold -- to the crash of 1987, learn what was done about them at the time, their aftermath, and how knowing about market behavior in times of crisis can help you.
These excerpts deal with two issues: The prime reasons for crashes -- overtrading (too many shares in play at once), and who can be called to save the day during a crisis: the lender of last resort.
Now overtrading is by no means a clear concept. It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive "gearing." Pure speculation, of course, involves buying for resale rather than use in the case of commodities, or for resale rather than income in the case of financial assets. Overestimation of profits comes from euphoria, affects firms engaged in the productive and distributive processes, and requires no explanation. Excessive gearing arises from cash requirements which are low relative both to the prevailing price of a good or asset and to possible changes in its price. It means buying on margin, or by installments, under circumstances in which one can sell the asset and transfer with it the obligation to make future payments.
As firms or households see others making profits from speculative purchases and resales, they tend to follow: "Monkey see, monkey do." In my talks about financial crisis over the last decade, I have polished one line that always gets a nervous laugh: "There is nothing so disturbing to one's well-being and judgment as to see a friend get rich." When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior to what has been described as "manias" or "bubbles." The word mania emphasizes the irrationality; bubble foreshadows the bursting. In the technical language of some economists, a bubble is any deviation from "fundamentals," whether up or down, leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values (as prices) are called "noise." In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.
From Chapter 10: The Lender of Last Resort
The lender of last resort stands ready to halt a run out of real and illiquid financial assets into money by making more money available. How much? To whom? On what terms? When? These constitute some of the dilemmas of the lender of last resort, after it is determined, first, that there should be one, and second, who it should be....
The experience of the United States is especially pertinent to the questions: Who is the lender of last resort, and how does it or he know it? Under the First and Second Banks of the United States there was some ambiguity, despite the designation of the Bank in each case as a chosen instrument. On various occasions, the Treasury came to the aid of the banks by accepting customs receipts in postdated 30-day notes (1792), by making special deposits of government funds in banks in trouble (1801, 1818, and 1819), and by relaxing the requirement of a commercial bank to pay the Bank of the United States in specie (1801).
With the failure to renew the charter of the Second Bank of the United States in 1833, the Treasury was even busier, both before and after passage of the 1845 law requiring the Treasury to keep funds out of the banks. In times of crisis, and in periods of stringency caused by crop movements, the Treasury would pay interest and/or principal on its debt in advance, make deposits in banks despite the law, offer to accept securities other than government bonds as collateral for deposits of government funds, or buy and sell gold and silver. Banks became accustomed to looking to the secretary of the Treasury for help in an emergency, and for relieving seasonal tightness. In the fall of 1872, Secretary of the Treasury George S. Boutwell served as a lender of last resort by the possibly illegal method of reissuing retired greenbacks. His successor, William A. Richardson, did the same thing a year later.
The Treasury could absorb money in deposits and pay out surpluses from existing funds, but apart from the greenback period it could not create money. For this reason, it was unsatisfactory as a lender of last resort, unless it had previously accumulated a budget surplus. In 1907, when the till was low, the Treasury issued new bonds -- $50 million of Panama Canal bonds, which were eligible for collateral for national bank notes, and $100 million of 3 percent certificates of indebtedness -- hoping to entice existing cash and specie out of hoarding. In the end, the day was saved by a capital inflow from Britain of more than $100 million. Moreover, the devices used were ad hoc in the extreme. An analysis of the crisis of 1857 suggests that the federal government was incapable of intervening effectively, and that the public, including the banks, was left without guidance to stem the tide of the crisis. As we shall see, it was worse than that: intervention proved to be too much and too early.
Copyright 1978 Charles P. Kindleberger. Rights secured from John Wiley & Sons, Inc.
Foreword by Robert M. Solow.
