walkitout (walkitout) wrote,

A Few Remarks about Kindleberger's _Manias..._

I like the series published by Wiley, "Wiley Investment Classics". I think Kindleberger was a smart, good-hearted, right thinking man. Nevertheless, I cannot help but find _Manias, Panics, and Crash_ a huge disappointment. Turns out if you do a bang-up job regulating a political economy for a few decades and don't have any "real" crashes, people who come to adulthood and work within that context don't really understand what it's like _not_ to be in that context. Fish. Out of water.

_Manias ... _ describes its subject, mostly by listing things. He doesn't do all that great of a job of understanding that which he is listing, which is a separate problem suggesting he isn't a great historian. That is not the problem I am interested in. This is, from the opening paragraph of Chapter 6:

"the pattern seen by Lord Overstone, the leading British banker of the middle of the nineteenth century, quoted with approval by Walter Bagehot: "quiescence, improvement, confidence, prosperity, excitement, overtrading, CONVULSION [sic] [[sic]], pressure, stagnation, ending again in quiescence." The formula stretches euphoria into five stages that are difficult to sort out and puts pressure after, instead of before, the financial crisis itself (convulsion). If the order is altered, however, distress and pressure consist in a period in which the rosy expectations of boom are gradually or quickly undermined and give way to gloom."

I recognize that it is easy to be a young -- or even middle-aged -- adult who has lived through the last five years, and respond to references to "the bust" with "What?" If you didn't lose your job, and if the people you know who lost their jobs are kind of dodgy on employment anyway (ditto foreclosures/bankruptcies), and you didn't have investments which lost a third of their value rapidly and then took a long while to recover, assuming they did before you foolishly sold at or near the bottom, etc., then the last five years can seem like just more of the same-old-same-old, whether that's the grinding slog of poverty or the obliviousness of established wealth. That's probably 5%-25% of the population.

The rest of us found the last few years to be more than a little worrisome, and we all came to some set of conclusions about why it happened and hold some set of ideas about what might make things All Better and whether those policies have been implemented and if not what's stopping them from happening. And of us, a fraction of us have some degree of understanding of just what a liquidity crisis is, and what zero lower bound means. "Distress", in Overstone's language, does not happen _before_ CONVULSION. It happens _after_ CONVULSION, and it is the long-lasting liquidity crisis that meant even people with stellar credit and a substantial down payment had no chance of getting a non-conforming loan as recently as early 2011. Nobody IPO'd and the idea of issuing new corporate debt, well, humorous!

Bouncing along with little or no growth and the constant risk of tipping over into deflation is stagnation.

I'd go into why Overstone's understanding of the stages of euphoria are equally insightful, but what's the point? Well, just one point. "Prosperity" is that point where credit is available and businesses can, er, do business. "Excitement" is that time where "Prosperity" has ticked along for long enough that many people _realize_ you can start a business and succeed, and so a lot more people are willing to try. "Overtrading" is when "Excitement" has gone along long enough that dour people are finally noticing that their more stable friends are making money. CONVULSION is when the dour people get screwed by the smart money exiting the game (which is why they are so dour). Pressure is the unwinding of it all -- the more there is to unwind, the worse it is, especially if the unwinding process is allowed to gratuitously damage otherwise stable businesses. Stagnation is where everyone is going, I don't care, I'm never taking a risk again. Quiescence is when people start to forget.

The big trick to watching this happen around you is to introspect over a period of years to recognize which kind of a sucker you are, so you can calibrate your own filters when perceiving "reality". [<-- This, in turn, requires that you _remember_ what happened, in what order and how you felt about it along the way. Hard.] But Kindleberger couldn't do that, because none of it happened during the time he was paying attention.

ETA: Altho maybe if he'd been a better historian ...

ETAYA: De Long and Eichengreen with a glowing perspective on Kindleberger's more important work, which I have not read, _The World in Depression_. But I have to say, sentences like this do not inspire me: "Kindleberger argued that at the root of Europe’s and the world’s problems in the 1920s and 1930s was the absence of a benevolent hegemon". Pretty sure that's not the argument contained in Keynes' _The Economic Consequences of the Peace_.


I've already blogged about how much I dislike US-centric criticism of Eurozone policies. Did they take austerity too far? Yes. Is this a fair characterization: "Yet today, to our surprise, alarm and dismay, we find ourselves watching a rerun of Europe in 1931."? Fuck no. We are not watching a rerun of Europe in 1931. Pouring money on Greece and taking the focus off improving the quality of its governance is a terrible idea. And a million other things that the troika know way more about than we do.

It is often possible to "explain" a situation at multiple levels, and have those explanations be compatible. However, too much of a focus on issues like "international lender of last resort" and too little of a focus on issues like "out of control banking sectors and tiny little island nations which support them during booms" are only compatible up to a point. You can't _just_ bail people out when it gets bad -- you also have to take steps to prevent that particular problem from recurring. Which is what the troika is trying to do, and which a whole lot of people are ignoring, because they have a hammer and everything is a nail.

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