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A Short History of Financial Euphoria (Penguin business)
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49 of 50 people found the following review helpful
on July 2, 2001
Format: Paperback
IN THIS SMALL but witty and well-crafted book, Galbraith chronicles the major speculative episodes, from the seventeenth-century tulipmania to the junk-bond follies of the eighties. The book was first published in 1990 and thus the recent dotcom-bubble burst is not covered. Nevertheless, the Harvard professor's book is still worth reading. A reason is that he claims to have identified common patterns in the history of financial euphoria. `In small ways the history of the great speculative boom and its aftermath does change. Much, much more remains the same', he predicts.
The perennial features are these. Some seemingly new and desirable artifact or development captures the financial imagination of a large number of people (say, group 1). The arrival of tulips in Western Europe, gold in Louisiana, the advent of joint-stock companies (corporations), real estate in Florida, or the economic designs of Reagan are all examples. The price of the object of speculation goes up. The object when bought today is worth more tomorrow. This attracts new buyers and assures a further price increase. Those in group 1 are persuaded that the new price-enhancing circumstance is under control, and expect the market to stay up and go up, perhaps indefinitely. The individual or institution that discovered the novelty (in group 2) is thought to be ahead of the mob. Fewer in number, individuals of group 2 perceive the speculative mood of the moment, try to get the maximum reward from the increase as it continues, and plan to be out before the eventual crash. The affluence of group 2 is wrongly associated, by group 1, with a miraculous financial genius. When something triggers the ultimate reversal, group 2 decides now is time to get out. Group 1 finds its illusion abruptly destroyed. Both groups sell or try to sell. The market collapses.
Galbraith observes that, in this process, `speculation buys up the intelligence of those involved'. The crowd converts the individual in group 1 from possessing reasonable good sense to stupidity. Those in group 2 also make errors of vanity by thinking they will beat the speculative game. It seems that `all people are most credulous when they are most happy'. Reputable public and financial opinion reinforces euphoria by condemning those who express doubt or dissent by warning of a crash. The celebrated Yale economist Irving Fisher, for instance, spoke out sharply against Roger Babson, who foresaw the crash of 1929. But the critic must wait until after the crash for any approval, Galbraith laments.
Despite the fact that common features in speculative episodes recur, history counts little because a financial disaster is quickly forgotten by a new, self-confident generation. Something is perceived as a financial novelty merely because the financial memory is short: `financial operations do not lend themselves to innovation'. Insightfully, Galbraith notices that all financial innovation involves the creation of debt leveraged against more limited assets. This is the case of banks, whose debt is leveraged on a given volume of hard cash. This is also the case of the holding companies created in the 1920s, whose stockholders issued bonds and preferred stock to buy other stocks. And this is the case, too, of the junk bonds of the mergers-and-acquisitions mania in the 1980s, when high-risk, higher-interest bonds were issued in greater volume against the credit of the companies being taken over. As Galbraith puts it: `the world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version'.
However a crisis may strike at any moment whenever a debt is perceived to become dangerously out of scale in relation to the underlying means of payment. After the crash, group 1 expresses anger against the `financial genius' of group 2. `Financial genius is before the fall', Galbraith prophesies. Group 1 finally realizes that having more money may mean that a person in group 2 is indifferent to moral constraints. Group 2 could have even gone beyond the law, as far as leverage is concerned. Incarceration of some individuals of group 2 may follow. Leverage is seen as morally disputable at last.
Talks of regulation and reform follow. However, the speculation itself or the aberrant optimism that lay behind it will not be discussed. `Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.' Why? Because it is easier for group 1 to blame one individual or a few individuals in group 2 than to take responsibility for its own widespread naivety. And also because there is a need to find a cause for the crash that is external to the market itself. After all, the market is believed to be `a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error'. The deficit in the federal budget was, for instance, blamed for the 1987 crash. Another anecdotal account of Black Monday has been that the crash was caused by portfolio insurance computer programs which sold stocks as the market went lower.
