In an interview on Investment

Your next book?

I would add Manias, Panics and Crashes by Charles Kindleberger. I think people should just study economic history more carefully, because what we’re seeing today has happened before, probably in a less extreme way, but it’s all happened before, on a smaller scale in terms of the excesses that have happened. Basically, Kindleberger looks at various manias that occurred in different asset classes: commodities, equities and homes – I mean building booms – as well as John Law and the South Sea Bubble. And he describes very well how these manias occur and what the symptoms are of manias in terms of excessive speculation, overleverage, borrowing, fraud, embezzlement, high trading volumes and so forth, and how they then end. I mean, usually you have a slump after a crisis occurs. The crisis is a symptom of the excesses of the previous boom, and then economically a slump occurs.

In an interview on Crashes

To start with, tell me about the Kindleberger book, Manias, Panics and Crashes. Is there an overall theory of crashes here?

Kindleberger’s great virtue is that he was both a respected economist and a student of human nature, and he knew that human nature could never be bottled up in an economic model. His book is a terrific narrative of a series of bubbles, going back to pre-industrial days – the Dutch tulip craze, the South Sea bubble, and so forth.

None of them is exactly the same, of course. They take place at different periods, involve different instruments and different kinds of mind-sets. But each one is about people getting caught up in one sort of enthusiasm or the other. Why would a company like Merrill Lynch think that housing prices that rose in real terms by 97 per cent between 2002 and 2005 would continue to rise?

House prices went up 97 per cent in real terms in a few years?

Yes, in the US. The same things happened in other places too, in Britain, Spain, Ireland, and the banks said: ‘Gee, this is great.’

People are enjoying the bubble so much that…

It was an obvious bubble. Even I could see it, so how come they couldn’t?

Maybe because you weren’t raking in the money. What could we do to help us foresee crashes?

I made a point in a half-joking way in a book once, but I think it was really right. We should look at the top five or ten investment banks that every year hire a bunch of top graduates from MIT and Harvard Business School. Then we should watch what those guys work on because that’s where the next crash is going to be.

It’s true! It takes about five or six years but they assign the brightest guys to whatever is new and on the cutting edge and every time it gets pushed over the brink until there’s some kind of crash. Most of the time it’s a fairly modest crash. What was so strange about this one is, I think, for the first time all the regulators helped make it happen. One of the points that the Rogoff and Reinhart book, This Time It’s Different, makes is that this happens all the time and has always happened – the whole world gets caught up in the same kind of enthusiasms.