Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) | 
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Product Description
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.
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Customer Reviews:
• Manias, Panics, And Crashes 07 July, 2008
I gave this book to my grandson who is majoring at UCSD in economics. He has not had any course yet covering the history of financial crashes, etc. and finds it fascinating to compare past times with the present economic slowdown. Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics)
- Reviewed by customer ID: A10WB6ADLSMSP5
• Presents A Correct Analysis But Should Have Devoted Some More Time To The Warnings Of Smith And Keynes-4 .5 Stars 01 June, 2008
Kindleberger does a great job of demonstrating what the root cause of economic downturns is.The process starts as bubbles of speculation on a sea of enterprise and entrepreneurship as pointed out by Keynes.However,as time passes the bankers decide to shift loans to speculators as well as starting to engage in speculation themselves.The situation changes as one observes a sea of speculation with few bubbles of enterprise floating on top.This sets the stage for the bubble to start growing with the finance coming from the bankers who fuel the expansion in the bubble.This leads to the mania stage.All it takes here is for some tiny liquidity disruption to set off a panic of selling which leads to the Crash as various participants discover that their paper wealth has evaporated ,leaving them with crushing debt loans as their debt leveraging and margin account financing now becomes an albatross around their necks.The end result is various bankruptcies and defaults and a recession or depression.
Kindleberger shows how this pattern occurs over and over again in history.Unfortunately,Kindleberger fails to provide the reader with a simplified summary from the earlier work of Adam Smith and J M Keynes that explains the crucial steps involved in inflating,but not creating, the bubble-(a)loans from the commercial bankers to loanees whom the bank knows for certain are going to be engaged in speculative behavior and (b)the decision by the banks themselves to enter the market as active speculators.It is true that the bubbles themseves start irrespective of the banking system since individuals are free to engage in speculative finance with their own money and assets.However,the bubbles could not grow and expand over time if the bankers refused to allow the speculators to leverage their debt position by obtaining extensive lines of credit from the bankers to expand their debt positions.
Everyone who reads this book should also read pp.290-340 of The Wealth of Nations[1776;Modern Library(Cannan)edition]and chapters 12 and 22 of The General Theory of Employment,Interest and Money(1936).Keynes proves mathematically that it is uncertainty and speculation(the speculative demand for money) that cause involuntary unemployment in chapter 21 on pp.305-306.The neoclassical(monetarism,rational expectations,real business cycles,etc.) schools must,therefore ,deny that there is anything called uncertainty or ignorance;there is only risk, which is represented by the standard deviation sigma.Similarly ,they must deny that there is any significant speculative demand for money;there is only a transactions demand for money.Kindleberger essentially demonstates that the neoclassical schools have absolutely no historical support.This also means that there would be no statistical support for their claims that the normal probability distribution is applicable to a wide range of industrial and financial markets.Kindleberger, as well as the new coauthors of this latest edition, overlooked the immense support that Kindleberger could have used to buttress his overwhelming historical evidence that has been madee available by Benoit Mandelbrot. Benoit Mandelbrot has presented massive amounts of statistical evidence, for over 50 years ,demonstrating that the neoclassical school's claims about the normal distribution do not have a shred of evidence to support them.It should not be surprising to discover that NO neoclassical economist in the 20th or 21st century has ever done a single goodness of fit test on the various time series data sets in order to supply support for their claims that price changes in all markets are normally distributed over time.
I recommend this book .It will allow a reader to understand the negatives that could very well happen in the 2008-2010 time period.Ben Bernanke's 1.2 trillion dollar banker and Wall Street bailout,from August,2007-May,2008, has merely delayed the inevitable while creating massive new bubbles in oil and commodities and driving the value of the dollar to new lows.Bernanke has merely substituted future stagflation for recession.
- Reviewed by customer ID: A1UI9T8WKJPZN5
• Relevant But Hard To Read 01 October, 2008
I am no economist and just an interested general reader. I expected to read narratives about past financial crises and how they played out. But this book is not organized that way. It doesn't tell any story from start to finish. Instead it references lots of different crises in a kind of shorthand way, without giving the background or the overall narrative.
Many of the references are pretty darn obscure, at least to me. So fine, if he's talking about how a certain phenomenon works and he says, "as in 1932," or "as in the S&L crisis," I'm with him. But when he says, "just as in the 1762 case in Belgium" (made up example)--well, my eyes start to glaze over, because he hasn't told me the story of 1762 Belgium, but referenced it as if it should be as familiar to me as the Great Depression in the US.
I also think there's something wrong with the writing style. He seems not to start out with topic sentences that show us where he's going, or to end with a summing up of the significance of what he's just said. Certain details recur within a few pages of each other. The effect is pretty scatter-shot, as if it was not carefully edited and made to flow.
There is plenty of raw material here for anyone watching our current economic crisis and wondering how it happened, but you have to work for it. What I get from it is that in certain circumstances, if everyone does what seems best to him or her in the market, the end result will be disaster for all. It's not really irrational to buy when prices are increasing by the day, because huge profits can indeed be made. But the more people that make that individually rational choice, the more irrational the whole thing becomes.
Maybe I could compare it to a stampede to an exit door in a fire. Each person's individual best choice is to get out as quickly as possible. But if you allow that psychological reality to play out, you might have people trampled to death at the door who then block everyone else from escaping.
Reading this was like listening to a rather elderly professor of history who is intimately familiar with many obscure incidents, but doesn't provide the context for his young students to follow his train of thought.
- Reviewed by customer ID: A1157CR0T5UM9D
• Relevant, But Difficult To Read 19 November, 2008
There is a wealth of great information and insight in this book, but it is organized in a manner that reduces interest and readability. The authors make points and then provide examples from several financial crises, with the result that almost every single page covers multiple events but you never really get a full picture of those events. It is incredibly relevant to the current (2008) crisis, so it is unfortunate the book isn't organized better.
