This current economic recession, just like the ones that have preceded it, have a lot of people asking who's fault it is and why it happened. Blame has been placed on the mortgage companies, the banks, the federal government, deregulation, homeowners who overspent, Wall Street traders, etc. A really big-picture view of the whole thing is just that, in a free-market economy, booms and busts are just going to happen. They will happen due to any number of indeterminate, ephemeral and fluky reasons. These unpredictable reasons then cause a run, which devalues a market and money, or the valuation of something in terms of money, is lost. It's a two-stage process: the initial reason followed by the run. But it is the run that makes the market fall. Think of it like seeing a bear in the woods. The instinct is to run away, but if you do that he will definitely chase you and tear you to bits; but if you stay still, the bear might pass you by.
The causes, consequences and stories of market runs since the 1987 crash are the subject of Michael Lewis's Panic: The Story of Modern Financial Insanity. Lewis is the author of Liar's Poker, a story of his days at Salomon Brothers and a contributor to the New York Times Magazine, Bloomberg and Slate. Panic is an anthology of news reports, interviews, editorials and articles previously published in The New York Times, The Economist, The Wall Street Journal, Fortune, Bloomberg News and other media. The authors of these pieces include Lewis himself, Paul Krugman, Joseph Stiglitz, Jeffrey Sachs, Robert J. Shiller and even humorist Dave Barry. The book is divided into 4 parts: Black Monday 1987; the Southeast Asian and Russian currency crises; the dot-com bust; and the sub-prime mortgage collapse. Unfortunately, Panic's chronology ends just at the time Bear Stearns was collapsing. Still, the content provided by the previous two decades makes fascinating reading.
Part one of anthology begins with a July 1987 Time article describing the "wild bull market," and is followed by an excerpt from Lewis' Liar's Poker that describes the insanity he saw on October 19th, Black Monday, at Salomon Brothers. The look back to that time is enlightening. I had just graduated from high school the previous June, and although I didn't pay much attention to the crash itself, I do recall how the times suddenly changed, especially the job market. Part three, the dot-com days, is still fresh in my memory though. Anything Internet was always going to be the greatest thing. A March 2000 Barron's article, however, listed hundreds of companies that would soon go bust. One that was expected to fail almost immediately was Marketwatch.com, now owned by the Wall Street Journal. Salon.com was soon to follow, as was Amazon.com. CDNow.com looked healthy, though; it is now owned by Amazon. Investors tried, but the truth is that nobody can predict the future. The dot.com crash sorted it out though.
Lewis' retrospective on runs is like watching a stampede from a helicopter. Panic gives us the benefit of hindsight about some of the rationalized absurdity that causes a market to go amok. The sell-offs that happen when a market falls are perfectly rational at the time because free-markets are not collective or communal and thus every participant must protect himself. As Panic demonstrates, this is the way of things. Sometimes it's merely a correction, but sometimes, when we run from the bear, it's a collapse.
This book is an interesting read especially in these times, when the whole world is wondering, is the panic over… or are we just building up to the big one?