A Short History of Financial Euphoria

At times, while reading this book, it feels like you’re going through ideas that have already been said a thousand times. But then you remember: this book is over 30 years old. And while it wasn’t the first —and certainly not the only one— to discuss these topics, it stands out as one of the clearest and most enjoyable compilations out there. That’s why it became a classic. The main premise —or conclusion, or moral, however you want to call it— is simple, but also feels inevitable. And that’s what makes it so powerful: Bubbles tend to emerge when a new technology or product enters the economy and brings with it a compelling narrative of endless optimism. That narrative fuels an emotional engine —what we now call FOMO. Eventually, the plausible scenarios can no longer justify the valuations, and the cycle turns. The “last fool” buys in, and what follows is a reversal: FOMO becomes fear of being in, and everything collapses. Then 20 years go by, everyone forgets, and the cycle repeats. One of the less frequently mentioned but very insightful ideas in the book is how bubbles are often driven by what appear to be financial or technological innovations — tools that society uses to justify increased leverage.

Galbraith's wonderful little book (Only 110 pages) is a quick guided tour -- with pithy analysis interspersed throughout -- of get-rich-quick movements, and, more importantly, the foolish thinking BEHIND such phenomena. Galbraith takes the reader on brief tours of some of the more notorious financial booms-gone-bad, such as the "Tulip Craze" in Holland and the Banque Royale bust in France in the 1600's, the South Seas "Bubble" of the 1700's, and, more importantly, the numerous episodes throughout American financial history, from Colonial times through the busts of 1819, 1837, 1857, 1873, 1907, 1929 -- and 1987 (Galbraith's book was first published in 1990 -- ten years before the dot-com bust....). The source of these rush-to-riches-gone-sour, argues Galbraith, rests on several ever-consistent, historically re-occurring causes: First, the quest for leverage (i.e. generating more funds than having the means to actually support them) and lavish debt spending; Second, the pathological, recurrent inability of the financial world to learn from the past; Third, the silly notion that the possession of wealth is directly equal to a persons' intelligence (Wealthy individuals, contends Galbraith, are not rich because of brains, but more often through chance and circumstance -- a fact the public ignores at their own peril); Fourth, the incessant human desire to become affluent by the easiest means possible; Fifth, the 'religious' quality Americans consistently perscribe to "the market," i.e. that free enterprise is 'perfect' -- Corruption, loss, and falling markets are due only to "outside forces" (Like 'evil CEO's' or 'government intervention') -- rather than the public's endless supply of gullibility, culpability, and simple greed. The financial world, Galbraith brilliantly contends, is rooted in a quasi-theological outlook: Successful Wall Street moguls are treated as divine shamans; dogmatic faith in the latest financial hoopla is considered a virtue; critics are readily condemned as heretics; and once the bubble bursts, there exists a curious religious playing-out of "Sin-Fall-Guilt-Punishment," whereby the men who we once revered as financial geniuses are quickly strung-up in the court of public opinion -- sacrificial lambs for the public's own short-sightedness. Galbraith warns his readers that money-making innovations in the world of finance are simply worn-out re-workings of very, very old schemes. New bubbles emerge under new guises and fanciful terminology -- but the game remains forever the same. Once one crisis has passed, a new financial rush soon emerges, and the vicious cycle of irrationality and idiocy (Galbraith's terms) begin again. In the end, Galbraith warns his readers to be very wary of those who promise you easy wealth, and should you jump on the latest money-making bandwagon -- and most likely end up losing in the end -- don't blame anyone or anything except............YOURSELF. Excellent book!!

