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A Short History of Financial Euphoria (Penguin business)

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IN THIS SMALL but witty and well-crafted book, Galbraith chronicles the major speculative episodes, from the seventeenth-century tulipmania to the junk-bond follies of the eighties. The book was first published in 1990 and thus the recent dotcom-bubble burst is not covered. Nevertheless, the Harvard professor's book is still worth reading. A reason is that he claims to have identified common patterns in the history of financial euphoria. 'In small ways the history of the great speculative boom and its aftermath does change. Much, much more remains the same', he predicts.

The perennial features are these. Some seemingly new and desirable artifact or development captures the financial imagination of a large number of people (say, group 1). The arrival of tulips in Western Europe, gold in Louisiana, the advent of joint-stock companies (corporations), real estate in Florida, or the economic designs of Reagan are all examples. The price of the object of speculation goes up. The object when bought today is worth more tomorrow. This attracts new buyers and assures a further price increase. Those in group 1 are persuaded that the new price-enhancing circumstance is under control, and expect the market to stay up and go up, perhaps indefinitely. The individual or institution that discovered the novelty (in group 2) is thought to be ahead of the mob. Fewer in number, individuals of group 2 perceive the speculative mood of the moment, try to get the maximum reward from the increase as it continues, and plan to be out before the eventual crash. The affluence of group 2 is wrongly associated, by group 1, with a miraculous financial genius. When something triggers the ultimate reversal, group 2 decides now is time to get out. Group 1 finds its illusion abruptly destroyed. Both groups sell or try to sell. The market collapses.

Galbraith observes that, in this process, 'speculation buys up the intelligence of those involved'. The crowd converts the individual in group 1 from possessing reasonable good sense to stupidity. Those in group 2 also make errors of vanity by thinking they will beat the speculative game. It seems that 'all people are most credulous when they are most happy'. Reputable public and financial opinion reinforces euphoria by condemning those who express doubt or dissent by warning of a crash. The celebrated Yale economist Irving Fisher, for instance, spoke out sharply against Roger Babson, who foresaw the crash of 1929. But the critic must wait until after the crash for any approval, Galbraith laments.

Despite the fact that common features in speculative episodes recur, history counts little because a financial disaster is quickly forgotten by a new, self-confident generation. Something is perceived as a financial novelty merely because the financial memory is short: 'financial operations do not lend themselves to innovation'. Insightfully, Galbraith notices that all financial innovation involves the creation of debt leveraged against more limited assets. This is the case of banks, whose debt is leveraged on a given volume of hard cash. This is also the case of the holding companies created in the 1920s, whose stockholders issued bonds and preferred stock to buy other stocks. And this is the case, too, of the junk bonds of the mergers-and-acquisitions mania in the 1980s, when high-risk, higher-interest bonds were issued in greater volume against the credit of the companies being taken over. As Galbraith puts it: 'the world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version'.

However a crisis may strike at any moment whenever a debt is perceived to become dangerously out of scale in relation to the underlying means of payment. After the crash, group 1 expresses anger against the 'financial genius' of group 2. 'Financial genius is before the fall', Galbraith prophesies. Group 1 finally realizes that having more money may mean that a person in group 2 is indifferent to moral constraints. Group 2 could have even gone beyond the law, as far as leverage is concerned. Incarceration of some individuals of group 2 may follow. Leverage is seen as morally disputable at last.

Talks of regulation and reform follow. However, the speculation itself or the aberrant optimism that lay behind it will not be discussed. 'Nothing is more remarkable than this: in the aftermath of speculation, the reality will be all but ignored.' Why? Because it is easier for group 1 to blame one individual or a few individuals in group 2 than to take responsibility for its own widespread naivety. And also because there is a need to find a cause for the crash that is external to the market itself. After all, the market is believed to be 'a neutral and accurate reflection of external influences; it is not supposed to be subject to an inherent and internal dynamic of error'. The deficit in the federal budget was, for instance, blamed for the 1987 crash. Another anecdotal account of Black Monday has been that the crash was caused by portfolio insurance computer programs which sold stocks as the market went lower.

Galbraith's book is compulsory reading for economists, especially those working on behavioural finance or econophysics. Being an antidote to illusory financial euphoria, the book is thus of interest to the general public as well. Galbraith's own sense of déjà vu towards speculative financial bubbles enabled him to predict the crash of 19 October 1987. People really seem to be intrinsically unable to prevent getting stuck in the error-prone dynamics of bull markets, as in his 'bubble story'. But perhaps they have already learned some minor lessons on how to better protect themselves in the aftermath of crashes. Indeed despite the fact that the Black Monday crash was nearly twice as severe as the stock market collapse of 1929, it did not trigger a depression. Likewise the internet-bubble burst of 2000 had a surprisingly modest effect on wealth. Will we finally learn to learn from history?

