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2015 | Buch | 7. Auflage

Manias, Panics, and Crashes

A History of Financial Crises

verfasst von: Robert Z. Aliber, Charles P. Kindleberger

Verlag: Palgrave Macmillan UK

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Inhaltsverzeichnis

Frontmatter
Introduction to the Seventh Edition
Abstract
It was my great good fortune to inherit Manias from Charles Kindleberger after he had brought out the first four editions. The first edition of Manias was published in 1978, four years before the first major post-World War II global banking crisis and more than forty years after the Great Depression of the 1930s. Kindleberger had been discussing some the ideas about the causes of these periodic banking crises in his classes at MIT for three or four years before the first edition was published. The motivation may have been the surge in loans from the major international banks to the governments and governmentowned firms in Mexico, Brazil, Argentina, and ten other developing countries; the external indebtedness of these countries was increasing by 20 percent a year, perhaps three times the increases in their GDPs. These rates of growth of indebtedness were too high to be sustainable. Kindleberger was focused on the ‘end game’ and the adjustments that were likely when the lenders concluded that they should slow the increase in their loans to these indebted borrowers. The insight that led to Manias was the instability in financial markets during the 1920s and the 1930s and the Great Depression. He was concerned that the move to a floating currency arrangement after the US Treasury closed its gold window after the historic Camp David weekend of August 1971 was likely to be a source of financial instability.
Robert Z. Aliber
1. Financial Crises: A Hardy Perennial
Abstract
The years since the early 1970s are unprecedented in terms of the large changes in the day-to-day and month-to-month prices of commodities, currencies, bonds, stocks, and real estate relative to their long-run average prices. There have been four waves of banking crises; a large number of lenders in three, four, or more countries collapsed at about the same time as the prices of real estate and securities in these countries and the prices of their currencies fell sharply. Each country that experienced a banking crisis also had a recession as house-hold wealth declined in response to the sharp fall in the prices of securities and real estate, and as the banks became much more reluctant suppliers of credit as their own capital was depleted. The Great Recession that began in 2008 was the most severe and the most global since the Great Depression of the 1930s.
Robert Z. Aliber, Charles P. Kindleberger
2. The Anatomy of a Typical Crisis
Abstract
Historians view each event as unique. In contrast economists search for the patterns in the data, and the systematic relationships between an event and its antecedents. History is particular; economics is general. The business cycle is a standard feature of market economies; increases in investment spending lead to increases in household incomes and in GDP growth rates. Macroeconomics focuses on the explanations for the cyclical variations in the rates of growth of GDP around the long-run trend rates of growth and why these trend rates are higher in some countries than in others.
Robert Z. Aliber, Charles P. Kindleberger
3. Speculative Manias
Abstract
The word ‘mania’ suggests a loss of a connection with rationality, perhaps mass hysteria. The loss of connection with rationality reflects that the investors, lenders, borrowers, and the bank and financial regulators fail to recognize that a crash always is the end game for the mania. Economic history is replete with manias that involved the construction of canals, railroads, and homes and commercial properties as well as manias that involved stock prices. Economic theory assumes that men and women are rational — and hence manias would not develop. The rationality assumption is disconnected from the observation that manias occur episodically. This chapter focuses on the increases in the investor demand for a particular type of security or asset and the next chapter is centered on increases in the supply of credit.
Robert Z. Aliber, Charles P. Kindleberger
4. Fueling the Flames: The Expansion of Credit
Abstract
Speculative manias gather speed through expansion of credit. Most increases in the supply of credit do not lead to a mania — but nearly every mania has been associated with rapid growth in the supply of credit to a particular group of borrowers. In the last hundred years, the increases in supplies of credit have been provided in part by the banks, in part by the development of new financial instruments and in part by cross-border investment inflows. The mania in tulip bulbs in the seventeenth century occurred because the sellers of the bulbs provided credit to the buyers.1 John Law had his Banque Générale, later the Banque Royale, as his source of credit while the South Sea Company relied on the Sword Blade Bank. In 1763 credit expansion in Holland was financed by the Wisselruiti, or chains of accommodation bills (think post-dated checks) from one merchant to another. The British canal mania of 1793 was fed by spending facilitated by loans from many newly established country banks to the entrepreneurs who were developing the canals.
Robert Z. Aliber, Charles P. Kindleberger
5. The Critical Stage — When the Bubble is About to Pop
Abstract
