A Brief Book Review of “A Short History of Financial Euphoria” by John Kenneth Galbraith
Cassius: ”Men at some time are masters of their fates. / The fault, dear Brutus, is not in our stars, / But in ourselves, that we are underlings.” — Julius Caesar (1623)
John Kenneth Galbraith is another one of these thrice-named economists like John Maynard Keynes who often had something instructive to say and said it in a charming way. In this brief book, A Short History of Financial Euphoria (1990), he does just that. In roughly 100 pages he recounts the constant patterns within various episodes of financial euphoria and devastation over several hundred years. He provides the reader something of “considerable practical value [in] aiding understanding and prediction.”
We learn that although market participants love to cast the blame for market speculation and crashes at everything and everyone but themselves, “financial deprivation and larger desolation are […] inherent in the system.” We also learn that there are two principle groups of actors necessary for euphoria to occur in the first place: (1) Those who believe some new and wondrous asset has been introduced to the world and that its proper value will be ever higher than its current price levels and that any price is a good one to pay for it (i.e., a group Galbraith calls fools). Also, (2) a smaller group who skeptically believe a speculative fervor has undertaken the former group but that they can comfortably ride that wave and exit before the asset prices in question crash (i.e., people the fools think geniuses). That latter group tends to include bankers, government officials, famous speculators, or more generally, “intellectually questionable men in intimate and protected association with large assets.” The means by which they both allow euphoria in asset prices and benefit from it has always been leverage, though it usually takes on many different names, disguises, and reasons. Galbraith contends that whenever someone is said to be a genius in financial markets, they probably are not, and whenever something is said to be new, it probably is not. “The rule,” he writes, “is that financial operations do not lend themselves to innovations. […] The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version.”
I really enjoyed this book for the same reason I enjoyed Charles P. Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises (5th Edition; 2005), The Go-Go Years: The Drama and Crashing Finale of Wall Street’s Bullish 60s (1973) by John Brooks, Roger Lowenstein’s When Genius Failed: The Rise and Fall of Long-Term Capital Management (2000), and Robert J. Shiller’s Irrational Exuberance (2005). It seems important to try to learn of debacles in financial history to increase your odds of not repeating them. Maybe something to consider the next time your cousin or an Instagram celebrity suggests you buy into an ‘initial coin offering’. Galbraith is even more specific in his prescription for the reader: “The only remedy, in fact, is an enhanced skepticism that would resolutely associate too evident optimism with probable foolishness and that would not associate intelligence with the acquisition, the deployment, or for, that matter, the administration of large sums of money.” I think that is wise counsel.