Book: "A Short History of Financial Euphoria"

As we head into a recession, a good book to remind you that this has all happened before is John Kenneth Galbraith's A Short History of Financial Euphoria. The title is correct--the book is short: 113 pages.

Although written in 1990, his words could be used describe recent events: the dot.com boom and bust, the rise and fall of Enron, and the mortgage market collapse:

Some artifact or some development, seemingly new and desirable--tulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reagan--captures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objets d'art, and other property, when bought today, are worth more tomorrow. This increase and the prospect attract new buyers; the new buyers assure a further increase. Yet more are attracted; yet more buy; the increase continues. The speculation building on itself provides its own momentum.

This process, once it is recognized, is clearly evident, and especially so after the fact. So also, if more subjectively, are the basic attitudes of the participants. These take two forms. There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course.

And then, of course, the crash comes.

If you're a bit weak on economic history and want to brush up, Galbraith gives capsule histories of some of the great boom-and-bust episodes: the tulipmania in Holland in the 1630's, the Bank Royale scandal in the early 1700's, and the Crash of 1929.

A quick and enjoyable read from a famous economist, while at the same time a bit unsettling: "We should have seen it coming...."

   

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