Manias, Panics, and Crashes: A History of Financial Crises

435 Pages·2015·3.766 MB·English

by  Robert Z. Aliber, Charles P. Kindleberger (auth.)

MANIAS, PANICS, AND CRASHES
M A N I A S ,
P A N I C S , A N D
C R A S H E S
A HISTORY OF FINANCIAL CRISES
Seventh Edition
ROBERT Z. ALIBER
Emeritus Professor of International Economics and Finance,
Booth School of Business, University of Chicago
and
CHARLES P. KINDLEBERGER
formerly Ford Professor of Economics,
Massachusetts Institute of Technology
© Charles P. Kindleberger and Robert Z. Aliber 2005, 2011, 2015
© Charles P. Kindleberger 1978, 1989, 1996, 2000
Foreword © Robert M. Solow 2015
Afterword © Robert Skidelsky 2015
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
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Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The authors have asserted their rights to be identified as the authors of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First edition published 1978
Second edition published 1989
Third edition published 1996
Fourth edition published 2000
Fifth edition published 2005
Sixth edition published 2011
Seventh edition publish 2015 by
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ISBN: 978–1–137–52575–8
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A catalogue record for this book is available from the British Library.
Library of congress cataloging-in-publication data
Kindleberger, charles poor, 1910–2003.
Manias, panics and crashes : a history of financial crises / charles
p. Kindleberger, formerly ford professor of economics,massachusetts institute of
technology, usa, robert z. Aliber, professor of international economics and finance,
university of chicago graduate school of business, usa. – Seventh edition.
Pages cm
Revised edition of manias, panics, and crashes, 2011.
Isbn 978–1–137–52575–8
1. Financial crises. 2. Business cycles. 3. Depressions. I. Aliber, robert z. Ii. Title.
Hb3722.K56 2015
338.5942—Dc23 2015017424
CONTENTS
List of Tables vi
Foreword vii
Robert M. Solow
Introduction 1
1 Financial Crises: a Hardy Perennial 5
2 The Anatomy of a Typical Crisis 38
3 Speculative Manias 53
4 F ueling the Flames: the Expansion of Credit 78
5 T he Critical Stage – When the Bubble Is About To Pop 104
6 Euphoria and Paper Wealth 132
7 Bernie Madoff: Frauds, Swindles, and the Credit Cycle 143
8 International Contagion 1618–1930 183
9 Bubble Contagion: Mexico City to Tokyo to Bangkok to
New York, London, and Reykjavik 200
10 Euromania and Eurocrash 224
11 Policy Responses: Benign Neglect, Exhortation, and Bank Holidays 235
12 The Domestic Lender of Last Resort 260
13 The International Lender of Last Resort 279
14 The Lehman Panic – An Avoidable Crash 313
15 The Lessons of History 340
Epilogue 369
Notes 379
Afterword 404
Lord Robert Skidelsky
Index 407
LIST OF TABLES
6.1 World’s tallest buildings 133
8.1 Reported failures in the crisis of 1847–48,
by cities (number of failures) 193
13.1 Official finance commitments (last-resort lending)
($US billions) 307
FOREWORD
Charlie Kindleberger (CPK from now on) was a delightful colleague: perceptive,
responsive, curious about everything, full of character, and, above all, lively.
Those same qualities are everywhere evident in Manias, Panics, and Crashes.
I think that CPK began to work on the book in the spirit of writing a natural
history, rather as Darwin must have done at the stage of the Beagle – collecting,
examining, and classifying interesting specimens. Manias, panics, and crashes
had the advantage over rodents, birds, and beetles that they were accompa-
nied by the rhetoric of contemporaries, sometimes with insight, sometimes
just blather. It was CPK’s style as an economic historian to hunt for interesting
things to learn, not to pursue a systematic agenda.
Obviously, then, he would have had a field day with the housing bubble, the
piling-up of risk, the financial panic of 2008, and the evaporation of perceived
wealth that followed it and led to the recession from which we are – at best – just
emerging. The whole story was ripe for CPK: it was big, it was international in
scope, and it implicated a whole zoo of new shadow-banking institutions, finan-
cial derivatives, and financial practices. And, God knows, it produced a lot of
rhetoric before, during, and after.
Of course, he was an economist by training and experience, and he soon
found patterns and regularities, and causes and effects. What caught his eye
especially were the irrationalities that seemed so often to enmesh those directly
or indirectly enmeshed in the events themselves. By itself that would have been
merely entertaining. The story got interesting for CPK with the interaction of
behavior and institutions. The occurrence of manias, panics, and crashes, and
their ultimate scope, also depended very much on the monetary and capital-
market institutions of the time.
CPK could not have known at the start just how hardy a perennial financial
crises would turn out to be. The quarter-century after the publication of the first
edition featured a whole new level of turbulence in national banking systems,
exchange-rate volatility, and asset-price bubbles. There was always new material
to be digested in successive editions. This history cannot have been merely the
result of increasing human irrationality, though CPK would have been charmed
by what a German friend of ours called ‘Das Gesetz der Verschlechtigung aller
viii FOREWORD
Dinge’ (the Law of the Deterioration of Everything). Increasing wealth, faster
and cheaper communication, and the evolution of national and international
financial systems also played an indispensable role, as sketched in Chapter 13,
added to later editions by Robert Aliber. CPK’s effort at economic history found
