This is the sixth edition of Charles Kindleberger's classic history of financial crises since the dawn of capitalism. As the title of the opening chapter puts it, financial crisis is a "hardy perennial", and there has been no shortage of material for the purposes of updating. The new edition incorporates events such as the collapse of Lehman Brothers and the Bernie Madoff fraud into its analysis, which brings a welcome freshness. On the other hand, the updating - by Robert Aliber of the University of Chicago, following Kindleberger's death in 2003 - has turned it into a less cohesive and pacy read compared to, say, the third edition (1996).
Nevertheless, even though it would be worth rereading the original version, the living text does a good job of using the whole long history of financial crises to illustrate the tendency to boom and bust that is inherent in the markets. The argument is that there are exaggerated cycles in the supply of credit, causing alternating manias and crashes - a claim that is all too plausible at the moment.
Another useful thread in the book is the role of property in driving credit cycles in the 20th century. The US and UK house-price bubbles clearly played a part in the latest crisis, and other countries - Australia, Ireland, Spain - also experienced them. The same phenomenon occurred in the late-1980s boom and bust from which Japan has not yet recovered. The oil shocks of the 1970s, too, were felt first in the property markets. This is interesting, because while it is very difficult for governments to do anything to control the internal dynamic of the financial markets, they may be able to influence where the crash occurs. Aliber claims that the Lehman Brothers panic was ""avoidable"" and that Washington should have bailed out the company. In the end, it had to bail out the rest of the industry instead.
“We are where we are"", as one hears repeatedly in regulatory circles these days. With the European markets (and banks) in turmoil, it is not at all clear that a second act of the Great Crash can be averted. Does Manias, Panics and Crashe shold any lessons for the people who supervise our financial system? Well, no. Aliber concludes that if the new regulatory framework, including the Dodd-Frank Act 2010, had been in place in 2000, it would have made no difference. The previous edition ended with a warning that the political situation is such that the international co-operation needed to regulate financial cycles is extremely unlikely to be forthcoming. This is the version of the book I would send today to Angela Merkel, Nicolas Sarkozy, Silvio Berlusconi et al.
Such pessimism is well founded mid-crisis, but in the aftermath of any big crisis there is a moment when the essential co-ordination can take place to limit the room for the next bubble to emerge. However, the underlying moral of this book is surely true: if we want the dynam¬ism of capitalism, we have to live with the dynamics of the markets.
Charles P. Kindleberger
Charles Poor "Charlie" Kindleberger (October 12, 1910 – July 7, 2003) was a historical economist and author of over 30 books. His 1978 book Manias, Panics, and Crashes, about speculative stock market bubbles, was reprinted in 2000 after the dot-com bubble. He is well known for hegemonic stability theory.
His earliest book was International Short-Term Capital Movements (1937).
Although mainly an academic at MIT after 1948, Kindleberger during the course of his life worked for several American institutions, such as the Federal Reserve Bank of New York (1936–1939), the Bank of International Settlements in Switzerland (1939–1940), and the Board of Governors of the Federal Reserve System (1940–1942).
Kindleberger was a leading architect of the Marshall Plan. In 1945-1947 he served at the Department of State (Acting Director, Office of Economic Security Policy), and shortly (1947–1948) as counselor for the European Recovery Program.
As a 'historical' economist (or economic historian), Kindleberger relied on narrative exposition and knowledge of history rather than mathematical models to prove his point. His book, Manias, Panics, and Crashes is still required reading at many Masters of Business Administration (MBA) programs in the United States.
Kindleberger described his around-the-clock work to develop and launch the Marshall Plan with singular passion in a 1973 interview.
'We were conscious of a great sense of excitement about the plan. Marshall himself was a great, great man—funny, odd but great—Olympian in his moral quality. We'd stay up all night, night after night. The first work ever done that I know about in economics on computers used the Pentagon's computers at night for the Marshall Plan. I had a tremendous sense of gratification from working so hard on it,' Kindleberger said.
Kindleberger was on familiar terms with noted economists and was a graduate of the University of Pennsylvania and Columbia University (A.M., Ph. D.), later rising to the eminent position of Ford International Professor of Economics at MIT.
Robert Z. Aliber
Robert Z. Aliber is a Professor Emeritus of International Economics and Finance at the University of Chicago. He is best known for his contribution to the theory of foreign direct investment. He has given the concept of Foreign exchange rate in foreign direct investment. Aliber argues that a multinational corporation from hard currency area can borrow at lower rates in a soft currency country than can local firms.
Aliber received a Bachelor of Arts degree from Williams College (1952) and Bachelor of Arts (1954) and a Master of Arts (1957) from Cambridge University. He received his Ph. D. from Yale University. He has been a Staff Economist at the Commission on Money and Credit (1959-61) and at the Committee for Economic Development (1961-64). Aliber served as a Senior Economic Advisor at the United States Agency for International Development (1964-65). He was appointed as an Associate Professor at the University of Chicago in 1964.