Galbraith's book is compulsory reading for economists, especially those working on behavioural finance or econophysics. Being an antidote to illusory financial euphoria, the book is thus of interest to the general public as well. Galbraith's own sense of déjà vu towards speculative financial bubbles enabled him to predict the crash of 19 October 1987. People really seem to be intrinsically unable to prevent getting stuck in the error-prone dynamics of bull markets, as in his `bubble story'. But perhaps they have already learned some minor lessons on how to better protect themselves in the aftermath of crashes. Indeed despite the fact that the Black Monday crash was nearly twice as severe as the stock market collapse of 1929, it did not trigger a depression. Likewise the internet-bubble burst of 2000 had a surprisingly modest effect on wealth. Will we finally learn to learn from history?
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20 of 21 people found the following review helpful
on April 9, 2002
Format: PaperbackVerified Purchase
Galbraith paints a picture of the episodes of financial euphoria that allow one to see the seeds of the next bubble being planted. What Galbraith points out are the common themes of market bubbles. In the end, the same script is run as we hear that "this time is different" Although published in 1990, this reads like an epilogue to the tech/internet bubble of 1999-2000. The old saying goes that "what we learn from history is that we do not learn from history." Galbraith gives us the tools to learn from history. In an age of books like "Dow 36,000" and other mania induced work, this classic is a reality touchstone for all serious, sophisticated investors - individual and institutional alike. I would rate this book as a **********, but am limited to ***** (5 stars).
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15 of 15 people found the following review helpful
on July 31, 2006
Format: PaperbackVerified Purchase
Galbraith's wonderful little book (Only 110 pages) is a quick guided tour -- with pithy analysis interspersed throughout -- of get-rich-quick movements, and, more importantly, the foolish thinking BEHIND such phenomena. Galbraith takes the reader on brief tours of some of the more notorious financial booms-gone-bad, such as the "Tulip Craze" in Holland and the Banque Royale bust in France in the 1600's, the South Seas "Bubble" of the 1700's, and, more importantly, the numerous episodes throughout American financial history, from Colonial times through the busts of 1819, 1837, 1857, 1873, 1907, 1929 -- and 1987 (Galbraith's book was first published in 1990 -- ten years before the dot-com bust....). The source of these rush-to-riches-gone-sour, argues Galbraith, rests on several ever-consistent, historically re-occurring causes: First, the quest for leverage (i.e. generating more funds than having the means to actually support them) and lavish debt spending; Second, the pathological, recurrent inability of the financial world to learn from the past; Third, the silly notion that the possession of wealth is directly equal to a persons' intelligence (Wealthy individuals, contends Galbraith, are not rich because of brains, but more often through chance and circumstance -- a fact the public ignores at their own peril); Fourth, the incessant human desire to become affluent by the easiest means possible; Fifth, the 'religious' quality Americans consistently perscribe to "the market," i.e. that free enterprise is 'perfect' -- Corruption, loss, and falling markets are due only to "outside forces" (Like 'evil CEO's' or 'government intervention') -- rather than the public's endless supply of gullibility, culpability, and simple greed. The financial world, Galbraith brilliantly contends, is rooted in a quasi-theological outlook: Successful Wall Street moguls are treated as divine shamans; dogmatic faith in the latest financial hoopla is considered a virtue; critics are readily condemned as heretics; and once the bubble bursts, there exists a curious religious playing-out of "Sin-Fall-Guilt-Punishment," whereby the men who we once revered as financial geniuses are quickly strung-up in the court of public opinion -- sacrificial lambs for the public's own short-sightedness. Galbraith warns his readers that money-making innovations in the world of finance are simply worn-out re-workings of very, very old schemes. New bubbles emerge under new guises and fanciful terminology -- but the game remains forever the same. Once one crisis has passed, a new financial rush soon emerges, and the vicious cycle of irrationality and idiocy (Galbraith's terms) begin again. In the end, Galbraith warns his readers to be very wary of those who promise you easy wealth, and should you jump on the latest money-making bandwagon -- and most likely end up losing in the end -- don't blame anyone or anything except............YOURSELF. Excellent book!!
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8 of 8 people found the following review helpful
on September 16, 1999
Format: Paperback
Reading about the history of speculation is a way to broaden one's critical views of investing. Galbraith presents the material in an entertaining way and doesn't oversell the important points he makes about mass psychology and market reform. His self-deprecatory moments are very engaging indeed. I would go so far as to suggest that this book should be required reading for any investor.
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5 of 5 people found the following review helpful
VINE VOICEon December 19, 2010
Format: PaperbackVerified Purchase
Money makes people stupid, but other people assume the possession of money means the pessessors are smart. There's a good deal of evidence for this proposition, which is repeated over and over in this essay, but in "A Short History of Financial Euphoria," John Galbraith was not interested in providing evidence. (You can find plenty in Edward Chancellor's "Devil Take the Hindmost.") Galbraith was just jeering.

