#BookTalk: Manias, Panics and Crashes – A History of Financial Crises

What we learn from history is that we don’t learn from history. Governments come and go, policies are made and then changed as economic circumstances change, but human behaviour, in general, oscillates between fear and greed. This tendency always remains. This book chronicles the history of extreme financial gyrations.

Most investors and professional money managers may have fancy degrees, but they have no clue about the history of financial markets. They draw easy parallels and compare linearly, while markets always present challenges on an exponential scale. In such constantly evolving dynamic markets, complacency often can be a killer.

The author provides attention to the social psychology that leads people to take the risk of investing in Ponzi schemes and asset price bubbles. Today’s generation of investors, finance and economics professionals, students, and policymakers looking to avoid crashes has access to the panoramic history of financial crises that this book enables.

“Manias, Panics and Crashes” describes the cycle of financial crises, including how they start, grow, spread, and take on a life of their own. The author provides an insightful account of a series of bubbles, stretching back to the Dutch tulip craze, the South Sea bubble, the dotcom bubble, the Global Financial Crises, and more.

None of them are exactly the same; it’s about people riding the ‘this time is different” kind of enthusiasm. Each time, it’s much bigger and scarier. From being good to crazy to crashing, this is how it all unfolds. At first, it’s good because only a few people are involved. Having the first-mover advantage, they make a lot of money. As more people, and most of them, get involved, it becomes crazy. This has all happened before.

During times of exuberance, people fail to see —or rather, ignore— what has happened before and choose to rationalise by counterargument. The author describes how these manias occur, what their symptoms are—excessive speculation, over-leverage, high trading volumes, fraud, embezzlement, and so forth—and how they end in a slump. In the latest 8^th edition, authors introduce new chapters on cryptocurrency and the United States as the global lender of last resort.

From the Book

“Wall Street underscores Joseph Schumpeter’s observation that ‘creative destruction’ dooms those who stand still in a capitalist economy. Financial markets have become the epicenters of that reality.”

“The outcome of the previous mania and crash unleashes exchange rate changes and capital flows that set the stage for the next wave of crises.”

“The more interventionist the authorities are in the current crisis, the more intense the next mania will be because some of the lenders and investors will extend credit in the belief that they will be bailed out.”

“History shows that increases in regulations applied to established institutions create incentives to develop new institutions that are outside the scope of regulations.”

“The dominant argument against the a priori view that panics can be cured by being left alone is that they almost never are left alone….The Chicago School assumes that the market participants are always more intelligent than the authorities, in large part because the authorities are motivated by short-term political objectives.”

“Timing presents a special problem. As the boom mounts to a crescendo, it must be slowed without precipitating panic. After a crash has occurred, it is important to wait long enough for the insolvent firms to fail, but not so long as to let the crisis spread to the solvent firms that need liquidity.”