Customer Reviews

A Short History of Financial Euphoria (Penguin Business)

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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?

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).

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!!

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.

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.

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.

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.

John Kenneth Galbraith's short, literary book on financial speculation and the inevitability of subsequent economic catastrophe contends that devastating financial collapse is built into the free-enterprise system - an idea as intriguing today as it was when this book debuted in the mid-1990s. The late famous economist ended this treatise with a chilling question: "When will come the next great speculative episode and in what venue will it recur?" Everyone now knows the answer to that question all too well. Alarmingly, according to Galbraith, the travails that capitalist economies are now grimly experiencing will recur over and over. getAbstract suggests that anyone who wants to understand the kinks in the system - and human nature - that will continue to lead to hugely devastating, economic train wrecks should read Galbraith's book.

This tiny but hugely important book predates the current financial crisis by several decades, and predicted it perfectly.

Galbraith tells us, simply and clearly, that the same thing happens over and over again, and he explains why. The thing that happens is that people discover that they can increase their profits with leverage: if you own a $1.00 item that appreciates to $1.10, you make a $0.10 profit, but if you can add $9.00 of borrowed funds to your $1.00 and buy 10 items, you can multiply your gain by a factor of 10.

Of course, the same thing works in reverse too: if the item drops to $0.90 you're completely wiped out, and if it drops to $0.80 whoever loaned you money gets pretty unhappy too. Given the obvious increased risk of taking on leverage, the key question is why people keep rediscovering the profit side of the equation and reforgetting the risk side. Galbraith has an answer: every new bubble includes a new form of the argument "this time it's different." Here's the crucial observation: the very fact that people are saying "this time it's different" is what makes it exactly the same as every other time. The "new new thing," the "long boom," I-can-always-refinance-next-year, and so on, have historical analogs every few decades back as long as there's been finance. We really never learn.

It's amazing how quickly the real estate bubble followed after the dot-com bubble, and how both of them occurred in an era when the pattern has been so perfectly analyzed and explained. This book was written before a lot of today's behavioral economics work; perhaps these new tools will finally point to how we can avoid the next event? It's nice to hope anyway, I confess I'm not holding my breath.

This book is a must-read for understanding the current economic situation. The 1990s tech bubble, which turned into the housing bubble, was just a classic case of a financial bubble. In each case, they all thought they were smarter than previous generations, and that somehow the "New Economy" had changed the rules. The end result was always a financial depression that sometimes lasted for decades.

Rather than head scratching about "what happened", which is also a classic response to the bubble bursting, reading a bit of economic history shows that this is nothing new, and that our generation and our nation is not immune from typical human economic behavior.