The Panic of 1907: Lessons Learned from the Market's Perfect Storm

 
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"Before reading The Panic of 1907, the year 1907 seemed like a long time ago and a different world. The authors, however, bring this story alive in a fast-moving book, and the reader sees how events of that time are very relevant for today's financial world. In spite of all of our advances, including a stronger monetary system and modern tools for managing risk, Bruner and Carr help us understand that we are not immune to a future crisis."
—Dwight B. Crane, Baker Foundation Professor, Harvard Business School

"Bruner and Carr provide a thorough, masterly, and highly readable account of the 1907 crisis and its management by the great private banker J. P. Morgan. Congress heeded the lessons of 1907, launching the Federal Reserve System in 1913 to prevent banking panics and foster financial stability. We still have financial problems. But because of 1907 and Morgan, a century later we have a respected central bank as well as greater confidence in our money and our banks than our great-grandparents had in theirs."
—Richard Sylla, Henry Kaufman Professor of the History of Financial Institutions and Markets, and Professor of Economics, Stern School of Business, New York University

"A fascinating portrayal of the events and personalities of the crisis and panic of 1907. Lessons learned and parallels to the present have great relevance. Crises and panics are as much a part of our future as our past."
—John Strangfeld, Vice Chairman, Prudential Financial

"Who would have thought that a hundred years after the Panic of 1907 so much remained to be written about it? Bruner and Carr break significant new ground because they are willing to do the heavy lifting of combing through massive archival material to identify and weave together important facts. Their book will be of interest not only to banking theorists and financial historians, but also to business school and economics students, for its rare ability to teach so clearly why and how a panic unfolds."
—Charles Calomiris, Henry Kaufman Professor of Financial Institutions, Columbia University, Graduate School of Business

Customer Reviews:

  • 2.5 stars-In 1907,as in 2007,the ancient wisdom of Adam Smith was completely ignored
    The two economists who wrote this book are half right about the Oct.-Nov.,1907 panic.Morgan did bail the system out.They are also half wrong.Unfortunately,the authors generally ignore the events preceeding this Panic.I am not talking about the immediate events necessarily,such as actions taken by the Bank of England,but a record of many,many years that demonstrated that Morgan was a main contributor to the creation of bank panics by means of his highly speculative loan policy.The facts are that Morgan was a well known speculator-financier-banker whose record ,since the Civil War, was one of creating ,and benefiting from,speculation.
    Adam Smith provided the solution to the problem of bank panics in 1776 in the Wealth of Nations(WN)[See pp.292-340,especially his summary on pp.339-340,of the Modern Library(Cannan)edition of the WN.]
    The first requirement is to have an independent central bank and a uniform currency.The second requirement is that no loans be made to projectors,(J M Keynes's speculators-rentiers),prodigals(like J P Morgan),and imprudent risk takers(like J P Morgan).ANY such loans made to such categories will WASTE AND DESTROY the aggregate savings of the nation.The savings must be lent,at a relatively low rate of interest ,only to the sober people ,who will use the loans productively to create jobs ,businesses,and real goods and services that add to the Wealth of Nations.The third requirement is that the rate of interest be fixed a little bit above the equilibrium rate of interest charged to prime customers.This low rate of interest must be maintained permanently in the long run.

    It is not surprising that these policies are identical to those put forth by J M Keynes in his General Theory in Part V on pp.321-327,338-353,and 374-377.The fact of the matter is that this book demonstates that the economics profession still has not mastered the wisdom of Adam Smith after two centuries .Economists get things half right and half wrong.The bizarre logic in this book is equivalent to awarding someone, who starts a forest fire great recognition if is able to put it out later with only moderate damages.Perhaps some policy maker,say Ben Bernanke,will decide to take a look at what Adam Smith concluded over 230 years ago.It's only a fifty-fifty proposition....more info
  • a must read for anyone interested in American finance
    Bruner's book is a must read for anyone interested in the history of American finance, or in the intricacies & complexities of financial crises in the US & elsewhere. The 1907 Panic was at once a watershed event in US finance, since it was the immediate stimulus for the creation of our first real central bank, the Federal Reserve. But it also was (and is) typical of financial crises generally. Those of the 19th century that immediately preceded it (that is, in the post-Civil War "Gilded Age"), and those of our own time (that is, Enron, Long-Term Capital Management, Continental Illinois, etc.). Bruner has done an fine job digging up the details of what actually happened in the October/November 1907 crisis, the personalities & institutions, and in showing how these events overlaid on an already unstable economic situation that were lowering public confidence. The book is very well written, if not novel-like, certainly approaching the form. I read nearly all of it in one sitting....more info
  • Panic of 2009
    While I was initially very skeptical about this book, it does provide some very interesting food for thought and eerie parallels between 1907 and 2009. If you are seriously interested in where we have been and where we could be heading, I would recommend that you read this book (and also encourage your friends to read this book).