A Short History of Financial Euphoria John Kenneth Galbraith Book Review By Richard E. Noble This book is indeed a "short" history of Financial Euphoria. I would have liked a much longer and more detailed history by Mr. Galbraith. In a previous book, "The Great Crash 1929," much of what is in this book has already been expressed. In fact, I think most of this work was excerpted directly from the "The Great Crash" verbatim. The advantages of this little book are that all these cases of speculative mania and fraud are lumped together in this one volume with updated commentary and some modern day comparisons. The author covers these type incidences up to the crash of 1987 in the later part of the Reagan administration. The author makes the point that all of these mania, panics or crashes have similar components. They are all based on speculation and leveraging. The mania is attributed to basic insanity and the misguided notion that because someone is rich he must therefore be wise. "In the first forward to this volume, I told of my hope that business executives, the inhabitants of the financial world and the citizens of speculative mood, tendency or temptation might be reminded of the way that not only fools but quite a lot of other people are recurrently separated from their money in the moment of speculative euphoria. I am less certain than when I then wrote of the social and personal value of such a warning. Recurrent speculative insanity and the associated financial depravation and larger devastation are, I am persuaded, inherent in the system. Perhaps it is better that this be recognized and accepted." There are two types of speculators who invariably get involved in these troublesome episodes or "bubbles." "There are those who are persuaded that some new price-enhancing circumstance is in control, and they expect the market to stay up and go up, perhaps indefinitely. It is adjusting to a new situation, a new world of greatly, even infinitely increasing returns and resulting values. Then there are those, superficially more astute and generally fewer in number, who perceive or believe themselves to perceive the speculative mood of the moment. They are in to ride the upward wave; their particular genius, they are convinced, will allow them to get out before the speculation runs its course. They will get the maximum reward from the increase as it continues; they will be out before the eventual fall." He points out that warnings about the temperamental nature of the present boom are never heeded and those who offer them are looked upon with derision. "In the winter of 1929, Paul M. Warburg, the most respected banker of his time and one of the founding parents of the Federal Reserve System spoke critically of the then current orgy ... and said that if it continued, there would ultimately be a disastrous collapse ... He was held to be obsolete in his views, `he was sandbagging American prosperity.'" This danger of speaking out against the speculative orgy as it is taking place often makes the bearer of such tidings the accused when the bubble finally bursts. It is a lose/lose situation in Mr. Galbraith's estimation. Yet he points out that he did the same himself in 1986 ... to no avail and much acrimony. So the speculative bubbles come and go and are endemic to the capitalistic system according to the Professor. He also suggests that they are cyclical. They reoccur every twenty or thirty years. They are directly proportional to the amount of time necessary for the previous fiasco to be forgotten and a new generation of semi-educated fools take their positions in the financial community. "The circumstances that induce the current lapses into financial dementia have not changed in any truly operative fashion since the Tulipomania of 1636-1637. Individuals and institutions are captured by the wondrous satisfaction from accruing wealth. The associated illusion of insight is protected, in turn, by the oft noted public impression that intelligence, one's own and that of others, marches in close step with the possession of money..." The mistaken notion that since a person is rich he must be intelligent is emphasized over and over throughout the short text. So what is Mr. Galbraith's solution? "The only remedy, in fact, is an enhanced skepticism that would resolutely associate intelligence with the acquisition, the deployment, or, for that matter, the administration of large sums of money ... there is the possibility, even the likelihood, of self-approving and extravagantly error-prone behavior on the part of those closely associated with money ... a further rule is that when a mood of excitement pervades a market or surrounds an investment prospect, when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution ... Yet beyond a better perception of the speculative tendency and process itself, there probably is not a great deal that can be done. Regulation outlawing financial incredulity or mass euphoria is not a practical possibility." This conclusion I find very interesting and extremely disappointing. After all his great insight and explanation of the circumstances precipitating these speculative fiascos he closes with: Regulation outlawing financial incredulity or mass euphoria is not a practical possibility. This conclusion appears somewhat demented also. Mr. Galbraith, it appears, has completely forgotten that in most of these cases a crime was committed and that the euphoria involved was not inclusive of the masses, as he states, but of a select group of people within the masses reigning in the financial community. The Tulipomania is rather unique. It seems to be the perfect example of innocent mass insanity. But most of the other cases involve crime and criminal personalities not simply a massive delusion. There was swamp land in the 20's in Florida involving everyone's favorite con-man, Charles Ponzi. There were gold mines that didn't exist and were never worked or mined. There were worthless stocks and bonds and real criminals involved in the various scams. During the course of the book the author mentions that some of these individuals were punished with prison sentences or ostracized, and "justifiably so" says he. Instead of fraud he now seems to be defining the criminal behavior involved in each of these scandals as "inciting financial incredulity or mass euphoria" which, I agree, would be difficult to prosecute. Where is his outrage for the crimes and criminals involved? I find it interesting to note that if a man robs a corner store with a gun and steals one hundred dollars, he will most likely end up in prison. The man or the men who rob millions of innocent people of their assets through fraud and other criminal shenanigans are given an indifferent shrug by Mr. Galbraith. "Oh dear, what to do?" seems to be the gist of it. In our last scandal that nearly collapsed the economy of the entire world we clearly had criminal fraud, falsifying of documents, false testimony, false accounting procedures and figures and basic embezzlement. Most of us were victims yet not participants in the speculative mass euphoria - just as in 1929 and in other of these big financial calamities. We bought nothing and sold nothing. Yet when the final tabulations were given we lost tens of thousands, and some of us hundreds of thousands on our home equity and life savings. Our retirement pensions were looted. A property that was estimated before the euphoria at $125,000 may now be estimated at $50,000 or less. Because of the indulgences of the speculative euphoria in the financial and real estate sector we are all made to suffer and pay dearly. And the bandits are not even being pursued by a posse. It seems that this was the mindset of those involved. They knew they were acting criminally but made the calculation that as long as the majority in their industry participated in the crime, they would be in effect "too many to be prosecuted." It now appears that they were correct. We have an obvious case here of "Crime and No Punishment." This indicates to me that this criminal behavior is far from over. The thief who is successful in his thievery is encouraged to rob again. The next massive robbery seems to me to be just a matter of time and manipulation. At the beginning of this review I pointed out that Mr. Galbraith suggested that all of this business is inherent in the capitalist system - it is not only systemic but endemic. And now we find that it is also incurable and beyond regulation and justice. So then we are to sit back and periodically - every twenty years or so - let our wealthier sector rob us of all or part of whatever it is we thought to be our little nest egg or share in this great society. Crime on the part of certain groups among us is inevitable and any type of preventative attempt on the part of us or society is futile. If that is the reality of the capitalistic system, then maybe it is time to take a closer look at this capitalist system. This is like saying: Men will rape women. So girls, ready yourselves for the event and get used to it. This is very poor logic coming from a very intelligent man. I need a better solution than what the good Professor is offering here. Unfortunately, Mr. Galbraith died before this last economic disaster. I wish he lived to tell us his thoughts on this situation. Richard Edward Noble is a writer and author of: "Bloggin' Be My Life."

