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151 of 158 people found the following review helpful:
5.0 out of 5 stars
Much Improved 4th Edition of an Investment Classic, January 24, 2001
This review is from: Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) (Paperback)
If you are interested in how Alan Greenspan will probably handle the financial weakness that follows the year 2000 collapse of the Internet stocks, this book is a good guide. Chairman Greenspan is basically a follower of Professor Kindleberger. Both believe that pragmatic, flexible activism by the Federal Reserve can shorten up the pain from financial excesses. Those who are interested in the psychology of financial markets are often drawn to Professor Kindleberger's book after reading Charles MacKay's classic, Memoirs of Extraordinary Delusions and the Madness of Crowds. In this new edition, Professor Kindleberger has added useful perspectives on the Mexican and Asian financial crises of the 1990s and adjusted his interpretation to allow for more differentiation among crises than he did before. I found this edition by far the most satisfying of the four he has written. Professor Kindleberger is one of the few remaining literary economists, those who make their points in essays rather than through long equations that depend on questionable assumptions. This makes his work very accessible, even though it is as rigorous as it can possibly be while still remaining a popular work. If you believe in efficient markets or the overriding importance of macroeconomics, you will be angered and annoyed by this book. Milton Friedman and John Maynard Keynes each take their shots here, although in polite ways. As Peter L. Bernstein summarizes nicely in his introduction, Professor Kindleberger's argument boils down to four principles: (1) Irrational behavior does occur from time to time in financial markets. (2) There is a general, repeatable pattern in how this irrational behavior plays out (a positive economic displacement is followed by euphoria that takes the form of overtrading, then distress following revulsion, discredit by lenders in the overtraded assets, and then panic leading possibly to a crash brought on by those who bought high). (3) The economic system needs a lender of last resort to step in at the right time and in the right way to restore confidence and liquidity. (4) Trying to solve these problems by being doctrinaire is "wrong . . . and dangerous." Chapter one looks at how financial crises often accompany peaks in the economic cycle. Chapter two looks at the patterns of typical crises, described by "lumping" them together. Chapter three considers how speculative mania are begun by knowledgable insiders who then unload on overoptimistic outsiders who buy high and sell low. This chapter looks at how the crises differ from one another. Chapter four shows how either excess credit or too fast monetary expansion adds fuel to the flames. Chapter five considers the frequent association of swindles with these manias. Chapter six looks at the psychological stages of the whole process in more detail. Of central importance is the discomfort that many feel as they see a neighbor or friend become wealthy. Chapter seven looks at how the economic impact spreads to other domestic markets. Chapter eight looks at the transference to other international markets. Chapter nine looks at the pros and cons of trying to let these cycles take care of themselves. Chapter ten looks at the role of domestic lenders of last resort (the Federal Reserve in the U.S.). "How much? To whom? On what terms? When?" are the questions that require different answers each time in terms of who should get credit. In Chapter eleven, you see the special problems of the IMF. Will someone take the lead in time, or will everyone dally? The conclusion in Chapter twelve nicely summarizes the book. He argues tentatively that "a lender of last resort does shorten the business depression that follows the financial crisis." He also says there is "a presumption . . . that halting a cumulative deflation helps shorten the depression that follows." One issue that is not addressed in this edition is how such crises may occur more rapidly and with greater amplitude than before due to improved information flows. As a result, it will be more difficult for lenders of last resort to take correct action in a timely way. Clearly, "jawboning" such as talking about "irrational exuberance" will do little good. As we sort out the results from the crash of the "dot com" stocks, the groundwork is probably being laid for a fifth edition. How will you respond to the next mania that builds? Keep sight on rational values, even in times of irrational exuberance. For a deflation along with a credit squeeze will usually follow.
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16 of 17 people found the following review helpful:
5.0 out of 5 stars
A chronicle of financial irrationality, December 8, 2003
This review is from: Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) (Paperback)
Those who lost money in the 1990's stock market bubble may be tempted to think that they have been cursed with misfortune of unparalleled proportions. Reading "Manias, Panics, and Crashes" will surely change their mind. Bubbles, they will learn, are an enduring feature of financial markets, and generations of investors have fallen in the trap of buying very high to sell even higher, only to find that the frenzy cannot last for ever. The mania part of the story is familiar: a new invention will revolutionize the economic landscape and bring forth unimaginable profits. The abundance of credit, coupled with leverage (buying with borrowed money), accelerates this process and buying leads to more buying. Then comes the panic: some event shakes confidence and wakes up investors to the mania that has clouded their judgment. This panic leads to a crash: borrowed money needs to be repaid and investors will sell anything at any price to meet the bankers' needs. Charles Kindleberger has chronicled dozens of financial bubbles spanning more than four centuries. His historiography is impressive and the reader can often wonder how Kindleberger amassed such large amounts of data: his sources are primary and secondary, and they come from economics, history, politics, and even literature. The text is well written and the reader hardly notices that the ride covers centuries' worth of financial troubles. What, in the end, is Kindleberger's moral? Most cures for dealing with financial troubles, he writes, are no cures at all. Raising interest rates has not proven particularly useful and neither has continued warning from authorities that the investing public is inflating a bubble. The solution, he believes, lies in having a lender of last resort. The trick, of course, is to avoid moral hazard and prevent the public from gambling due to the reassurance of a lender of last resort. The answer is ambiguity: the lender can come in and save the day but investors should never be certain that help is forthcoming. In the end, "Manias, Panics, and Crashes" is a classic account of financial bubbles and its immense history and shrewd analysis will appeal to both the layman and the expert. And the book's message, that financial bubbles have to be met with an artful lender, should be taken at heart by those interested in the past and future of financial crises.
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14 of 16 people found the following review helpful:
4.0 out of 5 stars
Shows how much I know-- I really enjoyed it., September 2, 2003
This review is from: Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics) (Paperback)
I read it because so many of the books I was reading referred to it. Despite the negative reviews, I have to say that I found it neither dusty nor boring. Particularly given the last bubble that we have just been through, I found it fascinating to read his theories about what fuels a mania.
Disclaimer: I can't even claim to be an armchair economist. Just an interested business bystander.
If you get confused as to which financial crisis Kindleberger refers, use the appendix at the back. One flaw that the book really does have is to assume that you know all about the various events upon which it draws for its evidence. Perhaps for future editions it would be smart of the publisher to include a brief introductory chapter on the subject. While real economists would have no need for that introduction, the other readers of the book (and it does seem to be marketed at a wider audience) would benefit.
Lots of great references to further reading included as well.
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