    Comments regarding the application of Complex System Theory and the experiences from 1907 appear to be highly pertinent and very timely:

    1) Complex systems create convenient pathways for serious problems to travel and expand;

    2) Wasted information asymmetry opportunities occur when political and government officials fail to use superior information in a timely and effective manner (or even worse implement policies that elevate exposure to risk of a crisis);

    3) With current global financial systems, institutions in different countries are linked and financial crises have increasingly stronger international dimensions;

    4) Complex systems can display surprising non-linearities. Orderly systemic structures can produce unpredictable behavior;

    5) Highly complex systems make it difficult for anyone to know what is really going on; and,

    6) System complexity makes it difficult for all participants in the financial system to be well-informed when needed the most.


    Other general observations related to the case study include:

    1) Gaining clarity as to which banks are solvent or insolvent might hurt weak banks but could help healthy banks;

    2) Every major financial panic has occurred after an episode of rapid economic growth;

    3) The "boom" part of the credit cycle tends to erode the shock absorbers that cushion the financial system in a slump;

    4) Outlandish rhetoric from President Theodore Roosevelt regarding big business and "the wealthy" added to calls for news laws and increased government regulation;

    5) The global financial system is larger, more intertwined, and much more complex than ever;

    6) The overall world economy has experienced buoyant growth, thus absorbing liquidity and removing discipline at a critical time;

    7) Outlandish rhetoric and counter-productive policies can further erode already weak investor confidence;

    8) Any significant financial crisis can lead to further vulnerability from "real" economic/other shocks (e.g., war, oil shortages, pandemics, etc.);

    9) Never underestimate the potential impact of fear, greed, and other aberrant behaviors; and,

    10) If you believe the comments in the book, you will come to highly admire J. Pierpoint Morgan (at least for his pivotal role in calming the panic of 1907). The only problem is that no one of his stature has at yet stepped forward in 2009.
    ...more info
  • Santyana was Right
    Remember what George Satyana said ("Those who do not know history are condemned to repeat it")? Well, he was right as this very timely book demonstrates. The book is a case study of the financial panic of 1907 when liquidity and asset value issues rocked U.S. banks, trusts and financial markets. Much of what occurred in 1907 bears an eerie resemblance to the current "credit crunch". A reader may wonder whether he or she is reading a book or the most recent edition of The Wall Street Journal. Aside from its timeliness, the book offers a workmanlike account of some very interesting occurrences and does a very good job in painting a portrait of the larger than life characters involved in the 1907 panic--- particularly the legendary J.P. Morgan (the authors had access to and quote from the private papers of several Morgan partners). If you like stories of the Guilded Age (be it real life accounts or Edith Wharton), you will like this book. Finally, the book pulls off the hat trick by providing a nice scholarly summing up of factors leading to the financial panic of 2007. This book should be required reading for everyone working on Wall Street today....more info
  • Precusor if "IT"
    The value of this historical book is in its bringing together the various strands of thought on how financial crises happen, drawing on Kindleberger, Minsky, Calomiris, et al. Four of the seven ingredients are from the Minsky model, and the rest reflect more recent work and the authors' view that "political leadership" can make or break a crisis. The authors concluded, as of June 2007, that another Great Depression can "almost certainly" happen. Read it also for the high drama, including on the life of J. P. Morgan....more info
  • A lot of small details regarding the panic.
    The Panic of 1907 seems to focus a lot on the small details of the panic. The conclusion in my opinion, fails to take a look at the big historical picture. The Federal Reserve was later created in 1913, to help prevent another liquidity crisis. But was this a devil`s bargain? What would JP Morgan have to say about the Federal Reserve`s dilution of the US money supply? I wonder which is the lesser evil, an unregulated financial industry, or government control of the money supply? Thomas Jefferson warned against the use of a Central Bank. His warning has long since been forgotten . The book never discusses these type of larger issues.
    The authors also talk a lot about the rational pricing of stocks. Stock prices reflect peoples emotions, not their rational thoughts.
    The House of Morgan, by Ron Chernow is a much better review of the 1907 Panic....more info
  • J. Pierpont Morgan Saves the World
    This is a very short book about a fairly complex event. While it is accessable to the general reader, the book comes alive only when describing the recovery efforts of a group of private financiers led by J. Pierpont Morgan. More focus is needed to show how the problem developed and to help explain the dynamics of investor panic contagion. Further, government officials are given short shrift as either creators of the problem (President Roosevelt) or as Morgan's lackeys (Secretary of the Treasury Cortelyou).

