MONEY, GREED, AND RISK.

• Author: Nocera, Joseph
• Position: Review

MONEY, GREED, AND RISK by Charles R. Morris Times Books, $25

"DUMB LENDING IS USUALLY AT the heart of any financial crisis," writes Charles R. Morris towards the end of this mercifully short, surprisingly engaging review of financial crises down through the ages. His specific reference is to one of the most recent financial crises--the near collapse last summer of giant hedge fund Long Term Capital Management, the blame for which he correctly lays as much on the firm's imprudent lenders as on the principals themselves. But his larger point is this: When it comes to big-time financial crises, there's really nothing new under the sun. We only think there is.

Morris is one of the more original thinkers around. Of his eight previous books, several--including The Cost of Good Intentions, a meditation on unintended consequences, and Computer Wars, a look at the forces that brought IBM low some years ago--are considered minor classics. Money, Greed and Risk is not in the same league as those books, but it has its share of rewards for the patient reader.

Though the book starts slowly, with an excessively detailed look at the financial machinations of the Robber Baron Age, it becomes increasingly illuminating after Morris jumps to the modern age of finance and begins tackling such topics as Michael Milken, the S&L crisis, the leveraged buy-out craze of the 1980s, and last year's Asian currency crisis. Gradually, guided by the author's sure hand, one begins to see the pattern, what he calls "the recurring cycle of financial innovation" Here's how he describes it:

"Technological, demographic, or industrial change creates an essentially new financial demand. After a few false starts, some new invention ... brilliantly meets the challenge. An exuberant development period follows, as more and more firms pile in to take advantage of the sudden opportunity. Exuberance quickly becomes gross excess, precipitating a crisis. The subsequent crash burns off the excess, buyers and sellers adjust their expectations, regulators update their rules and alarm systems, and yesterday's brilliant innovation becomes just another of the industry's workaday departments."

As Morris shows, this is the pattern that allowed for the rise of both the railroads and the steel industry back when J.P. Morgan and Jay Gould were the great financiers of the age. Gould, for instance, devised railroad debt instruments that were snapped up by European investors. Eventually, the whole thing...