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Product Description
Financial crises and speculative excess can be traced back to the very beginning of trade and commerce. Since its introduction in 1978, this book has charted and followed this volatile world of financial markets. Charles Kindleberger's brilliant, panoramic history revealed how financial crises follow a nature-like rhythm: they peak and purge, swell and storm. Now this newly revised and expanded Fourth Edition probes the most recent "natural disasters" of the markets -- from the difficulties in East Asia and the repercussions of the Mexican crisis to the 1992 Sterling crisis. His sharply drawn history confronts a host of key questions.

Customer Reviews: Read 41 more reviews...

4 out of 5 stars

There's nothing new under the sun, or in the world of financial chaos December 10, 2008
2 out of 2 found this review helpful

This book is compendious and at times dry but immensely illuminating. As I write this, the U.S. and the world are descending into what looks like a very ugly economic time; Manias, Panics, and Crashes will make you think it was written for this very crisis, when that's sadly the point: the same story gets recapitulated over and over again, and no one seems to learn the lesson. The latest edition came out in 2005, well before the housing bubble popped but not too long after the dot-com bubble popped. As Paul Samuelson says on the cover, "Sometime in the next five years you may kick yourself for not reading and re-reading Kindleberger's Manias, Panics, and Crashes."

Kindleberger argues, apparently following Hyman Minsky, that the business cycle largely follows the credit cycle. This sounds incredibly obvious if one is sitting in the middle of the 2008 bubble, but let's review the arc. First some external shock gives the economy a boost -- say, the rise of the Internet in the mid- to late nineties. Money rushes to fund that boom. Banks and venture capitalists loosen their purse strings perhaps more than they should. The money from the boom spills over into other markets, like real estate. Asset prices keep climbing, and people believe that they'll never come down. People buy securities with the expectation that they'll be able to sell them off in a few months, and that there will be at least one idiot after them ready to buy up their asset when they're ready to sell it. Any number of investment experts claim that we've overturned the law of gravity, and that the sky's the limit.

And then some sort of pop happens. Maybe an Enron collapses when people notice that their numbers don't make sense. Suddenly the banks that had lent them money on easy terms are taking a big hit and need to call in their loans. The customers holding those outstanding loans need to sell other assets in a hurry to make their payments. So they dump their real estate, say, at distressed prices. Property values decline. The various bubbles pop in tandem.

Now credit contracts, as banks only make loans to those they can really trust. When it gets really bad, no one trusts anyone else, and credit is entirely frozen.

Bubbles and their popping are contagious not only between classes of assets, but between nations. Kindleberger lays out any number of examples of this "contagion," with the Japanese bubble in the 80's and early 90's being maybe the most fascinating. Tokyo real estate was famously overvalued: "the chatter ... was that the market value of the land under the Imperial Palace was greater than the market value of all the real estate in California." Japan was swimming in money. That money has to go somewhere, so among other places it went to Hawaii; Hawaii is to Japan, apparently, what Florida is to New York City. When the Japanese bubble burst, so did the Hawaiian economy. And so did the economies of Indonesia and Thailand. But again, money has to go somewhere, and it's not going to stay in Asia when Asian economies tank. So it flowed to Mexico. All was well for Mexico until the Chiapas uprising and the assassination of Luis Donaldo Colosio Murrieta in 1994. On the money moved to the United States. And so on around the circle. One concern with the present crisis is that the whole world may have run out of places where the money can flow: we're all getting hit simultaneously by the credit freeze.

Kindleberger goes through the standard litany of approaches to crises like this: a central bank, deposit protection, etc. These solutions all have a standard problem, namely moral hazard: if you know you're going to get bailed out, you'll be more likely to take risks. The challenge is always to provide a backstop so that the whole system doesn't collapse, while not encouraging risky behavior. Depository banks get FDIC protection, but they all need to pay into the insurance fund. The story for investment banks doesn't seem that different: if they're going to be subject to bank runs like depository banks were, and if they leverage themselves as outlandishly as depository banks did, then they need to be regulated like depository banks are.

One important challenge is to provide this backstop internationally. If nations are increasingly interconnected, they need an increasingly interconnected response to economic crises. The International Monetary Fund and World Bank are supposed to handle this role, but everyone seems to be dissatisfied with them for reasons that I only dimly grasp.

In much of this, Kindleberger overlaps with books like Galbraith's Money: Whence It Came, Where It Went and Eichengreen's Globalizing Capital, but he's carved out a nice niche for himself. Shorter Galbraith is "An introduction to money, with special emphasis on the American and British banking systems and a hat tip to Keynesian demand-side management because that's what Galbraith's hobbyhorse appears to be." Shorter Eichengreen is "How it happened that the Western world got the gold standard, how we fell off that standard, and what happens now." Shorter Kindleberger is "A compendium of crises, one after the other, from the 1600s to now, and how no one seems to learn a thing from any of them."

Apart from policy prescriptions -- "always provide a backstop, but periodically let a bank or two fail to encourage the others" -- one of the things I take from Kindleberger is to put my money in some vehicle that yields a real annual return of 6%, then forget about it; I'm willing to make my way through bubbles getting comfortable while my friends get rich, if only so that I can remain comfortable while they get poor.

5 out of 5 stars

Second to none on the cause of financial crises November 28, 2008
1 out of 1 found this review helpful

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).

3 out of 5 stars

Relevant, but difficult to read November 19, 2008
4 out of 4 found this review helpful

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.

3 out of 5 stars

Relevant but hard to read October 1, 2008
8 out of 9 found this review helpful

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.

5 out of 5 stars

Manias, Panics, and Crashes July 7, 2008
1 out of 1 found this review helpful

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)