Jeering is a worthy exercise, especially if the targets are the morons who run American and world finance. Galbraith has much fun tweaking the self-described geniuses (at Citibank, especially) for taking the deposits of the Arab sheiks after the oil shocks and handing them over to the deadbeats of Latin America. Even when he wrote this long essay, in 1990, most people had forgotten that.

The bankers certainly had, since they soon repeated it.

We are always being told that business should be given its head, but Galbraith is not too impressed. In his view (matched by my own experience as a news reporter covering business), most managers are more or less incompetent or stupid, and success in business is mostly a matter of luck.

The underlying message of "A Short History" is unsupervised markets fail.

Galbraith notes that when markets do fail, there is always a circling of the wagons to protect the myth of the market and to lay the blame on some exogenous event. This sometimes goes to absurd lengths. After the '29 crash, exculpators tried to say that it was foretold by a mild dip in industrial production in the summer; and more recently rightwing and free-market publicists have settled on blaming the Federal Reserve for a slight increase in the discount rate, avowedly meant to curb speculation, that year.

The culprit, says Galbraith, is always speculation leading to insanity. Further, he asserts that it is a feature, not a bug; it's built in and there's nothing that can be done about it.

This is too pessimistic. Obviously, something can be done, since there were no crashes between the imposition of New Deal measures in the mid-'30s and 1987, shortly after the abandonment of New Deal circuitbreaker measures (either legally or in regulatory practice). In all the rest of American financial history, before and since, crashes have come every 20 years, which Galbraith ascribes to the forgetting time. Also, the passage of a couple of decades provides for the incursion of a new flock of ignorant fools who discover leverage and are persuaded that not only is it the way to easy riches, but that nobody ever thought of it before.

My experience of 40 years watching businesses confirms all this.

Another thing Galbraith and I agree about is the mystery of bubbles. History - he starts with the Tulipomania of 1736 - shows that anything can be bubblized. But what prevents some high-valued asset - think Picasso daubs - from bubblizing? Neither Galbraith nor I can say.

While I find Galbraith amusing, a little goes a long way. Even the little in this volume is more than enough for me.

Galbraith wrote this little book in 1990, which allowed him much fun at the expense of Michael Milken and Donald Trump. This demonstrates, I suppose, that even market skeptics are unable to predict the future. Trump is still with us.

About the time Galbraith wrote, Salomon Brothers (remember them?) predicted that the overbuilding caused by the savings and loan bubble had left New York City with so much empty office space that it would not be absorbed for 46 years. Forty-six months was more like it, at the cost of, since then, three more crashes.

I wouldn't care if only the plungers got hurt.
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4 of 4 people found the following review helpful
on November 15, 1996
Format: Paperback
This book is funny, incisive, and important. It is as good
as his others, although the scope is much narrower.
Even those who don't agree with Mr. Galbraith's somewhat
liberal views will have to admit that he is a great writer
and a great thinker.
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4 of 4 people found the following review helpful
on July 7, 1999
Format: Paperback
A short, concise and powerful little book. What you would expect from Galbraith. On the short list of people who can write about finance and keep it entertaining.
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2 of 2 people found the following review helpful
on May 6, 2014
Format: HardcoverVerified Purchase
I loved this book, but if you're looking for specific details about a given crisis, such as the Great Depression, you're going to be disappointed. Galbraith is looking at a bigger picture. He's writing about a pattern of crises -- a gestalt -- where the whole clearly transcends the explanations advanced for each of its parts. Viewed from that perspective, the author reveals an astonishing similarity in how such periods of financial euphoria followed by crisis keep recurring -- and how, after the fact, all the experts come out of the woodwork happy to explain why it happened. That is profound.

Patterns tell a story not recognizable from studying the specific events. As we've all observed in our interpersonal dealings, most people can readily explain their behavior on a given occasion, say, getting in a fistfight, but can't explain their habit of getting in fights. The same applies to history's many wars. A study of the facts and circumstances underlying the "War of the Roses" (1455-1485) may explain who were the good guys and who the bad guys, but it can't explain why mankind keeps getting into wars.

This book explains a historical pattern of booms and busts. In light of the Financial Crisis of 2008, it's arguably more pertinent today than it was when published in 1994. I'm currently reading Matt Taibbi's, "The Divide: American Injustice in the Age of the Wealth Gap" (2014). The author clearly thinks 2008 revealed a huge criminal conspiracy, witness the fact that he uses the word "fraud" at least 100 times. Other books such as Christopher Hayes's "Twilight of the Elites" beat the same drum.

