Tuesday, April 23, 2013

"New preface to Charles Kindleberger, The World in Depression 1929-1939"

We've visited Professor Kindleberger a few times, links below.
From VoxEU:
J. Bradford DeLong, Barry Eichengreen
Charles Kindleberger’s classic book on the Great Depression was originally published 40 years ago. In the preface to a new edition, two leading economists argue that the lessons are as relevant as ever.

The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right.

Both the existence of these parallels and their tragic nature would not have escaped Charles Kindleberger, whose World in Depression, 1929-1939 was published exactly 40 years ago, in 1973.1  Where Kindleberger’s canvas was the world, his focus was Europe. While much of the earlier literature, often authored by Americans, focused on the Great Depression in the US, Kindleberger emphasised that the Depression had a prominent international and, in particular, European dimension. It was in Europe where many of the Depression’s worst effects, political as well as economic, played out. And it was in Europe where the absence of a public policy authority at the level of the continent and the inability of any individual national government or central bank to exercise adequate leadership had the most calamitous economic and financial effects.2

These were ideas that Kindleberger impressed upon generations of students as well on his reading public. Indeed, anyone fortunate enough to live in New England in the early 1980s and possessed of even a limited interest in international financial and monetary history felt compelled to walk, drive or take the T (as metropolitan Boston’s subway is known to locals) down to MIT's Sloan Building in order to listen to Kindleberger’s lectures on the subject (including both the authors of this preface). We understood about half of what he said and recognised about a quarter of the historical references and allusions. The experience was intimidating: Paul Krugman, who was a member of this same group and went on to be awarded the Nobel Prize for his work in international economics, has written how Kindleberger's course nearly scared him away from international macroeconomics. Kindleberger's lectures were surely “full of wisdom", Krugman notes. But then, “who feels wise in their twenties?" (Krugman 2002).

There was indeed much wisdom in Kindleberger’s lectures, about how markets work, about how they are managed, and especially about how they can go wrong. It is no accident that when Martin Wolf, dean of the British financial journalists, challenged then former-US Treasury Secretary Lawrence Summers in 2011 to deny that economists had proven themselves useless in the 2008-9 financial crisis, Summers's response was that, to the contrary, there was a useful economics. But what was useful for understanding financial crises was to be found not in the academic mainstream of mathematical models festooned with Greek symbols and complex abstract relationships but in the work of the pioneering 19th century financial journalist Walter Bagehot, the 20th-century bubble theorist Hyman Minsky, and "perhaps more still in Kindleberger" (Wolf and Summers 2011)....MUCH MORE
HT: FT Alphaville's The Closer post.
From March 2009's "Bubbles, Jobs and Investment Tips: Jeremy Grantham visits Wharton":
...So how does Mr. Grantham feel about how most universities cover market efficiency? He began to address this topic by saying "science advances one funeral at a time," which was a famous statement made by Max Planck, the late German physicist. Mr. Grantham continued by commenting on how a University of Pennsylvania alumnus, Mr. Charles Kindleberger, once claimed that academics too often ignore the facts in defense of a theory. This makes sense given that Mr. Kindleberger was an economic historian. In fact in his book Manias, Panics, and Crashes, he relied on narrative exposition and knowledge of history rather than mathematical models to prove his point....MORE
 April 2013's "Jim Chanos on Banking, Wall Street, Incentives and Fraud":
...LP: What do we know about the timing of frauds? When are they most likely to happen?
JC [Chanos]: One of our models is the Kindleberger-Minsky model, named after Hyman Minsky and Charles Kindleberger. It’s a macro model, and basically it takes a look at various market cycles. What we find is that the greatest clustering of fraud in the financial markets occurs, as you might imagine, during and immediately after the biggest bull markets. As I like to tell my students, it’s basically a period in which people suspend their disbelief. Everybody’s getting rich and it becomes increasingly easy to sell more questionable schemes and investments to investors....
There are many more in between those two but this earlier quote is one of the most prescient things you'll find in the literature. From February 2009's "Creditanstalt Redux?: Failure to save East Europe will lead to worldwide meltdown":
I've been feeling far too chipper so I decided to check in with Ambrose Evans-Pritchard. Yikes.
From the Telegraph:

The unfolding debt drama in Russia, Ukraine, and the EU states of Eastern Europe has reached acute danger point. 
If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.
"A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen.
The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East....MORE
Well, other than that Generalfeldmarschall Paulus, how's the weather?
Creditanstalt failed in May 1931. From Kindleberger's "World in Depression: 1929-1939":

In 1929, the Bodenkreditanstalt was fused overnight with the Creditanstalt. The Bodenkreditanstalt brought to the Creditanstalt large loans to industrial concerns which could be maintained only by the device of ignoring market values...*
Hmmm, sounds familiar.
Unicredit now owns Creditanstalt.
In one post I copied out a whole section of 
Manias, Panics and Crashes
Ch.2 Anatomy of a Typical Crisis 
Here's a longer excerpt.