Drive in the fast lane, and you might just crash
AFR 22 Jan 2000 p 9
Sprouting a hearing aid from each ear, Charles Kindleberger, 89, takes the
wheel of his battered 1989 Ford Escort. I am trying to see who can endure
longer- the car or me. He presses the accelerator pedal down firmly. He
does not relent until we are overtaking much newer cars and much younger
drivers. But as we whiz along the freeway to Boston, Kindleberger
confesses a secret fear. He saw a news item about an older driver who
meant to slam on the brakes but hit the accelerator instead. "I think
about it all the time, he frets.
I assure him that I know I am in a good hands. There is no one who knows
more about crashes than Charles Kindleberger. The retired professor from
Massachusetts Institute of Technology is a leading expert on the subject of
financial colapses. And although he is now based at a genteel retirement
village on the outskirts of Boston, he is as energetic as his Escort and
shows promising signs of outlasting.it. He has just finished updating his
classic work, Manias, Panics and Crashes, a lively trip through three
centuries of financial disasters. The new edition will include the Asian
and Japanese crises.
Kindlerberger seems to enjoy his antiquity. In his sun-filled study, he
points at his computer free desk and chuckles: "A Japanese journalist came
to interview me the other day. He was so amazed at my old typewriter that
he took a photograph of it. Kindelberger's longevity gives him a rare and
valuable vantage point. Financial crises do not surprise or alarm him.
With as much sensitivity as a mortician's respect for the dead, he jokes
about the possibility of another world depression. His book opens: "There
is hardly a.more conventional subject in economic literature than financial
crises." His work like his conversation, crackles with wit. When a critic
complained that his book failed to include a definition of financial
crisis, Kindleberger responded that "the genus is like pretty women...hard
to define but recognisable when encountered"
Kindleberger's whole life has been intimately entwined with great disasters
and great rebuildings. He began his professional career working for the
Office of Strategic Services (predecessor of the CIA), poring over maps of
Germany to find suitable targets for the US Air Force to bomb in World War
II. Then he was involved in the rebuilding of the world after the war,
working on the Marshall Plan for rebuilding Europe. And, as an officer in
the US Treasury, he was involved in the creation of the new world order,
designing the enduring Bretton Woods institutions; the International
Monetary Fund to run the financial system, the General Agreement on Tariffs
and Trade to run the trade system, the World Bank to try to grapple with
poverty. But his boss in Treasury, Harry Dexter White, turned to be a top
Soviet agent. And in the McCarthyist fever of the time, Kindleberger,
though innocent, fell under suspicion of being a spy when an intercepted
phone conversation was misinterpreted by the FBI. They were, recalls
Kindlerberger,"tricky times". But he weathered the storm and began another
successful rebuilding-this time a personal one.
Today, his reputation is high and he can lay claim to shaping generations
of economic trinkers, including last year's winner of the Nobel Prize for
economics, Bob Mundell. Kindleberger does think that his former student has
gone "a little crazy" in his work of reviving the idea of the gold
standard, but that's another story. Kindlerberger skirted another
collapse, though. He sold all his shares in the Wall Street crunch of 1987.
And he hasn't gone back into the market. "Eighty-nine is not a good number
to be in a volatile market".
Which brings us from the past to the future of financial collapse.. What
does the grand old man of financial disaster think of the internet-inspired
stock boom? Kidlerberger does not dispute the long term posibilities of
technological transformation. But he is sceptical of the market's ability
to price internet stocks in the interim. "The auto stocks in 1929 played
exactly the same role then that internet stocks play now." he points out.
The transformative potential of the car was evident but impossible to price
accurately. It was the perfect object for speculation. Of course. Wall
Street's Great Crash in 1929 did not spare the auto investor. Together
with Roman coins in the 1620's, Duch tulips in the 1630 and railroad stocks
in the 1800s.Kindlerberger entered internet stocks in his historical
catalogue of objects.of speculation as early as 1995. "The auto stocks
started to go down in June 1929 because interest rates started to go up".
"US official interest rates, of course, began to inch up late last year.
Kindleberger leaves the point, like auto stock valuations in 1929, hanging
in mid air.
Will the US be the site of history's next financial crisis?" A lot depends
I'm quite a bit troubled by the rise in consumer debt of trillions of
dollars. If stocks were to drop by, say, half, then a lot of people would
be in bankruptcy as they found they couldn't service their mortgages and
their credit card debts. "A lot of the rich are taking the precaution of
buying very expensive houses because the present bankruptcy law says you
can't take the man's house." And if it should happen, there is a good
chance that Charles Kindlerberger will be typing it up on his ancien
machine for another edition of his book. As for the Escort, well, some
auto investments are just too speculative.