2014년 4월 7일 월요일

[Excerpts: J.K. Galbraith's] A Short History of Financial Euphoria (1994)

  • 출처: John Kenneth Galbraith(1994). A Short History of Financial Euphoria. Penguin Books. 초판(Copyright 1990). 재판(1993? 1994)
  • 자료: amazon; 구글도서
Contents:
Foreward to the 1993 Edition
1. The Speculative Episode  (1)
2. The Common Denominators  (12)
3. The Classic Cases, I: Tulipmania; John Law and the Banque Royale  (26)
4. The Classic Cases, II: The Bubble  (43)
5. The American Tradition  (53)
6. 1929  (70)
7. October Redux  (87)
8. Reprise  (105)
Note on Sources  (111)
CF. Related articles or reviews:
  1. Hans O. Melberg's review: Arguments Searching for Proofs (1998). 
  2. Was Galbraith Right?: The Great Crash, 2008, and Galbraith's Prescience (Stephen Dunn | Challenge, Nov-Dec 2011)
  3. Extreme Brevity of the Financial Memory (John P. Hussman, 2013)
  4. Econblog 101's review (Jan 2009)
  5. North American Value Investing's review (May 2012)
  6. A syllabus: History of Financial Turbulence and Crises (by Prof. Michalis M. Psalidopoulos, 2011)
  7. A syllabus: Market Crisis & the Future of Capitalism (Benjamin Lozano, ...)
  8. A syllabus: Finance and Fraud in the Revolutionary Atlantic (Prof. M. Ghachem, ...)

※ 발췌 (excerpts of which):
* * *

Foreword to the 1993 Edition

It is now three years since I did the main work on this small book. As I told in the Foreword to the earlier edition, it concerns matters that have interested me for a third of a century and more. I first dealt with them in ^The Great Crash, 1929^, published a little after the 25 anniversary of the 1929 debacle. That book has been continuously available ever since. Whenever it was about to pass out of print, some new speculative episode or disaster would bring it back to public attention. Over a lifetime I have been, in a modest way, a steady beneficiary of the speculative aberration in its association with more than occasional insanity. Only a stalwart character keeps me from welcoming these events as proof of personal prescience and as a source of small financial reward.

  In the first Foreword to this volume, I told of my hope that business executives, the inhabitants of the financial world and the citizens of speculative mood, tendency or temptation might be reminded of the way that not only fools but quite a lot of other people are recurrently separated from their money in the moment of speculative euphoria. I am less certain than when I then wrote of the social and personal value of such a warning. Recurrent speculative insanity and the associated financial deprivation and larger devastation are, I am persuaded, inherent in the system. Perhaps it is better that this be recognized and accepted.

  In the years since I wrote this short disquisition, the main players in the most recent speculative episode, that of extravagant eighties, have met their all but inevitable fate, and the larger economic consequences have been made strongly and sadly evident. The list of those who have descended abruptly from the heights is long, and only a few need be mentioned. Mr. Michael Milken, perhaps the most speculative figure of the last boom and certainly the best paid, is a recent resident in a minimum-security gaol, which, if not wholly uncomfortable, could not have seemed personally rewarding. One supposes that he met each new day without enthusiasm. Mr. Donald Trump is said not to be broke; he was, however, described in recent news accounts as having a negative net worth. This distinctions are no doubt important in the world of finance. The Reichman brothers, with Robert Campeau the Canadian gift to financial excess, are indubitably broke with depressive effect on the banks that were captured by their euphoric mood. Perhaps it is to their credit that, like Donald Trump, they erected monuments that will long commemorate their adventure. In London, tourists going down the Thames to the Tower will extend their journey to encompass the Canary Wharf development, perhaps the most awesome recent example of speculative dementia.

  To a marked extent, the speculative orgy of the eighties was in real estate, including that financed through the S&L's by the guaranteeing American taxpayers. Salomon Brothers of Wall Street recently estimated that it will be an average of 12 years before presently empty commercial real estate will be absorbed. Alas for averages. They think it will be an estimated 26 years in Boston, 46 years in New York and 56 years down in San Antonio, Texas (the leader, so to speak), in this provision for the future.

  But there is more. The recession that began in the summer of 1990 and continued so obdurately in face of the weekly predictions of recovery was almost certainly caused and was certainly deepened and prolonged by the speculative collapse. Public confidence was shaken, corporate investment was curtailed, troubled banks were forced to restrict lending, workers were discharged and corporate executives and bureaucrats shed. (One does not fire or sack higher-income personnel; in the interest of greater efficiency, they are only shed.)