1. Financial Crisis: A Hardy Perennial.
2. Anatomy of a Typical Crisis.
3. Speculative Manias.
4. Fueling them Flames: The Expansion of Credit.
5. The Critical Stage.
6. Euphoria and Economic Booms.
7. International Contagion.
8. Bubble Contagion: Tokyo to Bangkok to New York.
9. Frauds, Swindles, and the Credit Cycle.
10. Policy Responses: Letting It Burn Out, and Other Devices.
11. The Domestic Lender of Last Resort.
12. The International Lender of Last Resort.
13. The Lessons of History and the Most Tumultuous Decades.
Posted August 15, 2006
This book is extremely well written, however, the title is somewhat deceptive. Looking at the title, one would assume that the author probably takes you on a stroll through a chronological history of the primary financial world crises (at least at some point in the book). However, this is not how the book is written. Instead the book covers the panics in more of a topical method, which makes it hard for the novice in economics to get a lot out of this book. The author assumes that you know the basics about the major world crises and references them the way a senior college art text would jump around referring to different artists while making points about painting styles. I had hoped to learn a lot about the great financial crises in history, what caused them, and how the public and the governing bodies reacted to them. Instead, I felt like I got a lot of unrelated information thrown at me in a way I could not digest. Don't misunderstand me - if you already know a lot about the history of economics, you may get a lot out of the book. On the other hand, if you're looking for a historical primer on the subject - this probably isn't the right book for you.
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Posted April 28, 2001
If you are interested in how Alan Greenspan will probably handle the financial weakness that follows the year 2000 collapse of the Internet stocks, this book is a good guide. Chairman Greenspan is basically a follower of Professor Kindleberger. Both believe that pragmatic, flexible activism by the Federal Reserve can shorten up the pain from financial excesses. Those who are interested in the psychology of financial markets are often drawn to Professor Kindleberger's book after reading Charles MacKay's classic, Memoirs of Extraordinary Delusions and the Madness of Crowds. In this new edition, Professor Kindleberger has added useful perspectives on the Mexican and Asian financial crises of the 1990s and adjusted his interpretation to allow for more differentiation among crises than he did before. I found this edition by far the most satisfying of the four he has written. Professor Kindleberger is one of the few remaining literary economists, those who make their points in essays rather than through long equations that depend on questionable assumptions. This makes his work very accessible, even though it is as rigorous as it can possibly be while still remaining a popular work. If you believe in efficient markets or the overriding importance of macroeconomics, you will be angered and annoyed by this book. Milton Friedman and John Maynard Keynes each take their shots here, although in polite ways. As Peter L. Bernstein summarizes nicely in his introduction, Professor Kindleberger's argument boils down to four principles: (1) Irrational behavior does occur from time to time in financial markets. (2) There is a general, repeatable pattern in how this irrational behavior plays out (a positive economic displacement is followed by euphoria that takes the form of overtrading, then distress following revulsion, discredit by lenders in the overtraded assets, and then panic leading possibly to a crash brought on by those who bought high). (3) The economic system needs a lender of last resort to step in at the right time and in the right way to restore confidence and liquidity. (4) Trying to solve these problems by being doctrinaire is 'wrong . . . and dangerous.' Chapter one looks at how financial crises often accompany peaks in the economic cycle. Chapter two looks at the patterns of typical crises, described by 'lumping' them together. Chapter three considers how speculative mania are begun by knowledgable insiders who then unload on overoptimistic outsiders who buy high and sell low. This chapter looks at how the crises differ from one another. Chapter four shows how either excess credit or too fast monetary expansion adds fuel to the flames. Chapter five considers the frequent association of swindles with these manias. Chapter six looks at the psychological stages of the whole process in more detail. Of central importance is the discomfort that many feel as they see a neighbor or friend become wealthy. Chapter seven looks at how the economic impact spreads to other domestic markets. Chapter eight looks at the transference to other international markets. Chapter nine looks at the pros and cons of trying to let
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Posted December 9, 2002
This book goes through the economic history of our country. This book gets very wordy at times and goes into almost too much needless detail, but can be very informative. Kindleberger shows us that bad behavior can happen even now on the economic market, and that there is a definable parren to economic crises. Chapter one talks about how economic lows usually follow peaks in our economy. Chapter two discusses the patterns of a crisis. Chapter three compares crises and describe how they differ. Chapter four says that bad credit adds to the problems.Chapter five discusses those who help add to the problems of a crisis. Chapter six looks at the feelings of people as they make and lose money. Chapter seven deals with economies effects domestically and chapter eight internationally. Chapter nine talks about the good and bad of trying to let the problems fix themselves and chapter ten discusses the leaders of the economy. Although going into great detail, almost too much detail at times, it proves informative in the end. Three stars.Was this review helpful? Yes NoThank you for your feedback. Report this reviewThank you, this review has been flagged.
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