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.
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. If you want to, you can buy it here: Manias, Panics and Crashes: A History of Financial Crises.
Disclosure: The publisher asked if I wanted the book. I said “yes” and he sent it to me.