A Short History of Financial Euphoria (Whittle)
By admin • May 26th, 2009 • Category: Finance
A Short History of Financial Euphoria (Whittle)
by: John Kenneth Galbraith
A Short History of Financial Euphoria (Whittle)
By John Kenneth Galbraith
Publisher: Penguin (Non-Classics)
Number Of Pages: 128
Publication Date: 1994-07-01
ISBN-10 / ASIN: 0140238565
ISBN-13 / EAN: 9780140238563
Product Description:
World-renowned economist Galbraith, the bestselling author of The Affluent Society, reviews great speculative booms of the last three centuries, including the junk-bond follies of the 1980s. With wisdom and wit, he shows how the lessons of history can help us avoid financial calamity. "Entertaining in its instructiveness."–The Boston Globe.
Summary: A thought-provoking analysis of the mania of financial speculation
Rating: 5
The last page of Galbraith’s book denotes that the mania of financial speculation always recurs and is inescapable in human history (P.110). Economists and policy-makers usually attribute the cause of a financial debacle to external influences such as ineffective regulatory mechanism to contain bubble-led investment activities and weakening in economic growth (P.85). By reviewing the major financial debacles of the last three centuries, Galbraith researches on common features of financial debacles and concludes that there are at least two key factors that trigger the debacle: the extreme brevity of the financial memory and the specious association of money and intelligence (P.13).
This book is not lengthy but presents all classic cases since the 17th century including tulipomaina in Holland, Banque Royale in France, South Sea Company in England, and spectacular financial debacles in the US. To Galbraith, people have a very brief financial memory of no more than 20 years (P.87) This 20-year cycle from illusion to disillusion makes them forget lessons of the past and continue to invent highly-leveraged financial instruments without self-scrutiny and sanity. Moreover, people blindly believe that money is the measure of the intelligence that supports it (P.14). They applause acolytes of speculation and exclude any adverse opinion in order to justify the circumstances that can make them rich when a mood of optimism and excitement pervades in the financial market. The Schiller’s dictum of crowd insanity has been inherent in human history for centuries (P.5).
The renowned scientist Issac Newton has remarked that he can measure human motion but he cannot measure human folly. This book was published in the 90s but Galbraith’s insights of financial insanity are still relevant to institutional and individual investors nowadays who tend not to be a scapegoat of the next financial crisis.
Summary: an hour well spent
Rating: 5
This book explains how bubbles develop and crash; it was written in 1990 and it foretells our current mess. It is well written, prescient and ironic. It is worth reading now as is his book on the crash of 1929. The small book is written in simple terms without complex theory –his point is that bubbles are driven by greed –they are predicitable and tied to human nature. Regrettably, they can not be regulated away. Too bad we all did not read this before this current disaster.
Summary: This is a great read
Rating: 5
How appropriate this book is, given the recent real estate bubble burst. It is a short study of the historical bursting of bubbles. John Galbraith is a renowned economist, and admits he can’t predict when bubbles will burst, just that they will. The language you hear during the upward trend of bubbles is exactly the same – that "it" will never go down. People get into a frenzy or euphoric state and ignore that fact that the bubble will ultimately burst, as it always does. This book was written prior to the Stock Market crash of 1987, the dot com era, the more recent real estate bubble, which ultimately is the root of our current economic woes. This was a very quick read and I enjoyed it tremendously. A friend of mine lent me his copy to read a few years ago, and the recent crash of the real estate market led me to remember how much I enjoyed the book that I bought it for myself to reread.
Summary: Bubble, "mass insanity", euphoria, crash, "mass memory loss"
Rating: 5
"A Short History of Financial Euphoria: Financial Genius is Before the Fall" is a book that every financial manager must be required to read. Every financial company must have one copy in its library.
The book is powerful in its explanation and predictions of financial speculative episodes. In eight brief chapters, (I wish I could do that), JK Galbraith describes the financial euphoria preceding major financial collapses starting with the Tulipomania in the Netherlands in the 1600s and ending with October 1987.
All crashes have common features. First, and nearly always, is a reinvention of a financial instrument sold to investors as the blockbuster wealth-creator of all time. People buy into the instrument in herds, creating a speculative bubble, which in turn leads to "mass insanity." Two speculative behaviors characterize all financial euphoria. One involves investors who believe the bubble will last forever. The second relates to those who know the bubble will ultimately burst, but contend "they will get the maximum reward from the increase as it continues; they will be out before the eventual fall" (p. 4).
The two behaviors reinforce one another in two different, but related ways. Because of euphoric "mass insanity", there is always a strong belief in the unfailing ingenuity of financial geniuses. Partly because of such a belief, a dogmatic theology has emerged that condemns to Hell anyone who dares to caution against excessive speculation and mass euphoria. Critics are generally put down as unpatriotic and against capitalism. The consequence is a crash that "always ends not with whimper but with a bang" (p.5).
Here is the common sequence of speculative episodes: Bubble, then "mass insanity", then euphoria, then crash, and finally "mass memory loss". The latter guarantees that there will be another episode just as severe or even more so.
Highly recommended!
Amavilah, Author
Modeling Determinants of Income in Embedded Economies
ISBN: 1600210465
Summary: 4.5 stars-Galbraith and Adam Smith agree that banker financed speculation is a grave threat to capitalism
Rating: 5
Galbraith has written an excellent little book on the negative impacts of speculation on the American economy.The speculative dangers to free enterprise restarted with the Reagan administration’s deregulation and privatization of the financial sector of the economy in the early 1980’s.Galbraith’s analysis is completely applicable to the Michael Milkin-Ivan Boesky directed junk bond speculation of the mid to late 1980’s that led to the collapse of so many banks and S and L’s in the 1989-1991 time period,as well as the Dot com bombs and NASDAQ(DOW) meltdown of 2000-2002 period, and the subprime mortgage backed bonds folly of the 2003-? period that also witnessed the bankers’ reflating of the DOW bubble(2003-2007) and Ben Bernanke’s 1.2 trillion dollar attempted bailout of Wall Street that simply created another bubble in oil and commodoties while annihilating the value of the dollar.Galbraith, like Adam Smith,John Maynard Keynes,and Kindleberger before him,correctly identifies a pattern that emerges over and over again in capitalist economies-first,there is the banker financed and directed leveraging based on increased prices for some asset.It is claimed that this is a " new " economy and things will be different this time.This leads to the formation of the bubble .This is then followed by a mania featuring herd like " momentum " investing that is financed by the commercial banks.This leads to a panic ,which leads to a crash which leads to a recession or depression.
I have given Galbraith 4.5 stars here because he is completely ignorant of the fact that Adam Smith provided a much more detailed exposition of this problem in his The Wealth of Nations (WN)in 1776(See the Modern Library Edition (Cannan)of WN,pp.250-340).Smith’s conclusions,supplied on pp.339-340,include the solution-prevent the bankers from financing the leveraging that speculators MUST have in order to put their plans into action.This requires a policy of restricting credit to 3 categories of borrower-the prodigals,the imprudent risk takers,and the projectors(Keynes’s speculators and rentiers).Of course,the forces of banking and finance,as pointed out by Keynes in 1938 in an article in the Eugenics Review, will resist mightily.
It is unfortunate that Galbraith never read WN.Galbraith could have used the intellectual support provided from the analysis presented by the greatest economist of all time to buttress his position substantially.
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