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Book Review
Lessons, a century later
S. RAMACHANDER
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Case study offering insight into the factors that influence market crash and bank panics
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THE PANIC OF 1907 — Lessons Learned from the Market’s Perfect Storm: Robert F Bruner, Sean D Carr; John Wiley and Sons Inc, Hoboken, New Jersey.
$ 29.95.
We live in exciting times for those interested in markets for money and investment. India is seeing a period of unparalleled economic growth and a hitherto undreamt of rise in the prices of all forms of equity. The Sensex which is a crude index tracking just some 30 corporate bodies influences conversation amongst the middle class as never before. Those who were till very recently used to only investing in bank deposits or safe fixed income assets, are perplexed and worrie
d. To them, a crash is always a reality lurking round the corner, which could wipe out a lifetime’s savings, as the UTI’s US-64 scheme debacle showed some years ago.
Market panics
This scholarly, yet lucidly, written book explores the panic of exactly a century ago, which occurred in the United States, causing untold havoc, including of course collapse of banks and suicides, besides financial ruin to many. The authors have gone into the complexities of the interlinked markets for stock, debt, currency, commodities, and gold, and show that a combination of factors causes periodic recurrence of crashes (in the stock markets) or panics (run on banks- based irrational fear). The convergence of all the forces in any one instance gives rise to the “perfect storm” referred to in the book’s title. Between 1814 and 1914 the U.S. saw 13 such panics and the one of 1907 was the worst. Contrary to what one might suppose, it did not follow a recession but a period of annual economic growth averaging 7.3 per cent, for the previous decade. It was a period of tremendous business consolidation, and growth of foreign investment inflow, as the U.S. had become the darling of investors all over the world. Yet the savings and the imported gold were not adequate to meet the expansionist demands of domestic business.
The parallels
This led to a sharp reduction in available credit, aggravated by the cost of relief operations after the San Francisco earthquake, all of which led to a sudden decline in stock prices, lower level of investor interest and finally a sharp fall in the confidence in the economy amongst all — bankers, consumers as well as corporate leaders. Added to this was the aggressive stance taken by the Theodore Roosevelt government against industrial consolidation, seen in the historic anti-trust acts and lawsuits, particularly against the oil monopoly of Standard Oil. The banks and markets of the U.S. were closely linked to those of the U.K. and continental Europe, and soon these too showed signs of weakening.
One can go on with this narrative and summarise the full course of events; but the review would not serve the purpose if it did not use this mainly to draw the obvious parallels with the so-called emerging Asian economies of today and the euphoria that surrounds the so-called India story. No doubt sustained economic growth is welcome, and richly deserved, especially by the poor. However, the exuberance of the stock markets is far more than justified by the fundamentals, and the shaky foundations of the economy cannot be kept hidden or forgotten for long. For this reason alone, this work is very timely, although given the nature of the treatment and the message, the bullish economists may not like it. Their first reaction will be to point out at length how we are different and our times are different. They may even dismiss the book as dated analysis and worth only as archive. Such an attitude would be unfortunate, because the seven causative factors have a chillingly familiar ring.
Causative factors
First, the markets are a complex system that defies any linear extrapolation. No one really knows what could prove a tipping point. Second, buoyant and unbridled growth always carries a hidden vulnerability. Third, the speed of telecommunication and the colossal scale of transactions make for far greater risk. Fourth, the leadership around the world is a major issue. There are very few strong and wise leaders anywhere on the horizon. Fifth, genuine economic shocks such as the price of oil create tidal waves far beyond the capacity of any single economy’s ability to cope. Sixth, as always, both undue greed and undue fear and aberrant reactions will complicate the effects of any shock. Finally, no attempt to bring sanity and coherence to international policy response has shown any signs of failure; so collective action fails, just when it is most needed, as we have seen in regard to the environment and global warming.
For these seven very persuasive reasons it is well worth studying the lessons of 1907 a century later. A salutary work.
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