    The authors portray Morgan as a giant among dwarves. He almost singlehandedly ends the panic with visionary, unselfish, decisive and commanding presence. In regard to the latter attribute, Morgan is shown summoning the United States Treasury Secretary to New York, warning short sellers that they will be "properly attended to" after the crisis and ordering bank presidents to work. At one point, Morgan is almost godlike as he decides which savings institutions will be supported and which will be allowed to die.

    Thus, The Panic of 1907 becomes the story of J. Pierpont Morgan vs. panic and greed. Government is given little credit for helping solve the crisis (except when the president agrees to interrupt his breakfast to promise he won't interfere with Morgan's plans). As an example of "adverse leadership," Theodore Roosevelt is listed as a primary cause of problems due to "rising regulation of an activist President."

    While it may seem like a small error, the authors mistakingly credit novelist Sinclair Lewis with reporting about the meatpacking business rather than Upton Sinclair. This carelessness causes me some concern about other details presented in this work.

    The reader knows more about the events of 1907 when he finishes the book but I am not sure that knowledge is balanced. Further, I did not find the lessons for today very applicable or compelling. I think the book would have benefitted from a bit more discussion about causes, effects and implications for the present. I would also be interested in a more nuanced analysis of the motives of Morgan and the other financiers who acted to help turn the corner on the panic but who must bear some responsibility for the state of finances prior to the crisis....more info
  • This is what reserves are FOR!
    The Panic of 1907 was a liquidity crisis unprecedented in US history. The US economy may well owe it's survival at that time to one man, J.P. Morgan, who orchestrated financial rescue efforts. He examined banks under fire, evaluated which were sound and which weren't and saved what could be saved by coordinating the supply of cash to weaker institutions from stronger ones in order to weather runs.

    At one point a young manager refused to put more money into the pool for fear that this would take his cash reserves below the regulatory requirement. Exasperated, Morgan belowed out "This is what reserves are for!".

    But what does this all mean? How did the panic start? What sparked it? What were the underlying conditions that made the situation so prone to catch fire? Why was it so difficult to coordinate a rescue? And what exactly are reserves for anyway?

    Authors Bruner and Carr answer these questions. They describe the 1907 panic in detail starting with the sparks, viz. the failure of two major New York institutions, and the pre-conditions, viz. low liquidity due to money spent rebuilding San Francisco and the absence in the US of a central bank. They then narrate J.P. Morgan's effort to steer the economy back to safe waters.

    Having given us the story of the panic, they ask could it happen again. Of course it can, and did. They describe the lessons to be learned and the signals to look for:

    -Market wide system like architecture
    -Buoyant growth
    -Inadequate safety buffers
    -Adverse leadership (e.g. hostile politicians)
    -Real economic shocks
    -Undue fear, greed, and other aberrations
    -Failure of collective action (until it's too late)

    This book was published at about the time of the sub prime debacle so it was written before the current bubble burst. Surely their peers were aware of these ideas but sadly no one listened.

    Vincent Poirier, Tokyo...more info
  • A nice story, but left me disappointed
    No doubt the event provides the basis for an interesting story, but I thought that this book was low on insight. It's remarkable to read and see some of the similarities between 1907 and 2008, but the authors offer little insight regard causes, solutions, and lessons to be drawn. The final chapter makes an attempt, but was pretty weak, in my opinion.

    Perhaps I was expecting too much.

    While the story is quite good, there is certainly not even an attempt made at a balanced treatment of J.P. Morgan. That may bother you, and it may not. I was not particularly annoyed by it.

    To sum it up, I liked the story, and saw very little in terms of "lessons learned."...more info
  • Not quite sure what it wants to be
    The book is enjoyable enough - short and easily red. But one gets the sense that the authors aren't quite sure what their purpose is.

    In the opening and closing chapters, the authors purport to provide a theory of financial crises - that they represent a "perfect storm" of several factors converging at once.

    In between, they offer a rudimentary account of the events of the crises. It's enjoyable.

