Manias, Panics, and Crashes: A History of Financial Crises

"None of them is exactly the same, of course. They take place at different periods, involve different instruments and different kinds of mind-sets. But each one is about people getting caught up in one sort of enthusiasm or the other. Why would a company like Merrill Lynch think that housing prices that rose in real terms by 97 per cent between 2002 and 2005 would continue to rise? Yes, in the US. The same things happened in other places too, in Britain, Spain, Ireland, and the banks said: ‘Gee, this is great.’ It was an obvious bubble. Even I could see it, so how come they couldn’t? I made a point in a half-joking way in a book once, but I think it was really right. We should look at the top five or ten investment banks that every year hire a bunch of top graduates from MIT and Harvard Business School. Then we should watch what those guys work on because that’s where the next crash is going to be. “The reason banking and finance is so risky is that it’s highly leveraged. It’s playing with borrowed money.” It’s true! It takes about five or six years but they assign the brightest guys to whatever is new and on the cutting edge and every time it gets pushed over the brink until there’s some kind of crash. Most of the time it’s a fairly modest crash. What was so strange about this one is, I think, for the first time all the regulators helped make it happen. One of the points that the Rogoff and Reinhart book, This Time It’s Different, makes is that this happens all the time and has always happened – the whole world gets caught up in the same kind of enthusiasms."

"This is written by a very learned economic historian who published treatises on the Depression and other major historical developments. It is the definitive informal history of financial bubbles and euphorias, which have done so much to shape history—whether it was the stock market bubble that preceded the Great Depression or the bubble in Japan in the late 1980s or the mania associated with tulips in Holland centuries ago. The lives of tens of millions of people are affected by these financial fluctuations and the decisions governments make about how to respond to them. Kindleberger’s book tells that story. The hope of economics—of the kind of policy embodied in the Dodd-Frank Act, or the response that the Obama Administration mounted in 2009, which produced a very different outcome in 2009 than we saw from similar antecedent circumstances in 1929—all of that says that there is no basis for fatalism. Policy choices can make a very big difference in both prevention and recovery. Get the weekly Five Books newsletter At the same time, Kindleberger’s book carries the message that, while policies may change and economic circumstances may vary, human psychology and oscillation between fear and greed are likely to always be with us. There will be a tendency, after any period when things go well for people, to become complacent and take more risks. Kindleberger’s message is that complacency can be a self-denying prophecy."

"I think people should just study economic history more carefully. What we’re seeing today has happened before — probably in a less extreme way or on a smaller scale in terms of the excesses, but it’s all happened before. Kindleberger looks at various manias that occurred in different asset classes: commodities, equities, and homes – I mean building booms – as well as John Law and the South Sea Bubble. He describes very well how these manias occur and what the symptoms are of manias in terms of excessive speculation, overleverage, borrowing, fraud, embezzlement, high trading volumes, and so forth — and then how they then end. I mean, usually you have a slump after a crisis occurs. The crisis is a symptom of the excesses of the previous boom, and then economically a slump occurs."