While such demagoguery is appealing, I'm still going with Galbraith: It seems nobody ever sees a crash coming, including the greedy participants at the heart of it. You can say the mortgage bubble was wrong, but it's the same kind of wrong that caused thousands of people to spend crazy amount of money on a single tulip bulb 370 years ago.
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2 of 2 people found the following review helpful
VINE VOICEon September 5, 2012
Format: PaperbackVerified Purchase
A Short History of Financial Euphoria

John Kenneth Galbraith

Book Review

By Richard E. Noble

This book is indeed a "short" history of Financial Euphoria. I would have liked a much longer and more detailed history by Mr. Galbraith.

In a previous book, "The Great Crash 1929," much of what is in this book has already been expressed. In fact, I think most of this work was excerpted directly from the "The Great Crash" verbatim.

The advantages of this little book are that all these cases of speculative mania and fraud are lumped together in this one volume with updated commentary and some modern day comparisons. The author covers these type incidences up to the crash of 1987 in the later part of the Reagan administration.

The author makes the point that all of these mania, panics or crashes have similar components. They are all based on speculation and leveraging.

The mania is attributed to basic insanity and the misguided notion that because someone is rich he must therefore be wise.

"In the first forward to this volume, I told of my hope that business executives, the inhabitants of the financial world and the citizens of speculative mood, tendency or temptation might be reminded of the way that not only fools but quite a lot of other people are recurrently separated from their money in the moment of speculative euphoria. I am less certain than when I then wrote of the social and personal value of such a warning. Recurrent speculative insanity and the associated financial depravation and larger devastation are, I am persuaded, inherent in the system. Perhaps it is better that this be recognized and accepted."

There are two types of speculators who invariably get involved in these troublesome episodes or "bubbles."

"There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall."

He points out that warnings about the temperamental nature of the present boom are never heeded and those who offer them are looked upon with derision.

"In the winter of 1929, Paul M. Warburg, the most respected banker of his time and one of the founding parents of the Federal Reserve System spoke critically of the then current orgy ... and said that if it continued, there would ultimately be a disastrous collapse ... He was held to be obsolete in his views, `he was sandbagging American prosperity.'"

This danger of speaking out against the speculative orgy as it is taking place often makes the bearer of such tidings the accused when the bubble finally bursts. It is a lose/lose situation in Mr. Galbraith's estimation. Yet he points out that he did the same himself in 1986 ... to no avail and much acrimony.

So the speculative bubbles come and go and are endemic to the capitalistic system according to the Professor. He also suggests that they are cyclical. They reoccur every twenty or thirty years. They are directly proportional to the amount of time necessary for the previous fiasco to be forgotten and a new generation of semi-educated fools take their positions in the financial community.

"The circumstances that induce the current lapses into financial dementia have not changed in any truly operative fashion since the Tulipomania of 1636-1637. Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft noted public impression that intelligence, one's own and that of others, marches in close step with the possession of money..."

The mistaken notion that since a person is rich he must be intelligent is emphasized over and over throughout the short text.

So what is Mr. Galbraith's solution?

"The only remedy, in fact, is an enhanced skepticism that would resolutely associate intelligence with the acquisition, the deployment, or, for that matter, the administration of large sums of money ... there is the possibility, even the likelihood, of self-approving and extravagantly error-prone behavior on the part of those closely associated with money ... a further rule is that when a mood of excitement pervades a market or surrounds an investment prospect, when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution ... Yet beyond a better perception of the speculative tendency and process itself, there probably is not a great deal that can be done. Regulation outlawing financial incredulity or mass euphoria is not a practical possibility."

This conclusion I find very interesting and extremely disappointing. After all his great insight and explanation of the circumstances precipitating these speculative fiascos he closes with: Regulation outlawing financial incredulity or mass euphoria is not a practical possibility.

This conclusion appears somewhat demented also. Mr. Galbraith, it appears, has completely forgotten that in most of these cases a crime was committed and that the euphoria involved was not inclusive of the masses, as he states, but of a select group of people within the masses reigning in the financial community.

