I've just finished reading Charles Kindleberger (and Robert Aliber)'s classic, "Manias, Panics and Crashes" (5th ed). It's good, and I could write a lot about it. The most striking aspect was the narrative - instead of presenting each case in a chronological order (as most academic works do), they split the chapters up into the different stages. The problem with this is the amount of repetition, as aspects of each story are alluded to in several chapters. At first I found this grating (for example the repeated use of the term "hit parade"), but by the end of the book it appears to be a useful pedagogical device. It's almost as though you receive three of four thorough accounts of each crisis.
The book is of course a work of economic history, and strikes me as a definitive compendium of key events, interesting tidbits, and general insights. As a theoretical work it is lacking, and I was disappointed by the quality of the discussion of the Austrian school - they assert that "the latest experience with bank deregulation in Latin America and especially in East Asia - do not support the view that 'good money drives out bad'" (p.74). Forgive me, but I don't think White and Selgin have that in mind when they talk about free banking.
Having said that, at least the "neo-Austrian school" receive a hearing, and several references are made to Murray Rothbard. People often debate the extent to which Austrians receive mainstream recognition, but this is the classic "mainstream" text on financial crises, and Rothbard's in it. You don't need people to agree with you to cite you, provided your arguments are well-researched.
I learnt a great deal about the present crisis from reading this book, and have taken a far broader view of the historical causes and forces of globalisation. The notion that the US housing bubble was 100% down to bad domestic Fed policy is untrue, and the real issue is working out the extent to which outside factors were permitted to have an effect. In the past I've used a metaphor of an "airbed", which I think is more fitting than "bubble" - bubble's burst, but Kindleberger shows how liquidity tends to merely get "sloshed" about from one country to another. The Japanese boom leads to the East Asian crisis leading to the US housing boom. Identification of additional policy errors are merely incidental (as good economists readily acknowledge)
Indeed this edition was written before the financial crisis, and he calls it pretty well:
Skeptics wondered whether the deflationary effects of the implosion of the stick price bubble [in 2001] had been largely offset by a bubble in the housing market. Will the storm subside, the flood crest and fall? Or will boom and crash spread from one market and country to another and the steps taken locally and internationally fail to halt panic and reverse the damage? (p.96)
the likelihood of escaping economic and financial crises in the years ahead seems small (p.238)
Whilst Kindleberger talks a lot about the benefits of an international lender of last resort, one section of the book I found most enlightening was the type of structure required - he actually comes pretty close to describing a polycentric system with deliberate regime uncertainty/common unknowledge. I don't know if the work of Lin Ostrom has been applied to free banking but the potential is there for some highly illuminating empirical work.
Finally, the aspect of the book that I took to be the main theoretical contribution (I didn't find the stages of crises especially novel or powerful - a good reading of Fisher and Hayek is all you need), is when he talks about greed. I'm one of many economists that have utilised the "greed didn't cause the crisis. It's a constant, like gravity. Sure it plays a part, but in the same way people don't blame plane crashes on gravity, we need to look for other factors". However I'm rethinking this:
Swindling increases in economic booms because greed appears to grow more rapidly than wealth
If we ignore the phrase "greed" (which I don't understand), the real issue here is "fraud", and the argument is that as the boom runs it's cause the incentives of manipulating financial information increases. Those who's profits derived from the easy money will now be tempted to embezzle money and cook the books. It seems historically accurate to place "fraud" as a stylised fact of the boom bust cycle, and a sign that we're reaching the upper turning point. But the part I find really interesting is that it's an excellent pedagogical tool.
Austrians are prone to say things like "the mistakes are made during the boom, they get revealed during the recession". This is, I believe, correct, but it can be a difficult sell. Most people believe that everything was fine in 2006, and that the economy is in a bad situation now. They're wrong, but if you don't understand capital theory, or counterfactual reasoning (e.g. being able to uncover the forced savings), it's understandable. However it's very easy to grasp the notion that during the boom fraud is being committed, it's only in the recession that it gets revealed.
Indeed maybe greed does increase during a credit boom, but whilst most people argue that the causation runs from greed to bubble, Kindleberger is clearly arguing the opposite - that the easy money makes greed more likely. Therefore we might have to sacrifice an effective analogy about airplanes and gravity, but in return we draw behavioural factors into the analysis and demonstrate exactly where the problems occur.
This is one of those books that I've been ashamed to have never read. As a means of public humiliation I've written this!
Recent Comments