When beset with financial problems, it is always good to check with John Kenneth Galbraith (1908-2006). His book “A Short History of Financial Euphoria” was last published in 1993 (Galbraith). It’s a small book, one you can easily read in a morning. In it Galbraith extracts the common elements to speculative investment behavior with insights gathered by briefly examining the history of the major boom and bust events, each of which sounds like our on-going trauma that began with the sub-prime housing market. Galbraith describes the speculative episode that unites all boom and bust cycles which he derives from his examination of history. He concludes that the financial markets have no more than a twenty year memory, which means that the stock market crash of 1987, created by the Reagan enthusiasm of deregulation and junk bonds and the current disaster with the housing market, are about on schedule. Galbraith argues that each boom cycle is associated with a genius, someone who is touted to have a new foolproof concept that overcomes those with hesitant memories of the last one and then, when the inevitable bust comes, the former genius may find himself exiled to another continent, in jail or permanently disgraced and impoverished (during our 1929 crash and depression, many Wall Streeters, once admired for their investment acumen, escaped accountability and fled with resources they could put together on the fly–note too Michael Milken of the junk bond era). During the early boom cycle, when more knowledgeable observers warn of too much leverage and too little liquidity, they are denounced and scorned as anti-progressive. In the winter of 1929, Paul Warburg, the most respected banker of his time and one of the founding leaders of the Federal Reserve System, criticized the orgy character of the bubble frenzy as “unrestrained speculation” and said that continuation of that trend would lead to collapse and catastrophe. The reaction to his statement drew scorn and ridicule and his detractors accused him of “sandbagging American prosperity” (Galbraith eventually became the Paul Warburg professor of economics at Harvard University).
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