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“ A Short History of Financial Euphoria”

“ A Short History of Financial Euphoria”. by John Kenneth Galbraith. Born 1908 in Iona Station, Ontario Ph.D. in agricultural economics from University of California, Berkeley Taught at Harvard and Princeton Universities Wrote over 1,000 articles, 48 books (many bestsellers)

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“ A Short History of Financial Euphoria”

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  1. “A Short History ofFinancial Euphoria” by John Kenneth Galbraith

  2. Born 1908 in Iona Station, Ontario • Ph.D. in agricultural economics from University of California, Berkeley • Taught at Harvard and Princeton Universities • Wrote over 1,000 articles, 48 books (many bestsellers) • 1972 President of the American Economic Association John Kenneth Galbraith 1908 - 2006

  3. Deputy Head, Office of Price Administration during WWII • Served in the administrations of 4 U.S. presidents: • Franklin D. Roosevelt • Harry S. Truman • John F. Kennedy • Lyndon B. Johnson • US Ambassador to India

  4. Honours from three countries: • 1946: Medal of Freedom from U.S. President Harry Truman • 1997: Order of Canada • 2000: Medal of Freedom from U.S. President Bill Clinton • 2001: PadmaVibhushan, India’s second-highest civilian honour, for strengthening US/India ties Galbraith receiving the U.S. Medal of Freedom in 2000

  5. A Short History of Financial Euphoria • describes major speculative episodes over 300 years • identifies common features of financial euphoria • explains why they continue to occur over time

  6. Contributing Factors: • 1. Extreme brevity of financial memory • “…when the same or…similar circumstances occur again… they are hailed by a new, often youthful, and always supremely self-confident generation as a brilliant discovery in the financial and larger economic world.” • 1970s: loans to Latin America • 1982: Penn Square Bank • 1980s: S&L crisis • 1987: Black Monday stock market crash • 1990: Japanese stock market crash • 2000: dot com crash

  7. Contributing Factors: • 2. Specious association of money with intelligence • “…there is a strong tendency to believe that the more money…of which an individual is possessed or with which he is associated, the deeper and more compelling his economic and social perception, the more astute and penetrating his mental processes.”

  8. STAGES of FINANCIAL EUPHORIA: • 1. Some artifact or development captures the financial mind • securities, real estate, art, tulips, etc. • price rises rapidly • price increase attracts new buyers • pushes price higher • speculation provides its own momentum

  9. STAGES of FINANCIAL EUPHORIA: • 2. A personal vested interest develops in the euphoria • increase in wealth reinforces belief in own judgment • belief takes hold that some new, price-enhancing circumstance is in control • feeling that price increase will continue indefinitely • dissenters are ignored, ridiculed, or condemned

  10. STAGES of FINANCIAL EUPHORIA: • 3. Rediscovery of leverage • all financial innovation involves the creation of debt secured, in greater or lesser adequacy, by real assets • inevitably a small variation on an established design • often less stable version • all crises involve debt that is out of scale with underlyingmeans of payment

  11. STAGES of FINANCIAL EUPHORIA: • 4. The inevitable reversal • cause of the fall is often much debated • the collapse is never gentle or gradual • everybody tries to sell at once • those who planned to time the market, can’t • inevitable losses and hardship

  12. STAGES of FINANCIAL EUPHORIA: • 5. The aftermath Jamie Dimon, CEO JPMorgan Chase: Bankers did “some really stupid things”

  13. STAGES of FINANCIAL EUPHORIA: • 5. The aftermath • anger at individuals who were previously admired for their financial acumen • scrutiny of the previously much-praised financial instruments and practices • talk of regulation and reform • speculation itself is rarely addressed

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