The standard model of the sequence of events that leads to a banking crisis is that a shock triggers an economic expansion that morphs into an economic boom and then euphoria develops; the prices of securities and real estate increase rapidly, much more rapidly than GDP. Then there is a pause in the pace of these increases in the price of securities. A few savvy or lucky investors sell some of their securities to park their speculative gains in a secure store of value. The slowing of the increases in the prices of securities and real estate may induce a more cautious approach by others. Distress is likely to follow as the prices of securities begin to decline. The pattern is biological in its regularity. A panic is likely and then a crash may follow. Lord Overstone, the leading British banker of the middle of the nineteenth century, saw a similar pattern and was quoted with approval by Walter Bagehot: ‘quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [sic], pressure, stagnation, ending in aquiesence’.1 Overstone identified five stages of euphoria before the financial crisis, or, in his words, the convulsion.
Robert Z. Aliber, Charles P. Kindleberger
6. Euphoria and Paper Wealth
Abstract
Consider the birthdates of some of the tallest buildings in the world. The Empire State Building in New York City — 1250 feet tall — was started in 1929, at the peak of a bubble. In the late 1980s it seemed like 80 percent of the building cranes used to construct tall structures were in Tokyo. By the mid-1990s many of these cranes had migrated to Shanghai and Beijing, and then they moved to the Persian Gulf. Now the tallest building is the Burj Dubai in the United Arab Emirates, completed in 2010.
Robert Z. Aliber, Charles P. Kindleberger
7. Bernie Madoff: Frauds, Swindles, and the Credit Cycle
Abstract
Charlie Ponzi is the most famous banker in American history, immortalized in the term ‘Ponzi scheme’. Ponzi owned a small firm that sold its own IOUs, sometimes called deposits, in one of the Boston suburbs in the early 1920s; he promised to pay the buyers of his IOUs 45 percent interest a year at a time when the traditional banks were paying two or three percent. Ponzi’s operation was straightforward — he used the money that he received from the sale of deposits on Wednesday to pay the interest to those who had bought the deposits on Monday. The interest rate that Ponzi paid was so high that most of those who bought the deposits on Monday were happy to keep their money with Ponzi, so they could earn ‘interest on the interest’.
Robert Z. Aliber, Charles P. Kindleberger
8. International Contagion 1618–1930
Abstract
The first question suggested by the review of the historical record that banking crises occur in waves is the source of the shocks that led to the surges in indebtedness and the prices of securities in the boom that precedes each of these crises. The second is the connection that links the crises that occur at about the same time in different countries — why did Mexico, Brazil, and Argentina have banking crises in the summer of 1982 and why did Iceland and Britain have a crisis at about same time as the one in the United States in 2008.
Robert Z. Aliber, Charles P. Kindleberger
9. Bubble Contagion: Mexico City to Tokyo to Bangkok to New York, London, and Reykjavik
Abstract
That four waves of surges in cross-border indebtedness and surges in prices of securities and of real estate have occurred in 30 years may set a record for global monetary instability. This succession of waves of banking crises might have been a coincidence; the alternative explanation is that one or several of these waves led to increases in cross-border investment inflows that led to increases in the prices of securities in other centers to levels that eventually became too high to be sustained. Obviously the first wave of surges in cross-border flows — which involved the rapid growth in loans from the major international banks to governments and government-owned firms in Mexico and ten other developing countries — was sui generis. Was there a connection between the banking crises in these countries and the surge in the supply of bank loans in Japan in the last half of the 1980s? Similarly was there a connection between the implosion of the prices of securities and real estate in Tokyo at the beginning of the 1990s and the surge in the external indebtedness in Thailand and its neighbors in Southeast Asia in the mid-1990s as well as in the external indebtedness of Mexico, Russia, Brazil, and Argentina? Was there a link between the Asian Financial Crisis that began in mid-1997 and the sharp increase in US stock prices in the next thirty months? And were the sharp increases in the prices of real estate in the United States, Britain, Ireland, Spain, and Iceland between 2002 and 2007 — and in the debt of the governments of Greece and Portugal and Spain in 2008 and 2009 — related to these earlier events?
Robert Z. Aliber, Charles P. Kindleberger
10. Euromania and Eurocrash
Abstract
One of the most ambitious innovations in international finance in the seventy years since the end of the Second World War was the establishment of a common currency for Germany, France, Italy, Spain, and most other countries that were members of the European Union (EU). Eleven of the fourteen EU member countries adopted the euro on 1 January 1999; Britain and Denmark chose to retain their currencies. More than ten countries subsequently have joined the EU and each has either adopted the euro or will do so as one of the conditions for joining the EU.
Robert Z. Aliber, Charles P. Kindleberger
11. Policy Responses: Benign Neglect, Exhortation, and Bank Holidays
Abstract
