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

Kindleberger was a professor of economics at MIT, and a deep scholar of the history of financial bubbles and subsequent crashes. He proves with many examples that growth in the supply of credit is a fundamental factor in bubble development, stengthening associations of this type categorized by Hyman Minsky. While Kindleberger's writing is sometimes redundant, his amazing grasp of the details of financial history, numerous examples, and deep understanding more than compensate for this minor limitation of style. This book has been through 5 editions and is an indispensable reference; it is also a fascinating read. It should not to be missed by any serious investor, nor any student of financial manias and panics.

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.

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.

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

The subtitle (A History of Financial Crises) is misleading. This is an excellent book as far as dissecting manias and trying to understand them, but it is mainly that -- a study of how manias develop and turn into panics or crashes. The impression that I got is that Dr. Kindleberger assumes the reader already knows financial history. If history is more of what you're looking for, I highly recommend Edward Chancellor's "Devil Take the Hindmost". You can always come back to "Manias, Panics, and Crashes" later for a deeper study.