- Reviewed by customer ID: A3DQ04TVLOGE4Q
• Second To None On The Cause Of Financial Crises 28 November, 2008
Kindleberger who passed away before the current financial crisis wrote the best book I have read on financial crises. His analysis of boom and bust cycle is prescient. It is much superior to Morris' still excellent The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash and Shiller's mediocre The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It.
Kindleberger thesis is that manias and panics result from the pro-cyclical changes in credit following the Hyman Minsky model. Credit expands during economic booms as creditors compete for market share. Credit expansions fuel asset bubbles. At a turning point, leveraged speculative borrowers can't service their debt and have to liquidate their collateral (dubbed "Minsky Moment"). Asset bubbles burst. Economy slows down. Credit contracts as creditors struggle for survival. Thus, financial systems are prone to financial crisis.
Minsky defined three states of financial deterioration: a) hedge finance (borrower can repay both principal and interest); b) speculative finance (borrower can repay only interest); and c) Ponzi finance (borrower relies on asset appreciation to refinance debt servicing). Bubbles eventually burst as leveraged investors experience a "negative carry" on their investments, and stocks and housing markets crash. Borrowers default (Ponzi finance) and banks fail. Credit tightens exacerbating the crash.
The Minsky model is scalable. When homeowners (current housing crisis) and developing countries (LDC debt crisis) could not refinance their interest payments with new loans (Ponzi finance), the crisis ignited. The author uncovers other examples of Ponzi finance. These include Japanese real estate borrowers in the 80s, the S&L industry that became insolvent when rates were deregulated in early 80s, and the junk bond issuers of the 80s.
Financial crises are frequent and massive. The 90s witnessed many real estate bubbles that rendered banking systems insolvent in Japan, Finland, Norway, and Sweden. Banks wrote down over 20% of their assets. Deposit guarantee claims exceeded 15% of GDP. In 2001, the Argentinian bank crisis costs 50% of GDP.
Crisis can be lengthy. The Japanese asset bubble deflated the economy for two decades. During the Asian crisis, Hong Kong suffered deflation for 6 years.
He indicates how asset bubbles are sequential as they flow from one country to another. As Japan's asset bubbles in the 80s deflated in the early 90s, international flows left Japan for Thailand and Malaysia. When those countries' bubbles burst in the mid 90s, the funds flows went to the U.S. causing a stock bubble in the late 90s. In Asian countries, bubbles in real estate and stocks often occurred together. But, bubbles can move from one asset class to another. Greenspan lowered U.S. rates to 1% to shore up the economy after the 2001 recession associated with the dot.com bubble. The resulting low ARMs rates contributed to the housing bubble. He also mentions that international stock markets are highly correlated whenever crashes occur. International diversification does not work.
Asset price bubbles are triggered by economic "displacements." In Japan and Scandinavia in the 80s and 90s it was financial deregulation. Other displacements included financial innovations such as derivatives and securitization and technological innovations such as railroad, automobile, aircraft, and the computer.
Kindleberger describes the two stages of manias. The first one is rational exuberance lead by insiders who leverage the positive implication of displacements. The second stage is euphoria when insiders sell out to naive outsiders at the peak. Vulnerable speculators rely on false assumptions. Lenders to the oil sector in the late 70s assumed crude oil prices were headed to $90 by 1990 leading eventually to a housing and banking crisis in Texas in the 80s when such oil prices did not materialize. During the 1970s LDC debt crisis, banks accelerated lending to governments assuming governments don't default.
When Kindleberger analyzes the Great Depression. He notes that the speed of the money supply contraction was far slower than contraction of industrial production. The instant freezing of the credit markets resulting from the stock market crash provides a better explanation of the Great Depression.
Kindleberger indicates central bankers most often avoid pricking asset bubbles. Addressing asset bubbles causes a policy paradox: should they raise interest rates to preempt an asset bubble at the risk of throwing the economy into a recession? The one example of Yasuki Mieno, Governor of the Bank of Japan in 1990 who did prick an asset bubble is discouraging as he triggered two decades of deflation (average GDP growth < 1%).
Chapter 10 addresses whether Governments should intervene when bubble burst to preserve the financial system. Or do they create a moral hazard by doing so. He refers to Hoover and his Secretary of the Treasury as proponents of the "leave-it-alone liquidation" position. The rest is history. Their restrictive fiscal policies contributed to turning a recession into the Great Depression. History indicates that even when Government authorities did not intend to intervene at first, they eventually had to anyway. The Great Depression is an example. Hoover played tough and caused a disaster that FDR had to counter when he came in office.
Chapter 11 focuses on the issue of a domestic lender of last resort as a means to resolve crashes. Such a lender is to halt the debt-deflation downward price spiral on affected real and illiquid financial assets. There is a chronic debate whether the most appropriate lender of last resort is a nation's Central Bank or its Treasury. The Central Bank can readily create money. But, the Treasury can implement nearly equivalent Keynesian fiscal stimuli. Chapter 12 focuses on international lenders of last resorts that include the IMF, the World Bank, the Asian Development Bank, and ad hoc bilateral commitments between countries such as the ones between the U.S. and Mexico. These international lenders of last resort have provided financial assistance to the countries affected during the Asian crisis in the late 90s and the Mexican crisis in 1994.
All around this is an outstanding book. If you want to study this subject further, I also suggest Minsky's Stabilizing an Unstable Economy and The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy (Vintage).
- Reviewed by customer ID: A2PEVP36Y5A2EQ
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