The Program on America and the Global Economy (PAGE) of the Woodrow Wilson International Center for Scholars welcomed Robert Z. Aliber, Professor Emeritus of International Economics and Finance at the Booth School of Business, University of Chicago, on September 13, 2011 for a book launch of his newly released edition of ‘Manias, Panics, and Crashes: A History of Financial Crises.’ The book, in this case the sixth edition, was originally written by Charles P. Kindleberger with the first volume having been published in 1978. While noting that this is “essentially Charlie’s book “ Aliber said the book provides a contemporary account of financial crises. Given recent economic history, the subject matter is rife for an updated account. Kent Hughes, PAGE Director, moderated the event.
Aliber’s edition focuses on the most significant financial crises of the last 40 years. It begins in 1982 when a number of developing countries defaulted. It then proceeds to Russia’s default in the mid 1990’s, which immediately preceded the Asian financial crises, and then moves on to the current financial crisis, which Aliber termed the “Anglo-Saxon real estate crisis.”
He argued that these periods have a number of characteristics in common. The first is that they were all preceded by a rapidly growing credit supply. The second is that they were accompanied by a dramatic increase in real estate prices. Thirdly, along with these crises came massive swings in currency values. Lastly, during this period investment bankers “got filthy rich” as trading revenues soared.
Aliber also noted that the current rate of growth of indebtedness is faster than the rise in interest rates. He argued that this phenomenon, which he termed a “credit binge”, is not sustainable and at some point the borrowers were bound to alter their behavior. Aliber described the resulting shift in behavior, as a “shock to the monetary environment.”
Aliber then discussed US savings rates. He argued that foreign savings essentially replaced American savings. He did not see this as a failure of America’s “puritan work ethic” rather he saw it as a natural result of the fact that our “wealth objectives had been achieved.”
He then described the shocks that accompanied each period of crisis. In the early 1980’s the shock to the financial system was the rapid decline in the GDP growth of a number of developing countries, especially those in the Americas. The second shock was an appreciation of the yen after the 1985 Plaza Accord. To limit appreciation and its negative impact on Japanese exports, Japan intervened in financial markets to buy dollars. The resulting increase in bank reserves led to relaxed lending standards and a real estate bubble. For the third crises Aliber cited a series of factors, notably the impact on Mexico of the creation of the North American Free Trade Association. The theme running through these shocks, Aliber noted, was that they always happened to “the capital account.”
Aliber then described a historical account of the financial system influenced by noted economist Milton Friedman. Aliber noted how Friedman’s theories had a tremendous influence on the policy of deregulation throughout the latter portion of the 20th century. After discussing some of the fundamentals of the monetary system, Aliber concluded that “the system is faulty.”
He concluded by providing a rough formula, one that he thinks can ascribe the source of financial crises. He attributed 85% to the flaws fundamental to the system, 5% to the “ineptitude of the authorities”, and 10% to the “thievery by the bankers.”
By: Clark Taylor
Kent Hughes, Director, Program on America and the Global Economy