MANIAS, PANICS, AND CRASHES

MANIAS, PANICS, AND CRASHES

Charles Kindleberger


EVERYmonth , we find out how to draw yet more business lessons from history. As the stock market continues its ride in great gulping drops and soaring heights, take heart from this fact: Its all happened before... Now overtrading is by no means a clear concept . It may involve pure speculation for a price rise, an overestimate of prospective returns, or excessive gearing . As firms or households see others making profits from speculative purchases and resales , they tend to follow: Monkey see, monkey do.
In my talks about financial crisis over the last decade, I have polished one line that always gets a nervous laugh: There is nothing so disturbing to ones well-being and judgement as to see a friend get rich. When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behaviour to manias or bubbles. The word mania emphasises the irrationality; bubble foreshadows the bursting. In the language of some economists, a bubble is any deviation from fundamentals , whether up or down , leading to the possibility and even the reality of negative bubbles, which rather gets away from the thrust of the metaphor. More often small price variations about fundamental values are called noise. In this book, a bubble is an upward price movement over an extended range that then implodes. An extended negative bubble is a crash.