I bought this book after having read, and enjoyed immensely, Edward Chancellor's "Devil Take the Hindmost". Chancellor's text is a very readable book which serves as an excellent intoduction to financial speculation and bubble-mania. I bought Galbraith on the expectation of some greater insights - Galbraith's book on the Great Crash of 1929 is after all the definitive work on that episode. What I got was an introductory essay on the subject with a few, but not enough (at least for me), acute words of wisdom from the great man.

I should have noted that this book is described as a primer. Neverthless, this is 100 page book that could easily have been fitted into half that with a proper font and pagination. One shouldn't judge a book by its length, rather its quality, but I have to say I was expecting rather more for my money.

All that said, Galbraith's book is an interesting read and his insights into the popular linking of money and intelligence in particular are well articulated. He also resists the temptation to say "I told you so", one of a very few who could rightly claim the foresight to do so.

This is not a bad book, merely an introductory essay. For the interested reader I would suggest jumping straight in with The Great Crash, or turning to Devil Take The Hindmost for a popularist, but nevertheless scholarly overview.

this small book shows in a logical way how speculation can make intelligent people do stupid things.galbraith shows in detail how money can in a practical sense buys up the intelligence of those involved in it.the recent dot.com mania demonstrates galbraiths analysis at work,as people were swept away in the dot.com tide.galbraith is a true prophet,may he live to a hundred.

Reading Galbraith is always a delight. His deceptively simple style belies the wisdom of his words. In his introductory chapters he gives an overview of financial euphorias and their characteristics.

Panics and crashes are periodic and seem to be inevitable in a free-market capitalist system. Financial memory is short and knowledge of financial history non-existent. There is always a new generation with new ideas and for whom "this time it's different". This inherent instability of the system is both its strength and its weakness. In the speculative phase there are those who think that the market can only go higher; there are also those that know that it is a speculation, that there is money to be made if only they can judge the market correctly and get out near or at the top. As the author says "... the speculative episode always ends not with a whimper but with a bang".

He then gives descriptions of these euphorias, starting in the 17th century with Tulipomania in Holland. Moving to the 18th century, in France there is John Law and the Mississippi Company, giving us the term millionaire, and in England there is the South Sea Bubble. He then moves to America starting with the colonial experience with paper money, describing the various periodic panics of the following centuries through to the Great Crash of 1929. He finishes the examples with the crash of 1987.

This is an extended essay of just over 100 short pages which is well worth reading and does not date.

LINKS
Kindleberger Manias, Panics and Crashes
MacKay Extraordinary Popular Delusions and the Madness of Crowds
Carswell The South Sea Bubble
Mackay The Mississippi Scheme
Hyman Minsky Can "It" Happen Again?: Essays on Instability and Finance

As someone currently living through the consequences of the collapse of the Irish property bubble of the 00's it is enlightening but slightly depressing to read Galbraith's book describing similar economic episodes from the past.

The enlightenment in the book is that these bubbles have occurred numerous times in the past and are always caused by similar conditions, namely:
- A supposed new innovative product or business opportunity
- Widespread availability of credit
- An assumption (by themselves and others) that those who have wealth possess some form of higher business acumen
- A spurious conviction that the current speculative episode is radically different from all previous ones

These conditions cause speculation and steep price increases as people try to get on a good thing. Inevitably an unexpected event causes a market collapse and the you-know-what hits the fan.
This is where the depressing bit comes in. Analysis of the cause of each crash concentrates on the event that precipitated it, rather than the speculation that preceded it. Participators in the market always refuse to accept that market behaviour caused the crash. Therefore the market is doomed to repeat the same errors again and again.

Galbraith chooses a number of examples to demonstrate this behaviour such as The South Sea Bubble, the Banque Royal collapse in France and tulip speculation in Holland. In the twentieth century he looks at the 1929 and 1987 crashes. The book was written in 1990 and since then the dotcom crash and the 2008 crash have shown how this pattern continues to recur, just as the author predicted.

The book is short - 110 pages - so it is an introduction to these events rather than an in-depth analysis of any of them. It is written in language that make it readable for those not used to reading economic literature. In fact he describes his wonder at the short financial memory in a way that adds greatly to the readers enjoyment of the book.

Books on economics are not usually very easy reading, but in one sense I am glad that economists in general can't write as brilliantly as Galbraith does. Galbraith puts his inimitably elegant wit and articulacy at the service of the liberal outlook that I myself happen to share. I would not want to see the opposing party able to avail itself of comparable advocacy.

