A Conversation With... Robert Z. Aliber
Author of Manias, Panics and Crashes – seventh edition released October 2015
Why does this book remain so highly relevant?
Robert Z. Aliber is Professor Emeritus of International Economics and Finance at the University of Chicago’s Booth School of Business. He writes extensively and speaks internationally on currencies and international monetary issues. Bob Aliber was Director of the Center for Studies in International Finance; he was on the research staff for the Committee for Economic Development and Commission on Money and Credit; and he was Senior Economic Advisor for the Agency for Economic Development, U.S. Department of State. Best-selling publications include The Reconstruction of International Monetary Arrangements (ed., Macmillan, 1986), The Handbook of International Financial Management (ed. Dow Jones Irwin, 1989), and Global Portfolios (co-editor, Business One Irwin, 1991). He is a co-author of Money, Banking, and the Economy (Norton, First Edition, 1981, Fourth Edition 1990), Manias, Panics, and Crashes: A History of Financial Crises (Palgrave Macmillan, 5th ed. 2005, 7th ed. 2015), and author of The International Money Game (Palgrave Macmillan, 2001).
We talked to Bob about the seventh edition of Manias, Panics and Crashes: how it has endured its position as one of the foremost texts studying the global yet volatile history of financial markets, and why it remains such an important book today.
You first joined forces as co-author with Charlie Kindleberger for the fifth edition of Manias, Panics, and Crashes, which was released in 2005. How did this co-authorship come about?
I had known Charlie since the early 1960s. We shared an interest in the exchange rate experiences of individual countries in the period between the First World War and the Second; I had written my Ph.D thesis at Yale on Speculation in the French franc in the 1920s. One of Charlie's classic books was The World in Depression. We were both teaching at Brandeis University as visitors in the late 1980s. And after a lunch, I suggested that I would be interested in bringing out a subsequent edition of Manias.
The first edition of Manias was published in 1976. What have been the major shifts in the world economy since then?
There have been four waves of banking crises since the early 1980s. The first was in Mexico, Brazil, Argentina and ten other developing countries in the early 1980s. Japan and two of the Nordic countries, Finland and Sweden, were engulfed in the second wave in the early 1990s. The Asian Financial Crisis that began in July 1997 was the third in the series. The fourth wave involved the United States, Britain, Iceland, Ireland, and Spain in 2008; about the same time, Greece and Portugal were engulfed in sovereign debt crisis. Charlie was amazingly prescient in anticipating that there would be a large number of banking crises in the years following the first edition.
A seventh edition is quite an achievement. What are the major updates that this book addresses and why is the seventh edition a must-read for those interested in global financial affairs?
The world has been very generous to me; it is as if a new banking crisis that engulfs three, four or more countries at about the same time develops after the publication of each edition of Manias. The crises in these countries are similar; each has been preceded by an economic boom. And nearly every country that has had a banking crisis had previously experienced an increase in cross border investment inflows, which led to an increase in the prices of securities and to an increase in the price of its currency unless there was a commitment to parity. The decline in investment outflows from Japan in the second half of the1980s contributed to the surge in the prices of real estate and stocks. The booms in each of these countries resulted from the increase in investment inflows – and when these inflows slowed, the booms morphed into slumps and banking crises.
Could you give us a glimpse into the feedback that you have received for the book; how is it being used and how has it been found helpful?
The book is used in courses on economic history and international monetary history. Professors enjoy the broad sweep of history and the explanations for the origins of the banking crises in various countries.
What are the key messages that you hope that Manias provides for today's world?
The prevailing view of the source or origin of the U.S. banking crisis of 2008 that is found in Washington, New York, and other financial centers is that there was a series of "bad actors" who took on too much risk and were paid too much; there was a principal agent problem because these individuals were paid for "booking the business" while the firms they worked for were left with the risk. One part of the bad actors story is that the regulators were asleep or inept, and that was too little attention to the regulation of derivatives and other new financial instruments.
One shortcoming of this U.S. centric view is that it ignores the financial events in Britain, Iceland, Spain, and other countries at the same time. Another shortcoming of this view is that it ignores the similarities with the banking crises in more than forty countries in the 1980s and the 1990s. More importantly, the events that it highlights are the symptoms of a boom in the prices of securities and not the causes of the surges in these prices.
The view in Manias is that the U.S. banking crisis in 2008 had features similar to those in many other countries. Thus there was a surge in the foreign demand for U.S. dollar securities, which led to an increase in their prices and to a massive boom in home prices and construction. When the foreign demand for U.S. dollar securities slackened, real estate prices began to decline, which led to massive loan losses
In 2015 we have witnessed the risk that Greece will withdraw from the European Monetary Union, and a remarkable and unanticipated slowdown in China, after 30 years of brilliant economic growth. What are the key challenges for the global economy and what steps should be taken to ensure a resilient and stable future?
The key challenge for the global economy is to recognize that the international monetary arrangement is inherently unstable. Cross border investment flows have accelerated and are much more variable than when currencies were anchored to parities.
Greece got into financial difficulty after it joined the European Monetary Union; the banks headquartered in various countries in Northern Europe were eager to lend to the Government of Greece because the interest rates that the Government was willing to pay were high. The Government of Greece was eager to borrow because of the need to finance the construction of the facilities for the 2004 Olympic Games in Athens. All of the money that it needed to pay the interest on its indebtedness came from the lenders in the form of new loans.
China has had a massive boom in real estate prices, much like the one in Japan in the second half of the 1980s. But the difference is that that there are several tens of millions of unoccupied apartments in China. Apartment prices are declining and will decline further. Construction of new apartments is slowing. The origin of the housing bubble in China is different from that in Japan, but the impacts of the decline in prices will be similar.
The message of the seventh edition of Manias is that surges in the supply of credit are inherently unstable, and this instability is magnified when these surges result from increases in cross border investment inflows.