  The end is not yet. Had there been no speculative excess and collapse with their larger economic effect, the political history of 1992 would have been far different. It was the boom and collapse that ended the political career and presidency of George Bush. Without a recession and with a good or even a moderately performing economy, his reelection would have been certain, a cinch. With Herbert Hoover, Mr. Bush stands as one of two Presidents in this century who were destroyed by Wall Street. In politics, as in other matters, one must beware one's friends.

  Not all, it should be said for Bush, will be bad. John Law, who presided at a magisterial level over the Great French boom of the early 18th century, went dismally into exile. So did some of those in government office who suffered the South Sea Bubble. By contrast, Mr. Bush, as also Mr. Reagan out in California, will have a wholly civilized retirement. In small ways the history of the great speculative boom and its aftermath does change. Much, much more remains the same.

*

CHAPTER 1. THE SPECULATIVE EPISODE

That the free-enterprise economy is given to recurrent episodes of speculation will be agreed. Theseㅡgreat events and small, involving bank notes, securities, real estate, art, and other assets or objectsㅡare, over the years and centuries, part of history. What have not been sufficiently analyzed are the features common to these episodes, the things that signal their certain return and have thus the considerable practical value of aiding understanding and prediction. Regulation and more orthodox economic knowledge are not what protect the individual and the financial institution when euphoria returns, leading on as it does to wonder at the increase in value and wealth, to the rush to participate that drives up prices, and to the eventual crash and its sullen and painful aftermath. There is protection only in a clear perception of characteristics common to these flights into what must conservatively be described as mass insanity. Only then is the investor warned and saved.

  There are, however, few matters on which such a warning is less welcomed. In the short run, it will be said to be an attack, motivated by either deficient understanding or uncontrolled envy, on the wonderful process of enrichment. More durably, it will be thought to demonstrate a lack of faith in the inherent wisdom of the market itself.

  The more obvious features of the speculative episode are manifestly clear to anyone open to understanding. Some artifact or some development, seemingly new and desirableㅡtulips in Holland, gold in Louisiana, real estate in Florida, the superb economic designs of Ronald Reaganㅡcaptures the financial mind or perhaps, more accurately, what so passes. The price of the object of speculation goes up. Securities, land, objects' 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. ( ... ... )

  For built into this situation is the eventual and inevitable fall. Built in also is the circumstance that it cannot come gently or gradually. When it comes, it bears the grim face of disaster. That is because both of the groups of participants in the speculative situation are programmed for sudden efforts at escape. Something, it matters little whatㅡalthough it will always be much debatedㅡtriggers the ultimate reversal. Those who had been riding the upward wave decide now is the time to get out. Those who thought the increase would be forever find their illusion destroyed abruptly, and they, also, respond to the newly revealed reality by selling or trying to sell. Thus the collapse. And thus the rule, supported by the experience of centuries: the speculative episode always ends not with a whimper but with a bang. There will be occasion to see the operation of this rule frequently repeated.

  So much, as I've said, is clear. Less understood is the mass psychology of the speculative mood. When it is fully comprehended, it allows those so favored to save themselves from disaster. Given the pressure of this crowd psychology, however, the saved will be the exception to a very broad and binding rule. ( ... )

( ... ... )
( ... ... ) Walter Bagehot ... "all people are most credulous when they are happy."

  Strongly reinforcing the vested interest in euphoria is the condemnation that the reputable public and financial opinion directs at those who express doubt or dissent. ( ...  )
  • 1928년 Paul M. WArburg 사례. 
  • 1929년 9월 Roger Bobson 사례.
  • 1955년 갤브레이스 자신의 사례.
  • 1986~87년 갤브레이스 자신의 사례.

To summarize: The euphoric episode is protected and sustained by the will of those who are involved, in order to justify the circumstances that are making them rich. And it is equally protected by the will to ignore, exorcise or condemn those who express doubts.


CHAPTER 2. THE COMMON DENOMINATORS

( ... ... )

Contributing to and supporting this euphoria are two further factors little noted in our time or in past times. The first is the extreme brevity of the financial memory. In consequence, financial disaster is quickly forgotten. In further consequence, when the same or closely similar circumstances occur again, sometimes in only a few years, they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliantly innovative discovery in the financial and larger economic world. There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.

  The second factor contributing to speculative euphoria and programmed collapse is the specious association of money and intelligence. ( ... )

( ... )

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