The Tulipomania is rather unique. It seems to be the perfect example of innocent mass insanity. But most of the other cases involve crime and criminal personalities not simply a massive delusion. There was swamp land in the 20's in Florida involving everyone's favorite con-man, Charles Ponzi. There were gold mines that didn't exist and were never worked or mined. There were worthless stocks and bonds and real criminals involved in the various scams.

During the course of the book the author mentions that some of these individuals were punished with prison sentences or ostracized, and "justifiably so" says he.

Instead of fraud he now seems to be defining the criminal behavior involved in each of these scandals as "inciting financial incredulity or mass euphoria" which, I agree, would be difficult to prosecute.

Where is his outrage for the crimes and criminals involved?

I find it interesting to note that if a man robs a corner store with a gun and steals one hundred dollars, he will most likely end up in prison. The man or the men who rob millions of innocent people of their assets through fraud and other criminal shenanigans are given an indifferent shrug by Mr. Galbraith. "Oh dear, what to do?" seems to be the gist of it.

In our last scandal that nearly collapsed the economy of the entire world we clearly had criminal fraud, falsifying of documents, false testimony, false accounting procedures and figures and basic embezzlement.

Most of us were victims yet not participants in the speculative mass euphoria - just as in 1929 and in other of these big financial calamities.

We bought nothing and sold nothing. Yet when the final tabulations were given we lost tens of thousands, and some of us hundreds of thousands on our home equity and life savings. Our retirement pensions were looted.

A property that was estimated before the euphoria at $125,000 may now be estimated at $50,000 or less.

Because of the indulgences of the speculative euphoria in the financial and real estate sector we are all made to suffer and pay dearly. And the bandits are not even being pursued by a posse.

It seems that this was the mindset of those involved. They knew they were acting criminally but made the calculation that as long as the majority in their industry participated in the crime, they would be in effect "too many to be prosecuted."

It now appears that they were correct. We have an obvious case here of "Crime and No Punishment."

This indicates to me that this criminal behavior is far from over. The thief who is successful in his thievery is encouraged to rob again. The next massive robbery seems to me to be just a matter of time and manipulation.

At the beginning of this review I pointed out that Mr. Galbraith suggested that all of this business is inherent in the capitalist system - it is not only systemic but endemic. And now we find that it is also incurable and beyond regulation and justice.

So then we are to sit back and periodically - every twenty years or so - let our wealthier sector rob us of all or part of whatever it is we thought to be our little nest egg or share in this great society. Crime on the part of certain groups among us is inevitable and any type of preventative attempt on the part of us or society is futile.

If that is the reality of the capitalistic system, then maybe it is time to take a closer look at this capitalist system.

This is like saying: Men will rape women. So girls, ready yourselves for the event and get used to it.

This is very poor logic coming from a very intelligent man.
I need a better solution than what the good Professor is offering here.

Unfortunately, Mr. Galbraith died before this last economic disaster. I wish he lived to tell us his thoughts on this situation.

Richard Edward Noble is a writer and author of: "Bloggin' Be My Life."
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2 of 2 people found the following review helpful
on April 5, 2009
Format: Paperback
The last page of Galbraith's book denotes that the mania of financial speculation always recurs and is inescapable in human history (P.110). Economists and policy-makers usually attribute the cause of a financial debacle to external influences such as ineffective regulatory mechanism to contain bubble-led investment activities and weakening in economic growth (P.85). By reviewing the major financial debacles of the last three centuries, Galbraith researches on common features of financial debacles and concludes that there are at least two key factors that trigger the debacle: the extreme brevity of the financial memory and the specious association of money and intelligence (P.13).

This book is not lengthy but presents all classic cases since the 17th century including tulipomaina in Holland, Banque Royale in France, South Sea Company in England, and spectacular financial debacles in the US. To Galbraith, people have a very brief financial memory of no more than 20 years (P.87) This 20-year cycle from illusion to disillusion makes them forget lessons of the past and continue to invent highly-leveraged financial instruments without self-scrutiny and sanity. Moreover, people blindly believe that money is the measure of the intelligence that supports it (P.14). They applause acolytes of speculation and exclude any adverse opinion in order to justify the circumstances that can make them rich when a mood of optimism and excitement pervades in the financial market. The Schiller's dictum of crowd insanity has been inherent in human history for centuries (P.5).

The renowned scientist Issac Newton has remarked that he can measure human motion but he cannot measure human folly. This book was published in the 90s but Galbraith's insights of financial insanity are still relevant to institutional and individual investors nowadays who tend not to be a scapegoat of the next financial crisis.
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