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Manias, Panics, and Crashes: A History of Financial Crisis

Are we doomed to repeat history? Unfortunately yes! The book Manias, Panics, and Crashes: A History of Financial Crisis originally written in 1978, now on it’s fifth edition (2005), clearly illustrates just how predictable we are:

“The end of a period of rising prices for assets to distress whenever a significant number of investors have based their purchases of these assets on the anticipation that their prices will continue to increase. Some of these investors may have a ‘negative carry’ in that the interest rates on the funds borrowed to buy the assets exceed the cash income on the assets; these investors anticipated that they would be able to use the increase in value of the asset as collateral for new loans that would proved them with some of the cash that they would need to pay the interest on the outstanding loans. When asset prices stop increasing, these investors are shunted into distress mode since they have no ready way to get the cash they need to pay the interest on their outstanding indebtedness.”

And what about:

“Causes of distress and the symptoms of distress are observed at the same time and include sharply rising interest rates in some or all segments of the capital market, an increase in the interest rates paid by sub-prime borrowers relative to the interest rates paid by prime borrowers, a sharp depreciation of the currency in the foreign exchange market, an increase in bankruptcies, and an end of the price increases in commodities, securities, and real estate. These developments are often related and show that the lenders have become over-extended and are trying to reduce their exposure to risks and especially to large risks.”

Manias, Panics, and Crashes: A History of Financial Crisis

Sound familiar to anyone? And to think this was written years ago and it’s repeating itself yet another time. History does repeat itself.

The good news is that if you educate yourself you can come out ahead. And this is why I strongly recommend the book Manias, Panics, and Crashes: A History of Financial Crisis. It’s a pretty intense book written using somewhat verbose and specific economic terms, as you’ve probably already noticed from the quotes above. Therefore if you’re not familiar with economics and business expect it to take a bit longer. But overall the information is excellent and very viable. And although I believe myself to be fairly well versed in economics and business, this book sure brought home some points I hadn’t fully appreciated. A very good read. Well worth your time.



 
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Comments:

  •     Andy Brice
    · October 7th, 2007  · 1:19 pm  · Permalink

    Interesting. I’m expecting the insane UK housing market to level off or crash any time now. But I’ve been saying that for the last 5 years…

  •     Steph
    · October 10th, 2007  · 9:16 pm  · Permalink

    Hi Andy,

    Your comment has actually inspired me to write a full article in response. You should see it within the next few days to a week or so…

  •     FollowSteph.com
    · October 16th, 2007  · 9:52 pm  · Permalink

    […] once in a while a specific blog comment will elicit a full article rather than a simple blog comment response. Recently Andy Brice from […]

  •     Andrew Smith
    · January 17th, 2011  · 4:51 am  · Permalink

    Thanks for sharing this nice information

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