This Time It`s Different

This Time It's Different - Not! ________________________________________________________________________________________________________________ Manias, Panics and Crashes: Kindleberger and Aliber Palgrave MacMillan - Basingstoke Hants, UK - 2011 Capitalism without failure is like religion without sin - Kindleberger

This book was first published in 1978 and is now is in its 6th edition. Kindleberger himself is now deceased and the more recent updating is by his contemporary and co-author Robert Z Aliber. This book is not an easy read but represents a very scholarly assessment of capitalism's intrinsic tendency toward boom-bust cycles, which, pace Gordon Brown and his co-thinkers, is an endemic feature of the system.

The history of capitalism is precisely the history of bubbles, booms, manias and busts. The whole show probably started with the great Dutch tulip bubble of 1636, and then the two great euro bubbles, first in Britain with the South Sea Bubble in 1720 and then in France with an early version of Quantitative Easing and the ensuing Mississippi Bubble of the same year. According to the authors, the South Sea and Mississippi bubbles were related ... fuelled by monetary expansion in Britain and France that supported a high head of speculative steam. (p.57 Ibid).

It took a couple of centuries later for the next big bubble-bust phenomenon - the US stock market (or Wall Street) bubble and subsequent bust of 1929. Once again the basis for the rise in stock prices was due to excess money input which was a function of easy credit. The problem with easy credit conditions (which at the time are never considered a problem but a boon) is that it supplies the excess liquidity that enables speculative buying push to up prices. This results in serial asset bubbles in, well, whatever you choose: tulip bulbs, internet start ups, stocks and shares, property, bonds ... and anything else, which only encourages more buying and further elevating asset prices. Of course it cannot last and it doesn't. The stage is eventually reached when the rise in incomes and debt repayments on borrowed monies cannot keep up with the rate of asset-price inflation. Prices will eventually reach a plateau, and then begin to fall as highly leveraged debtors cannot borrow any more to service their debts from increasingly cautious lenders. These same borrowers will then have to sell some or all of their assets for payment of interest on their borrowed monies and this panic selling floods the market and results in falling asset prices. Now the boom transmutes into a bust. Fear now replaces greed as the great motivator.

The interesting point, however, is that most of the more significant episodes of boom-bubble-bust have come in our own time. Of the author's list 10 major boom-bust episodes since the aforementioned 6, have occurred since 1971. Starting with the so-called 'Tequila Crisis' in Mexico and other emerging markets in the 1970s through to the great banking and sovereign debt crisis of our own time. 1971 is a particularly interesting date since it marked the break-up of the Bretton Woods system and the definitive break with the gold standard.

Coincidence? Unlikely. Moreover we are not talking about individual national speculative capital movements but whole clusters of such phenomena. We have also seen the debt crisis more from the global periphery and semi-periphery of capitalism into its heartlands of North America, Europe and Japan. As the author's state: Four waves of credit bubbles in 30 years plus a bubble in US stocks in the late 1990s are unique in financial history ... Each wave of bubbles when the lenders become much more willing to extend credit to a group of borrowers, perhaps because their incomes or anticipated incomes were set to increase or because the regulatory environment had become less restrictive and lenders were no longer prohibited from extending credit to these borrowers. (Op.cit)

Globalization has facilitated easy movement of capital across national frontiers. This is especially the case with financial capital. Trading in the forex, capital and derivatives markets goes on for 24 hours a day with huge cross border movements of monies and near-money derivatives, this being accomplished with just with one click of a computer mouse. This huge ball of 'hot money' rolls around the world looking for easy pickings in terms of short term investment opportunities. It is not difficult to see the destabilising effect of such movements on national economies both at a domestic and international level.

During the East Asian crisis of 1997/98 such footloose capital flowed in massive amounts into the emerging markets of East Asia, the second tier of Thailand, Indonesia and Malaysia. This led to a rise in stock and property prices to giddying levels far above their equilibrium, and also pushed up the value of the national currencies. When the bubble burst the investors took their loot and exited, and asset prices duly collapsed. Moreover, many of the borrowers in these countries had borrowed in the currency of the investors, Yen or US$s. But as the value of their own currencies depreciated their debts as denominated in overseas currencies ballooned.

Similarly at the domestic level the ease of credit lead to house price bubbles and the subsequent bust in the US, UK, Spain, Ireland and Iceland, with all that followed. So time and again we come back to the same culprit: the ease and policy of credit expansion overseen by central banks around the world, and a glut of global capital looking for viable (and not so viable) investment outlets.

The expansion of credit which has been a feature of the post-1971 epoch has been made possible by a pure paper money (fiat) standard. Governments and Central banks around the world are no longer constrained by a gold standard which meant that their ability to create money was to a large degree circumscribed. A pure money standard meant that credit could be created to the point of infinity. Additionally the commercial banks have the ability to create money through the fractional reserve system. Add to this explosive mix the (sometimes complete) lack of regulation of the banking and finance industries and everything was in place for the ensuing colossal debacle.

All of the above are necessary features of the capitalist system. The system works through boom and bust. Nothing is going to change this, whatever the liberal-left reformers of the system might argue. Responsible capitalism, a capitalism which would be equitable, stable, in harmony with nature, with sustained growth is a creature of the imagination. As Lenin once remarked, If capitalism could do all these things, it would not be capitalism.

Finally, my somewhat short and narrowly focused review of this book hardly does it justice. Read it and see. Or as Financial Times guru Martin Wolf (who I believe is not a Marxist) enjoins The Latest crisis is unlikely to be the last. It may even be the precursor of a still bigger crisis in the years ahead. Read. Learn. Weep.