Customer Reviews

Manias, Panics, and Crashes: A History of Financial Crises (Wiley Investment Classics)

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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.

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.

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.

This book lays out the blueprint to spot a financial crisis in the making.

A. Plenty of money in supply and preferably at cheap rates.

B. A 'new technology'-from the birth of railroad stocks, to letter stocks of the 1960s and dot coms of the late 1990s.

C. A willing and enthusiastic media outlet (think CNBC and the dot com boom).

D. Cab drivers and plumbers suddenly trading actively in the respective markets. Another note I would throw in is when the investment community are saying 'it is different this time, simple valuation of securities is no longer possible'.

Kindleberger's work draws on this scenario time and time again.

A required reading for anyone actively trading in the markets.

The subtitle of this book, "A History of Financial Crises", is misleading since the book is actually a *commentary* on the history of financial crises. As such, it assumes that the reader is already familiar with the history of financial crises from 1600 to the present. The book is organized by the phases of a financial crisis, resulting in a near-complete lack of chronological coherence. The author may typically be talking about the Dutch tulip mania of 1636 in one sentence and the panic of 1907 in the next sentence, a style which quickly becomes exasperating. The overall purpose of the book appears to be the promotion of a thesis favoring the concept of a "lender of last resort" in order to mitigate financial crises. Consequently the book reads like an academic treatise, which is basically what it is. This approach is, in this reviewer's opinion, self-indulgent on the part of the author who appears to be addressing a readership primarily in academia, government and perhaps a limited segment of the banking industry. This book is neither instructive nor useful for the general reader.

This book probably deserves the title of "classic", being one of the first attempts by an economist to popularize for a broader audience a theory of speculative financial bubbles that takes into account "modern" macroeconomic theory (e.g. Keynes and the monetarists). The book identifies many common themes among some of the great financial manias in history, providing along the way some entertaining anecdotes and commentary.

Nevertheless, classic or not, I was a bit disapointed with the book. After 30 years and several editions it seems to be showing its age, with numerous uneven and unconvincing attempts to update the text to the late 20th century. I also found that the many historical examples were not well told or clearly differentiated and tended to blend together. Chancellor's "Devil take the Hindmost" seems to do a better job at providing a history of the great speculative bubbles. Most importantly, Kindelberger writes alot about what goverbnments should do after crashes occur, but he does not help much with a useful framework for spotting bubbles as they emerge -- or understanding how they tend to unravel.

Kindleberger dissects manias and panics to arrive at his conclusions. In the process, though, he bombards the reader with an abundance of detail and assumes a good understanding of university economics.

A non-economist will have difficulty to follow his line of reasoning. For example: "A synthesis of Keynesianism and monetarism, such as the Hansen-Hicks IS-LM curves that bring together the investment-saving (IS) and liquidity-money (LM) relationships, remains incomplete, even when it brings in production and prices (as does the most up-to-date economic analysis) if it leaves out the instability of expectations, and credit and the role of the leveraged speculation in various assets".

For those who enjoy thoughtful, dense reading, this book will make you a smarter investor. Unfortunately, for the large investing masses, those that have lost large sums in their 401k plans lately, the academic nature of this book puts this knowledge out of their reach.

Kindelberger's work is a classic study of speculative bubbles and their consequences, and should be read as such. From the first, this is a book that aims to seperate market moves from genuine crises - important in an age were there is a tendancy for the media to seek to dramatise the mundane in order to winn a BAFTA. The definitions provide a framework for examining the development of an irrational interlude in financial markets.

Kindelberger's analysis is not, therefore, a classic "history" primer for the curious - there is no spoonfeeding of facts, for that is not what the book sets out to present. Instead, this is an elegant and informed look at what how financial markets have departed from the course theoretical "rational" behaviour suggests that they should have taken. For all that, it is still an accessible text to those who take a casual interest in financial markets.

First off, I am an "average Joe" type of guy who is younger than the boomer generation. Learning and reading things like this is interesting although I don't read books like this a lot. But I do have two cents to give, like everyone else.

