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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 鈥楳anias, Panics, and Crashes: A History of Financial Crises.鈥�  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 鈥渆ssentially Charlie鈥檚 book 鈥� 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鈥檚 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鈥檚 default in the mid 1990鈥檚, which immediately preceded the Asian financial crises, and then moves on to the current financial crisis, which Aliber termed the 鈥淎nglo-Saxon real estate crisis.鈥� 

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 鈥済ot filthy rich鈥� 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 鈥渃redit binge鈥�, is not sustainable and at some point the borrowers were bound to alter their behavior.  Aliber described the resulting shift in behavior, as a 鈥渟hock to the monetary environment.鈥�

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鈥檚 鈥減uritan work ethic鈥� rather he saw it as a natural result of the fact that our 鈥渨ealth objectives had been achieved.鈥�

He then described the shocks that accompanied each period of crisis.  In the early 1980鈥檚 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 鈥渢he capital account.鈥�

Aliber then described a historical account of the financial system influenced by noted economist Milton Friedman. Aliber noted how Friedman鈥檚 theories had a tremendous influence on the policy of deregulation throughout the latter portion of the 20^th century.  After discussing some of the fundamentals of the monetary system, Aliber concluded that 鈥渢he system is faulty.鈥� 

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 鈥渋neptitude of the authorities鈥�, and 10% to the 鈥渢hievery by the bankers.鈥�

By: Clark Taylor

Kent Hughes, Director, Program on America and the Global Economy