Financial Markets and Financial Crises.

• Author: Kindleberger, Charles P.

This book which grew out of a 1990 NBER conference divides fairly well into two parts, the first on crises and panics in commercial banking, the second on current issues in corporate debt, the dollar and the savings-and-loan troubles of the 1980s.

The first part include papers by Mark Gertler, Glenn Hubbard and Anil Kashyap on the connections between crises and fluctuations in real investment; by Ben Bernanke and Harold James on the gold standard and 1929; by Fred Mishkin, testing the role of asymmetric information in panics; and by Charles Calomoris and Gary Gorton on the origins of panics. Barry Eichengreen and Peter Garber also write on the 1951 Fed-Treasury accord, an issue on the edge of the crisis theme.

There is much to chew on in these initial essays. The writers are at pains to move beyond earlier views focussed narrowly on monetary explanations, for example, that the October crash had little to do with the 1929-33 depression, or that distinction should be made between "real" financial crises which involved large declines in the money base, and "pseudo crises" which confound markets but do not. Much is what is made of what are claimed to be new theoretical insights, some of which are familiar if put into plain English from the new jargon, e.g., asymmetric information, adverse selection, moral hazard, agency problems, heterogenously-informed depositors, sequential-service constraint. Emphasis is put on panics occuring following a rise in the interest-rate differential between riskless and risky assets, following some untoward event such as a stock-market crash. Today in Wall Street this is called "a flight to quality." It is consonant with a change in expectations from euphoric which may have resulted in a bubble or in less spectacular overshooting to uncertainty or to fears of trouble.

Little attention is given to the events causing the change in expectations. Gertler, Hubbard and Kashyap blame monetary policy, mentioned three times in a single paragraph [p. 27]. Bernanke and James mention the possibility of a rise in real wages, without noting that this in 1929 and later came entirely from the decline in prices. Bernanke's frequently-cited 1983 paper explaining how bank troubles could produce depression through credit rationing did not investigate the connection between call-loan difficulties in October 1929 and the collapse in commodity prices as bank credit was denied commodity brokers. His paper with James mentions a price...