If many financial crises have a stylized form, should there be a standard policy response? Assume plethora, speculation, panic; what then? Should the government authorities intervene to cope with a crisis and if so when? Should they seek to forestall increases in real estate prices and stock prices as their price increases expand so the subsequent crash will be less severe? Should they prick the bubble once it is evident that the prices of property and corporate shares are so high that it is extremely unlikely that increases in rents and in corporate earnings could be sufficiently rapid and large to ‘ratify’ these lofty prices? When the prices of securities begin to fall, should the authorities adopt measures to dampen the decline and ameliorate the consequences?
Robert Z. Aliber, Charles P. Kindleberger
12. The Domestic Lender of Last Resort
Abstract
The hallmark in the development of ‘the Art of Central Banking’ over the last two hundred years has been the evolution of the concept of ‘a lender of last resort’. The expression comes from the French dernier ressort, and centers on the last legal jurisdiction to which a petitioner can take an appeal. The term has become thoroughly anglicized, and now the emphasis is on the responsibilities of the lender rather than the rights of the borrower.
Robert Z. Aliber, Charles P. Kindleberger
13. The International Lender of Last Resort
Abstract
The primary argument for an international lender of last resort is to reduce the likelihood that a country would transmit a deflationary shock to its trading partners, because the price of its currency would decline in response to a temporary surge in import payments or a shortfall in export earnings. This decline would transmit deflationary pressure to its trading partners, both when the price of its parity was reduced and when the price of its currency was allowed to decline. The cliché from the 1930s was that some countries followed a ‘beggar-thy-neighbor’ policy; they sought to increase manufacturing employment either by allowing market forces to lead to a decline in the price of their currency, or by establishing new and lower parities for their currencies. When the price of the Austrian schilling was allowed to decline in May 1931, deflationary pressure was transmitted to Germany; subsequently deflationary pressure was transmitted to Britain. When the price of the British pound declined after Britain went off gold in September 1931, the deflationary pressure was transmitted to the United States, France, Italy, and to the other countries that maintained parities for their currencies in terms of gold. When the link between the US dollar and gold was severed in March 1933, the deflationary pressure was transmitted to France and other countries that retained their gold parities.
Robert Z. Aliber, Charles P. Kindleberger
14. The Lehman Panic — An Avoidable Crash
Abstract
The bankruptcy of Lehman Brothers Holdings, the fourth largest US investment bank, in mid-September 2008 triggered the most severe financial panic and crash in a century. Lehman had been an aggressive buyer of mortgage-related securities; the firm used the money that it obtained from selling its own short term IOUs to buy long-term mortgages. Every investment bank is highly leveraged, but Lehman was at the extreme end of the spectrum in terms of its leverage; its assets were more than thirty times its capital. At times, Lehman’s leverage may have been as much as forty times its capital; at the end of each quarter, Lehman engaged in ‘window dressing’ so that its reported leverage appeared smaller than the leverage that it had had in the previous several months.
Robert Z. Aliber, Charles P. Kindleberger
15. The Lessons of History
Abstract
The last four hundred years have been replete with financial crises, which often followed increases in the supplies of credit, greater investor optimism, and more rapid economic growth. More and more individuals purchased securities and assets for short-term profits from the increases in their prices. Households became wealthier as the market prices of securities and assets increased, and consumption spending grew. Business firms became more upbeat and invested more. The external indebtedness of many countries increased, and at a pace that was too rapid to be sustainable. The domestic counterpart of the rapid increase in the external indebtedness was that the domestic indebtedness of a group of borrowers in these countries increased at rates that eventually proved too rapid to be sustained. Economic booms followed and then euphoria developed. The increases in the supplies of credit led to sharp increases in the prices of securities and real estate to levels that proved too high to be sustainable.
Robert Z. Aliber, Charles P. Kindleberger
Epilogue
Abstract
The economic achievements in China since the early 1980s have been brilliant, and probably unparalleled by those in any other country. Three hundred to four hundred million people — perhaps one third of the country’s population — moved from huts with dirt floors on farms and villages to apartments in the cities and near factories; they have a middle-class lifestyle ‘with clean water in and dirty water out’. The rate of economic growth averaged nearly 10 percent for nearly thirty years. China is the world’s second largest economy and even if its growth rate were to decline sharply, China will eventually surpass the United States as the world’s largest economy.
Robert Z. Aliber, Charles P. Kindleberger
Backmatter
Metadaten
Titel
Manias, Panics, and Crashes
verfasst von
Robert Z. Aliber
Charles P. Kindleberger
Copyright-Jahr
2015
Verlag
Palgrave Macmillan UK
Electronic ISBN
978-1-137-52574-1
Print ISBN
978-1-137-52575-8
DOI
https://doi.org/10.1007/978-1-137-52574-1