a subject that does not appear to be going out of style.
The shape of a ‘new financial architecture’ and the possible utility of a
lender of last resort – national and/or international – along with the guidelines
that ought to govern it were also among CPK’s preoccupations. He would cer-
tainly have been fascinated – and probably gratified – by the way the Federal
Reserve acted during the crisis not only as lender of last resort to the banking
system but almost as lender of last resort to the whole economy. He might have
felt much the same about the innovative responses to which his one-time stu-
dent, Mario Draghi, led the European Central Bank. Those who are engaged in
reforming (or at least changing) the system would do well to ponder the lessons
that emerge from this book.
One of those lessons is very general, and is most applicable in contexts
where irrationality may trump sober calculation. CPK was a skeptic by nature,
just the opposite of doctrinaire. He mistrusted iron-clad intellectual systems,
whether their proponents were free marketeers or social engineers. In fact, he
considered clinging to rigid beliefs in the face of disconcerting evidence to be
one of the more dangerous forms of irrationality, especially when it is prac-
ticed by those in charge. The international economy would be a safer place if
CPK’s tolerant skepticism were more common among the powers that be. I am
thinking, in particular, about current discussions of the so-called ‘Washington
consensus’, and the pros and cons of both freely floating exchange rates and un-
fettered capital markets.
Any reader of this book will come away with the distinct notion that large
quantities of liquid capital sloshing around the world should raise the possibility
that they will overflow the container. One issue omitted in the book – because
it is well outside its scope – is the other side of the ledger: What are the social
benefits of free capital flow in its various forms, the analogue of gains from
trade? CPK, whose specialties as an economist included international trade, in-
ternational finance, and economic development, would have been sensitive to
the need for some pragmatic balancing of risks and benefits. One can only hope
that the continued, up-to-date availability of this book will help to spread his
open-minded habit of thought.
As he carries the seventh edition up to date, Aliber emphasizes the likeli-
hood that the roughly concurrent credit bubbles in a number of different coun-
tries are interrelated events, possibly responses to a common disturbance. It
seems implausible that the appearance of housing-based credit bubbles in the
FOREWORD ix
United States, the UK, Ireland, and Spain merely reflects independent rolls of
the dice. Aliber shows how these events are transmitted internationally through
current account imbalances in a world in which capital moves easily across
borders. The analytically and empirically validated causal connection made by
Aliber between fluctuations in cross-border investment flows and subsequent
banking crises in a world of floating exchange rates now amounts to a full-
blown model. CPK, as a specialist in international economics, would probably
have cottoned on to this account.
A more complicated question, also surfaced by Aliber, is whether there are
successive ‘waves’ of credit bubbles that are causally related. If this is so, it has
important implications for the design of future regulation, both domestically
and internationally. We are now well beyond natural history.
It seems to me that the Aliber version preserves this basic Kindleberger ori-
entation but imposes a little more order on CPK’s occasionally wayward path
through his specimen cabinets. More manias, panics, and crashes may plague
us, but readers of this book will at least have been inoculated.
Robert M. Solow
INTRODUCTION TO THE
SEVENTH EDITION
Robert Z. Aliber
I
t was my great good fortune to inherit Manias from Charles Kindleberger
after he had brought out the first four editions. The first edition of Manias
was published in 1978, four years before the first major post-World War II
global banking crisis and more than forty years after the Great Depression of
the 1930s. Kindleberger had been discussing some the ideas about the causes of
these periodic banking crises in his classes at MIT for three or four years before
the first edition was published. The motivation may have been the surge in
loans from the major international banks to the governments and government-
owned firms in Mexico, Brazil, Argentina, and ten other developing countries;
the external indebtedness of these countries was increasing by 20 percent a
year, perhaps three times the increases in their GDPs. These rates of growth
of indebtedness were too high to be sustainable. Kindleberger was focused on
the ‘end game’ and the adjustments that were likely when the lenders concluded
that they should slow the increase in their loans to these indebted borrowers.
The insight that led to Manias was the instability in financial markets during
the 1920s and the 1930s and the Great Depression. He was concerned that the
move to a floating currency arrangement after the US Treasury closed its gold
window after the historic Camp David weekend of August 1971 was likely to be
a source of financial instability.
Kindleberger’s approach relied on contemporary and historic accounts of
the surges in the prices of securities and real estate and the subsequent crashes;
he quoted John Stuart Mill, Walter Bagehot, Alfred Marshall, and many others.
He grouped the remarks of these authors by the stages of the financial cycle –
first the increases in the prices of real estate and securities, then their observa-
tions when prices peaked, and then in the debacle as prices crashed. The third