Thursday, 13 August 2009
Financial history distilled into a thriller, that's what this book is. The short chapters tumble along and I found myself being caught up in an exciting story as the authors capture the mood of that time when the whole edifice of banking was poised on the brink of collapse and minutes at times lay between catastrophe and survival. The cascade of events, one crisis overlapping and exacerbating another, created extreme pressure under which both the public and the professional, supposed leaders, often wilted and panicked. But some men (and at the time, it seemed all were men) excelled in making the correct instantaneous decisions of huge consequence, chief among them the famous financier J. Pierpont Morgan.
Those who think the crash of 2008 was unique or more severe should read this book. You may find yourself thinking of all sorts of parallels between 1907 and 2008 - a sort of ironic "panics 101, as in 2008-1907 = 101". The authors deliver on the subtitle's promise of "Lessons Learned from the Market's Perfect Storm" in a last chapter where they provide a most helpful summary of the seven factors (with lots of references, being the good academics they are) that allow such deadly storms to occur:
1) System-like architecture to enable trouble to travel and propagate
2) Buoyant economic growth, engendering false optimism
3) Inadequate safety buffers, to stop a small slide before it becomes an avalanche
4) Adverse leadership, both political and economic, create an environment vulnerable to shocks
5) Real economic shock - the spark of the panic is an event of consequence that everyone understands is bad
6) Undue fear, greed and other behavioral aberrations create a self-reinforcing excess
7) Failure of collective action, which is necessary to prevent or put an early stop to a panic
The book's concluding "Coda: can it happen again? ... Almost certainly, it can." was written in 2007 (date of publication) it seems. Too painfully prescient. My one criticism of this book is that this conclusion is too timid. Since 1907, there have been numerous other crashes, 2008 being only the most recent. Though specific lessons are learned and defects fixed after each crisis (1907 led eventually to the creation of the Federal Reserve to improve the flexibility of the money supply and to institute deposit insurance to stem bank runs), the nature of our financial system has not changed in a way that can prevent future crashes. Governments, regulators and industry are always one step, one crisis behind.
The inevitable conclusion should be: IT WILL HAPPEN AGAIN. One needs to take measures both to try to detect the next bubble and subsequent crash and to organise finances to be able to withstand it in case one gets caught in the storm anyways.
My rating: Highly recommended. 4.99 out five stars (0.01 deduction for the slightly wimpy prediction)
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