Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets [Hardcover]

Philip T. Hoffman (Author), Gilles Postel-Vinay (Author), Jean-Laurent Rosenthal (Author)

Book Description

Publication Date: April 15, 2007 | ISBN-10: 0674024699 | ISBN-13: 978-0674024694

Financial disasters often have long-range institutional consequences. When financial institutions--banks, insurance companies, brokerage firms, stock exchanges--collapse, new ones take their place, and these changes shape markets for decades or even generations. Surviving Large Losses explains why such financial crises occur, why their effects last so long, and what political and economic conditions can help countries both rich and poor survive--and even prosper--in the aftermath. Looking at past and more recent financial disasters through the lens of political economy, the authors identify three factors critical to the development of financial institutions: the level of government debt, the size of the middle class, and the quality of information that is available to participants in financial transactions. They seek to find out when these factors promote financial development and mitigate the effects of financial crises and when they exacerbate them. Although there is no panacea for crises--no one set of institutions that will resolve them--it is possible, the authors argue, to strengthen existing financial institutions, to encourage economic growth, and to limit the harm that future catastrophes can do.

Editorial Reviews

Review

The excitement of Surviving Large Losses is not easy to convey. It is a different kind of thinking cap, that's all. On every page it reflects the substantial changes wrought by political economists during the past thirty years or so in the way we understand the sources of the wealth and poverty of nations. It delivers a profoundly optimistic message, however--that eventually we get wise to ourselves; that gradually financial knavery is reduced; that by learning from our mistakes we are creating a more stable financial order, and perhaps even a more just world. (David Warsh Economicprincipals.com )

The authors of this book, academics in the fields of history, social sciences, and economics, have done more than write a history of financial crises; rather, they explain the nature of these crises by putting economic theory into plain English. (R. J. Phillips Choice )

This is a timely book. It is also provocative in trying to do something no one has done before, namely provide a comprehensive political economy analysis of several centuries of financial crises and their effects on the development of financial systems. It aims to bridge the gap between the modern economics literature on finance and growth, and more traditional historical studies...Surviving Large Losses is a step forward in the social-scientific analysis of financial crises and historical financial development. (Richard Sylla Journal of Economic History )

Review

The authors are highly respected economic historians whose deep command of the specialist literature shines through. Their ideas are clearly presented, and effectively harness historical example to address one of the great questions of this age: why are some economies successful, and others not? Their answer will command attention among policy makers and scholars alike. (Stephan R. Epstein, London School of Economics 20070801)

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Product Details

• Hardcover: 272 pages
• Publisher: Belknap Press (April 15, 2007)
• Language: English
• ISBN-10: 0674024699
• ISBN-13: 978-0674024694
• Product Dimensions: 8.3 x 5.9 x 1 inches
• Shipping Weight: 14.4 ounces
• Average Customer Review: 5.0 out of 5 stars  See all reviews (2 customer reviews)
• Amazon Best Sellers Rank: #1,608,240 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

5 of 5 people found the following review helpful:

5.0 out of 5 stars Valuable look at why some countries' financial systems work, August 2, 2007

By 

Robert Ray (Orange County, California) - See all my reviews
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This review is from: Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets (Hardcover)

The authors take a look at how financial systems develop, frequently under the spur of financial crisis. Their arguments are supported by many interesting historical examples. The book begins with a look at how crises develop, from government predation and/or asymmetrical information (the seller knowing more than the buyer for example). It then reviews how different political systems respond to crises.

They also show that a well functioning financial system requires the right level of government (enough debt to get a bond market started, but not so much as to encourage the politicians to steal to pay it off, as in Argentina), a large enough middle class to provide a market for financial products and to discourage too much theft by government (the poor have no assets, the rich can afford to set up their own financial programs), and how the costs of information tie this together. The book ends with a look at some current situations, particularly microcredit and the looming problems of pensions and health care for a rapidly aging world with a static or declining population.

Their analysis is more theoretical than Kindleberger's 'Manias, Panics, and Crashes' and is focused on the structure of financial systems and how crises change them (not on panics per se).

Their discussion on pensions theorizes that privatization can not work, but doesn't discuss current private pension programs (in Chile for example). And the discussion of the role of asymmetric information mostly ignores the role of public manias. The authors used Enron as an example as an example of asymmetric information (since management's financial reports clearly did not reflect reality) but a look at the published 2000 Annual Report shows that in 2000 Enron was only marginally profitable, with a return on average equity of 8.6 % and a return on assets of 1.8 %. Operating earnings for 1998, 1999, and 2000 were 4.4 %, 3.1 %, and 1.9 % of sales. Yet the high price for the stock was over 4 times book value and 40 times earnings. Clearly a combination of ignorance and insanity was involved (the ignorance extended to the media; Fortune magazine proclaimed Enron as 'the most innovative company in the world' without wondering how anybody so wonderful had such a lousy return on investment).

Overall an very interesting and valuable look at financial systems, and how they develop and change within a country.

5.0 out of 5 stars "Those who don't learn from history....", October 27, 2011

By 

James L. Mizell - See all my reviews

This review is from: Surviving Large Losses: Financial Crises, the Middle Class, and the Development of Capital Markets (Paperback)

Those of us who have labored in the investment industry for decades witness repetitious institutional and individual behavior associated with economic and financial market cycles. That we don't dwell on the causes of these recurring cycles, as we move on to the next trade, doesn't reflect a lack of curiosity. Therefore, although "Surviving Large Losses" was written for an academic audience, it wasn't surprising to witness the broader interest in this book emerge during the "Financial Meltdown of 2008" and its aftermath. Written in language that a lay person can understand, it still becomes obvious that these scholars performed arduous research spanning centuries and continents to make their points so persuasively. It's understandable that scholars of Financial Crises become more prolific as new crises emerge. As such, the body of knowledge is passed among scholars from crisis to crisis throughout history, as it should be. I'm grateful that "Surviving Large Losses" found its way to me, as well. I can't say that reading this book will allow me to "escape" the sting of financial crises in the future. But, the accessibility of this lucid analysis did provide therapeutic reading for me in the aftermath of this most recent crisis. Hopefully, it can provide diversion for others, lay and scholarly readers alike, in the next one as well.