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Learning from History: The Panic of 1907

I recently finished reading a great book: The Panic of 1907 by Robert F. Bruner and Sean D Carr. Reading this book during the last couple of weeks of current turmoil in the financial markets made it seem particularly relevant in many ways – even though the events in the book took place 101 years ago. These were the days before the Federal Reserve even existed (the Fed came into existence in 1913 partially in response to the panic).

In particular, I was struck by what a small town both New York and the USA were in 1907 – how it was possible to bring together the key players into JP Morgan’s “Corner” in NYC for crisis meetings, etc. We’re in a very different world these days – with many of the securities manufactured on Wall St. over the last few years now in widespread, global distribution. You simply can’t just bring today’s large and diverse investor and issuer groups together to resolve crises the way JP Morgan did back then!

Published in August 2007, the book’s authors described seven essential elements that they believed need to be present to provide the basis for a “perfect financial storm”:

  1. A complex, systems-like architecture that spreads contagion quickly once it starts rolling
  2. Buoyant growth that eventually leads to excessive mistakes
  3. Inadequate safety buffers that lower the system’s margin of safety
  4. Adverse leadership that destroys confidence and increases risk
  5. A real economic shock from unexpected events
  6. Undue fear, greed, and other behavioral aberrations that accelerate the perceptions of bad news
  7. A failure of collective action even by the most well-intentioned people

The authors suggest that it’s the interaction of these factors that produces the crisis result. They say that “the way to forestall a financial crisis is to anticipate the storm’s volatile elements and, perhaps, even to fight their potential convergence.” Swift, decisive action of an appropriate magnitude is required.

Looking back at the events of last weekend, it seems that we were very fortunate to have had leadership who acted decisively to prevent a Bear Stearns meltdown – even though the action was deemed by some as an over-reaction.

Note: my one complaint about this book – it’s not available in a Kindle edition! Apparently publisher John Wiley & Sons isn’t supporting Kindle distribution of its books. Another of my recent favorite books, The Dick Davis Dividend: Straight Talk on Making Money from 40 Years on Wall Street, also published by Wiley – isn’t available in a Kindle edition either. See my earlier review of Dick’s book.

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