This really is a `short' history, only 100 or so pages. Its topic is recurrent, and seemingly ineradicable, stupidity. In Europe in the 17th century there was speculative frenzy over the introduction of -- can you believe this? - TULIPS. Not long after there was a similar stampede to participate in the hypothetical wealth of South American lands which the promoters neglected to mention were actually claimed by Spain. This was the famed South Sea Bubble, and there were some big names among its credulous participants. There was not only George Frederick Handel for one, there was also - can you now believe this? - Sir Isaac Newton. There is no point in a short review of a short and extremely readable book repeating the complete list. This latter example illustrates one of Galbraith's main points, namely that there is something about financial speculation that turns otherwise intelligent individuals, even men of true and colossal genius, into herds of lemmings. I dare say the Gadarene Swine in the gospel were similarly intent on making a fast shekel as they leapt to perdition over the cliff.

The book dates from 1990, since when we have had first the dot-com bubble and now whatever it is that we have as I write this by way of an apotheosis of avaricious folly. This is another of Galbraith's points, that the whole gullible mentality is like some hardy perennial weed, more robust than any tulip. It springs up reinvigorated with practically every new generation, and there seems to be no field of human activity in which history makes itself heard so little with its clear and obvious lessons. Galbraith does not go so far as to say that there is nothing new under the sun, but he leaves no room for doubt that there is really no such thing as innovation when it comes to manipulating debt. If someone were to claim to have a new method of calculating the multiplication tables, presumably nobody would believe him. Similarly with leveraging, which is to say assets secured (if that is any word for it) on debt. It is all smoke and mirrors, but we never seem willing to learn, and the lofty denunciations that over the years have greeted the nay-sayers (to use a popular barbarism) such as Paul M Warburg are no doubt awaiting anybody who will, in years to come, dare to predict the totally predictable when it next comes round and dare to say that if we do exactly the same things, however we dress them up cosmetically, we should not expect a different outcome.

This short book is aglow with its author's inimitable wit. You can almost open the book at any page randomly and find a gem or two. Galbraith's barbs are not cosmetic, to mix my metaphors a little. They are in support of his argument, and they are addressed to all of us, the great majority whose supposed wisdom is sometimes invoked when the usual disaster happens and the hunt is set off for individuals as scapegoats. It's all very well to blame it all on the Pied Piper, who is of course entirely guilty, but in this case his followers are free agents.

This great sage has now left us, aged 98 and apparently still working on another book when the end came. The collective folly that he pillories here lives on. Dare we hope that his wisdom, never perhaps so well expressed, may live on and flourish as well?

A bit boring and written using a difficult 19th century language style. However it does what it says on the cover "short" and brief historical chronology indeed.

John Kenneth Galbraith's short, literary book on financial speculation and the inevitability of subsequent economic catastrophe contends that devastating financial collapse is built into the free-enterprise system - an idea as intriguing today as it was when this book debuted in the mid-1990s. The late famous economist ended this treatise with a chilling question: "When will come the next great speculative episode and in what venue will it recur?" Everyone now knows the answer to that question all too well. Alarmingly, according to Galbraith, the travails that capitalist economies are now grimly experiencing will recur over and over. getAbstract suggests that anyone who wants to understand the kinks in the system - and human nature - that will continue to lead to hugely devastating, economic train wrecks should read Galbraith's book.

This a short, easy to read history of economic calamity, starting with the Tulip craze of the 1600's and ending in the 1987 crash. JKB idetifies 4 things which are present in all of them and then applies his own folksy wit and sarcasm to intrepeting the causes of them all, in a style very suited to the layman (me). You could sum up both it's relevance today and style with the quote "all crises have involved debt that, in one fashion or another, has become dangerously out of scale with the means of payment". Accurate and easy to understand. Given our banks started our current (and very familiar if you read the book) disaster by loaning trillions to people who could not pay it back (and felt clever all they time they were doing it), a read of this might prevent it happening again. Besides, if you're a quick reader, it'll only take 2 hours.

As previous reviewers state, this is a short book. In fact it's more like an essay, so you don't actually get much for your money. But it is worth shelling out for. Galbraith is one of those economists who manages to put things very simply and clearly, and this book will be an easy read for anyone. Some have accused Galbraith of being overly simplistic, and in a way the writing style could lull you into thinking that he isn't giving you the full story.

But in fact in the case of speculative bubbles the story really isn't that complicated, much as it seems we want to believe it is (complex explanations make it seem more justifiable that we were fooled). So what you really get is a straightforward run through how the process occurs. There are some really simple truths in the book - like the fact that we assume that people who are making a lot of money must know what they are doing. Basically we mistake luck for skill, and as the bubble continues to grow this only confirms the belief that something solid must be behind it. Hence more and more are drawn in, and feed the bubble further. There's also a great passage on what happens after the bubble bursts, where he argues that people avoid talking about the simple reality that we've all been taken in by seemingly endlessly rising asset prices.

Finally, since the book is so short you can get through it in an afternoon. So if you want a simple primer in bubbles this is ideal.

PS. If Galbraith stimulates your interest in bubbles, a longer and more detailed (but still very readable) book is Irrational Exuberance by Robert Shiller which I can't recommend highly enough.