Very well written. Brings back the art of concise and thoughtful writing on a broad subject rather than a 1000 pages of useless words.

John Kenneth has some great books however I didn't like this book that much. He sure was a great economist.

Brief history of financial bubbles. Entertaining and informative.

Easy and fun to read. Short, to the point. Teaches us to be prudent and stay far away from the dangers of recurring bubbles.

This short book is the economic equivalent of a cold shower for the unrestrained fiscal optimist . Whenever we see inflated prices, or “ new” financial products , one should lock oneself away , read this book and count to 1000 before opening your wallet

It is a brilliant book for those who are connected with financial market. It basically talks about the financial market euphoria that occurs almost every 10 years or so and how investors or Traders have short term memories that lead to this financial euphoria. Honestly an interesting read..

uses a lot of words i have never heard before, but you get the just of it, and it is a real good history about crashes in the market from 1630 and up to 1987. he does not cover the internet bubble burst of 2000, he passed away in 2006, so nothing on 2008. it is excellent reading too bad it was not in a little more laymans terms, but dont let that discourage you, it all boils down to ignorance and greed for the masses.

Mais do que um históricos sobre desatinos coletivos na área das finanças, o livro é uma lição de vida. Deve ser lido por todos os que anseiam enveredar no mundo dos investimentos.

Galbraith is one of my all-time favorite authors. It's not only his very elegant prose (before reading Galbraith, I didn't know that books about economics can be fun and even hilarious.) Galbraith, himself a Harvard Professor, is able to explain economic problems and elucidate technical dicussions - perhaps "to teach about economics" would be a more suitable expression - even to non-economists like me. This book dwells on the subject of speculation and the economic crises it causes: what originates speculation, some examples (the classic tulip case in the Netherlands in the 17th century, the Banque Royale in the 18th century, the South Sea Company in the 18th century, American examples in the 18th century, the 1929 crash, the 1987 crash), what can and what shouldn't be done against speculation. Needless to say, it is a topic that recurrently becomes important (e.g. 1987, the 1997 Asian crisis, the 2008-2009 crisis). This book is closely related to the same author's "The Great Crash 1929". But whereas the former is a rather brief study of speculation in general, the latter deals specifically with the 1929 crisis. On the one hand, if you want an introduction to the subject, "A Short History of Financial Euphoria" might be the best choice, but if you want an in depth analysis, go for "The Great Crash 1929"; on the other hand, these are complimentary books so reading both is also a good idea. Yet if I had to chose between both books, I would recommend "The Great Crash 1929".