Thursday, May 22, 2008

A SHORT HISTORY OF FINANCIAL EUPHORIA by John Kenneth Galbraith

The Book: John Kenneth Galbraith, A SHORT HISTORY OF FINANCIAL EUPHORIA. Whittle Books/Viking, 1993 (first edition). Fine condition.
First read: 1994
Owned since: 1994

Yesterday morning I did not buy oranges, because they cost almost a dollar apiece. Last week I did not go to the opening reception for the Maine Festival of the Book, because it's a hundred-mile round trip from here to Portland, and I had already spent more than $140 on gas that week.

Hard times are not quite here -- for me, at least -- but things are getting worse. It was inevitable, and the only consolation is that if we can all hang on, things will inevitably get better again.

I bought this book in the wake of the last major downturn, in the early 1990s. If you can remember back that far, the issues were similar: collapsing real estate values, overextended credit followed by a credit crunch, high fuel costs, general anxiety. By 1994, when this book came out, the seeds of recovery were already sprouting.

Economist John Kenneth Galbraith offers this short book (110 pages) to illuminate the causes of the recession that began in 1990. In his preface, Galbraith describes the "speculative excess and collapse" of the 1980s: real estate, junk bonds, interest rate deregulation, etc. "Public confidence was shaken, corporate investment was curtailed, troubled banks were forced to restrict lending, workers were discharged and corporate executives and bureaucrats shed."

Sound familiar? It was ever thus, says Galbraith. He walks us through several earlier cycles of excess and collapse: 17th-century tulipomania, John Law's Banque Royal, the infamous South Sea Bubble, the 1920s Florida land boom, and of course the Crash of 1929.

So why don't we ever learn? Well, it's human nature. "Individuals and institutions are captured by the wondrous satisfaction from accruing wealth," writes Galbraith, and with that goes this idea that if you're making money, you must be doing something smart. In fact, most people would say that making lots of money is the only real proof of intelligence. (Donald Trump would agree.)

But making money takes as much luck as skill, and as we've seen, it's possible to be too smart for one's own good (ask Jeff Skilling).

And no one's immune to the basic principles of physics, which apply both above and below. When I was in college, a sign in a friend's bathroom summed it up: Gravity -- it's not just a good idea, it's the law.

3 comments:

norby said...

Of course the question is, how long do we have to hang on?

JIM LAMB said...

And politicians saying ever stupider things, like the congresswoman yesterday threatening to nationalize the oil companies.

This time, about six more months. That may not be soon enough to prevent the election of the first communist president.

Then comes gas rationing and guess who the first people to be denied rations will be. Recreational boaters. But I will be in Costa Rica or Trinidad with all my assets by then.

That way the government can't take what I "...don't need...".

Anonymous said...

John Galbraith also says in the same book that he never sat on a corporation board of directors--a man who lived his honesty.

This book is must reading for anyone with a mutual fund or any stake in any aspect of the market. John sums it up simply thus (in my words).
Our society has very limited financial memory and we don't learn from the same mistakes in the past. We credit wealth with intelligence, and there is no correlation. Until we repudiate both the above statements, we will fall prey to continual bouts of leverage and crash, just as we have dozens of times since tulipomania in 1636.

Note that the same leverage principles (more debt than intrinsic value) continued past this book--we've had two bubbles since 1994: the dot-com bubble and this year the worldwide collapse. This is not to mention the mini-recession in asian markets in 2004-05 which threatened to cause a worldwide recession had it not been for the US holding (until this year) it all together.

Every one of these instances involved the confidence of those involved to believe in their own intelligence while at the same time leveraging debt. And today we see the same result.

When will we ever learn. Maybe it is time for a sensible leader to holds us all to responsibility. I hope Obama can withstand the mega pressure by speculative interest groups to do it.