I read this book from reviews and the fact that Alan Greenspan reads this author and apparently has been influenced by him. Dr. Kindleberger focuses on the most driving stimulant behind the market: human psychology. Price to earning ratios, earning reports, and numerous economic indicators are the rational guides, but once the major forces of the market--greed and fear--take root, they can cause momentous shifts in upwardly and downwardly directions quickly, or painstakingly slow and steadily. Mob or Crowd mentalities and the irrational forces behind them, are a recurring psychological and historical cyclical pattern according to Kindleberger, and he provides ample data to back this up. And, if one wants to do well in the market they can focus on picking when the gyrations will occur, choosing when to get in and when to get out.

I often talk with two sets of boomers: those who "hopped on" in the 1990s and "got off" at the right times, or nearly at the right times. It is cyclical, cyclical, cyclical. They are the ones who have benefitted. I also speak a lot with boomers who didn't get out of the market in time, or even at all (as of July 2002). The results are significant and life-long. Lifestyles are permanently affected for the rest of ones life, both in positive and negative ways. And as Dr. Kindleberger notes, there will be another Mania that will come, and the opportune thing to do, is pick when to get on, and when to get off.

Although what I am describing is very simplistic, the theme of the book is that natural patterns of behaviour are buying excessively (euphoria), and also rampant dumping (panic), which again, exceedingly sends the market in both directions. Baby Boomers that jumped on the stock-buying bandwagon in the 1990s, and didn't get out in time may not like this book. They may be reading it to try to figure out what's going on, and if one is to read this book they shouldn't assume the author will dumb it down with simple analogies, and dummy charts for laymen. It's not a simplistic Rick Edelman or Motley Fool type of book for the Boomer-come-lately, so stop complaining about the author's presentation.

As I write this review, we are waiting to see if the Fed's somewhat drastic cut in the federal funds rate will stop the slide into recession. Bank of America is acquiring Countrywide mortgage lenders. UAE has bought an $7.5 billion worth of junk bonds from Citigroup in a manner similar to the late Dr. Kindleberger's lender of last resort. So we have an event going here as I write.

As a Southern California homeowner, I am certainly not surprised at what is happening. Houses constructed and first sold for $30,000 in the late 1950's were selling for $600,000 and up a year ago. I would go to lunch and all anyone would talk about was real estate. I got a lot of crazy advice ("sell your home, move out to the desert, and live off the interest.") I would turn on the TV and watch Jim Cramer screaming "They're not making any more land out there!!!!!" How could that last? I decided it was time to read this book.

Manias, Panics, and Crashes is a scholarly work of Economic History. It sets up a model of a crash or panic and then explores each phase in succession. He writes narratives of events, such as the South Sea Island Bubble, and how the events transpired. Dr. Kindleberger examines the mania or bubble phase, the critical stage, and then examines two ways in which it ends. The two ways to end the panic are either to let it burn itself out or through a lender of last resort. He focuses on the economic more than the psychological factors that make up these cycles.

Kindleberger favors the lender of last resort solution as it cuts the duration of the crisis. He notes that the Great Depression could have been stanched more quickly had there been a lender of last resort. But, I think he presents opposing ideas to his in a fair and gentlemanly manner.

Yes, this book is not an easy book to read. Few books in economics are easy to read. No it doesn't give advice on profiting from a panic. The Late Harry Browne used to write such books before he began running for President. Those books are useless generally; by the time you want to read them, its already too late. Gold, foreign currencies, and the like will be at all time highs, as they are currently.

I recommend this book because this is a recurrent phenomena that is part of human nature. Optimism is a good thing. But if you are channel surfing late night television and an infomercial comes on with guys sitting in lounge chairs around a pool sipping margaritas and telling stories about how they became millionaires while working 2 hours a week, it's time to read Dr. Kindleberger's book.

Update: Last weekend, the Fed arranged a deal where JP Morgan-Chase acquired Bear Stearns for $2 per share to forestall a panic. There are many critics of this deal. Some say the corporate headquarters alone was worth many more times than what Morgan paid for the company. Most of the press gave the credit for the deal to Ben Bernanke, but Robert Novak in the Washington Post gives the credit to Timothy Geithiner, President of the NY Federal Reserve Bank.

So, the Fed is following the Kindleberger strategy of finding the buyer of last resort rather than the Milton Friedman strategy of letting the fire burn itself out. I suspect we will know in a month or so whether this strategy has succeeded or not.


I am reviewing and recommending the edition of this book released in 2000.