Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition [Paperback]

This book provides an analytical treatment of the process of speculation and monetary expansion that has sometimes led to a variety of historical crises. These major crises don't necessarily occur frequently within a human lifespan, so it is important to study these historical episodes in order to gain a better understanding of some of their common characteristics. It was written by "literary economist" Charles Kindleberger through the first four editions in 1978, 1989, 1996 and 2000, and subsequently updated by Robert Aliber in the fifth and (this) sixth edition in 2005 and 2011. Kindleberger passed away in 2003 at age 92. Specifically, Kindleberger and Aliber identify and discuss common attributes of the speculation and crisis cycle using material from lots of historical episodes. This is not a chronological story of crisis after crisis, like Charles MacKay's classic 19th century work, "Memoirs of Extraordinary Delusions and the Madness of Crowds," which I recommend. Rather, it is a highly readable discussion of the processes in play, with observations and analyses developed from a wide variety of historical crises.

My reference to Kindleberger as a "literary economist" means two things: First, Kindleberger has focused on a discussion of key theoretical concepts in a language (clear English) that the intelligent lay reader can understand, not on the more widely used language of mathematical economics and econometrics that is so common in the field today. Second, in addition to writing in English rather than math, Kindleberger writes in a sufficiently engaging and interesting style that it shouldn't put you to sleep. Indeed, this is a very interesting work that addresses some of the most irrational bubbles in history (see below). History doesn't always repeat exactly, but it does rhyme.

My first encounter with this book was back in the early 1990s, when I read the second edition. When I pulled my old copy off the shelf and reviewed it prior to taking up the latest edition, I noticed I had forgotten that Kindleberger devoted several pages to the work of Hyman Minsky, whose work has really come into fashion in the last five years. Basically, the Minsky Instability Hypotheses states that periods of prolonged economic stability lead to a reduced awareness of risk, which then leads to periods of instability when the risk that has been ignored finally presents itself on our doorstep. Put more simply, economic stability leads to economic instability. I mention this because it suggests that as a result of his research into speculation and financial crises, Kindleberger was keenly aware of the kinds of conditions that would ultimately play out in 2007 - 2009 and beyond.

In this sixth edition Aliber covers the new ground of more recent crises, making it a very nice update, and he includes his listing of the top ten financial bubbles:

1. The Dutch Tulip Bubble, 1636.
2. The South Sea Bubble, 1720.
3. The Mississippi Bubble, 1720.
4. The late 1920s stock price bubble, 1927 - 29.
5. The surge in bank loans to Mexico and other developing countries in the 1970s.
6. The bubble in real estate and stocks in Japan, 1985 - 89.
7. The 1985 - 89 bubble in real estate and stocks in Finland, Norway, and Sweden.
8. The bubble in real estate and stocks in Thailand, Malaysia, Indonesia, and several other Asian countries in 1992 - 97 and the surge in foreign investment in Mexico, 1990 - 99.
9. The bubble in over-the-counter stocks in the United States, 1995 - 2000.
10. The bubble in real estate in the U.S., Britain, Spain, Ireland, and Iceland between 2002 and 2007--and the debt of the government of Greece.

Late in this edition, Aliber devotes a chapter to "The Lehman Panic," which he refers to as "an avoidable crash."

Given the events of recent years, the latest edition is well timed to address the growing interest in systemic issues of speculative manias and monetary expansions that contribute to the national and international crises we see in panics and crashes that central banks and other lenders of last resort must struggle with. The authors devote two chapters to national and international lenders of last resort and their difficult decisions. As this book describes financial crises, they are "hardy perennials," so we have a lot to gain from understanding some of the common attributes of historical periods of speculation and crisis. As a clear, well-written and solid study of the whole process, this book deserves your serious consideration.

This is the first book that I have reviewed twice. I reviewed the third edition of the book previously, but I am reviewing the sixth edition now.

Kindleberger places the manias, panics, and crashes on a common grid, to see their similarities, In it he draws on a number of common factors:

* Loose monetary policy
* People chase the performance of the speculative asset
* Speculators make fixed commitments buying the speculative asset
* The speculative asset's price gets bid up to the point where it costs money to hold the positions
* A shock hits the system, a default occurs, or monetary policy starts contracting
* The system unwinds, and the price of the speculative asset falls leading to
* Insolvencies with those that borrowed to finance the assets
* A lender of last resort appears to end the cycle

The advantage over the third edition is that you get to hear about the Asian crisis LTCM, the tech bubble, Madoff, and the present crisis (banking & housing, soon to be sovereigns).

The main point for readers is to beware when monetary policy is easy, banking regulation is lax, and many seem to favor buying the asset du jour, often with leverage. What is self-reinforcing on the way up will be self-reinforcing on the way down, but with greater speed and ferocity, as bad debts have to be liquidated.

Quibbles

Hindsight is 20-20. If the US Government had rescued Lehman, something else might have proven to be "too big to rescue," that the government might allow to fail, but miss the connectedness of the institution. I do think the US Government should have been a DIP lender to troubled firms, but not a buyer of equity.

Who would benefit from this book: Most investors would benefit from this book. It will make you more skeptical of assets that seems to be doing unnaturally well; it will also make you more skeptical about catching falling knives in the market.

<Review of the 6th Edition>
Maybe not the definitive book on bubbles, speculation, and monetary expansion, but one can surely benefit from the knowledge obtained to avoid such casual financial distress to one's pocketbook. This 6th addition of Manics, Panics & Crashes is almost entirely re-written to include the relatively recent adventures and speculation in finance of the last 20 years. Beyond the exposé on the plethora of financial shenanigans over the last 300 years, a good amount of the text details the money flows during the old gold standard to assist in explaining causal reactions to the formation of bubbles and subsequent busts.

Surely many reading this review have experienced some effects described in the book, but nothing is really new as it has all been done before - just updated names for the same game (i.e. think Ponzi scheme). A worthy read for those interested in the history of financial shenanigans. However, the author's do assume you are aware of some of the classic Manics such as the Tulip Bubble and the Mississippi Company scheme. All in, is one is interested in financial history then this is an edition you would want to read.

The reader may be interested in Charles MacKay's classic "Extraordinary Popular Delusions and the Madness of Crowds" as a primer prior to reading this updated edition. As a side note, I was fortunate to read Extraordinary Popular Delusions nearly 20+ years ago and it saved me many headaches with the ability to spot several suspect adventures.

Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

Of note: The typeset of Manias, Panics is a little tough and could have been a different font and 1/2 point larger. A little rough on older eyes.

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