    And there's the split in purpose. As an analysis of the origin of financial crises, the book fails - you aren't going to provide a convincing analysis by just looking at a single incident. The history backs up their analysis, but that only demonstrates that their analysis is applicable to this particualar crisis.

    As a history, it's rather shallow - enjoyable sure, but not particularly insightful.

    It's still a good book, especially in light of the events of the past year. Just make sure you have your expectations set appropriately....more info
  • 1907 vs 2008
    In 1907 the president of the Knickerbocker trust was found to be an associate of the Heinze brothers. The Heinze brothers were shady characters in the financial world who were using loans from banks and the Knickerbocker trust to attempt a corner in a copper stock. The corner did not work and they lost millions, when the association between them got out to the public there was a run on the Knickerbocker trust. This set off a chain reaction of panic and runs on several banks. At the time there was no central banking authority like the Federal Reserve in the United States to maintain liquidity in the financial system and float loans to banks and trusts. The country was also on the gold standard so money could not be printed with out gold equivalents to back it. J.P. Morgan stepped up and made necessary loans to keep the financial system working. Then he began to conduct organized meetings with bank and trust presidents to move capital around as loans to preserve institutions that would fail other wise. In this book you will learn about the amazing financial maneuvers that were made to save the economy. It was not easy with Theodore Roosevelt's strong progressive stance concerned with large corporations and monopolies. This was a very pleasant read, entertaining, educational, and insightful. You will understand this historic financial crises when you are done.

    1907-1908
    President had a strong tone against big business.
    J.P. Morgan stepped in to save an economic collapse.
    Stock market collapsed 37% in a year.
    The financial system seized up with little liquidity.
    The Public lost confidence in the banking system.

    2008-2009
    New President has a strong tone against big business.
    J.P. Morgan & Co. stepped in to purchase and save a collapsing bank.
    Stock market collapsed over 40% in a year.
    The financial system seized up with little liquidity.
    The Public lost confidence in the economy.
    ...more info
  • Good overview of the panic of 1907
    This book provides a good event-by-event chronology of the important facts that contributed to and constituted the bank panic of 1907. The way in which the New York banks worked together to contain the panic to only a couple of institutions is well narrated. The book concludes with a few general lessons to be drawn from the occurrence of the crisis itself and the effectiveness of the steps taken to contain it. In the light of recent economic events, this is a very interesting read that has been well researched and recounted in accessible prose to the average reader....more info
  • An Insightful Look at a Financial Perfect Storm
    Shortly before 10:00 on the morning of November 14, 2007 Charles T. Barney walked into his second-story Park Avenue, took the pistol containing three bullets kept there for protection and fired one bullet into his head.

    Up to that moment, he was a man of the Gilded Age. The son of a prosperous Cleveland merchant, he married into the Whitney family, was a director of 33 companies and had served as the top officer of the Knickerbocker Trust Company up until a few short weeks prior.

    He had been asked to resign. The reason: early the previous month, he, along with several other New York City trust companies had funded an attempt to corner the market in the stock of a copper mining company. The attempt had failed. As word of his involvement spread, his investors and depositors panicked and started a run on his bank that would eventually lead to its closing.

    The country had lost confidence in its financial system. It would take leadership, largely from one man, J. P. Morgan, to restore it.

    Robert F. Bruner and Sean D. Carr take the reader day-to-day through this crisis. Beginning with the famed San Francisco earthquake and culminating with Barney's suicide, they draw seven lessons that are, perhaps more instructive today, than they would have been in 1907. They are:

    1. Complexity makes it difficult to know what is happening and establish linkages that enable the crisis to spread.
    2. Economic expansion creates rising demands for capital and liquidity. The mistakes that accompany those rising demands must eventually be corrected.
    3. In the late stages of an economic expansion borrowers and creditors overreach in their application of debt. This lowers the financial system's safety margin.
    4. Prominent public and private figures provided adverse leadership. Their policies raise uncertainty, lower confidence and elevate risk.
    5. Random events shake the economy and financial system.
    6. Greed becomes fear.
    7. Well-intended responses prove inadequate to the crisis' challenge.

    This book drips with insight. Well-written, easy-to-read, it should be read by banker, traders and students of business and economics. It is a rare dissection of how and why a panic unfolds....more info
  • Disappointed, but it is not terrible
    Gotta say I am surprised on this one. After reading the reviews I bought the book, and started off pretty saddened with the content.

    There is no history to the crisis, and by all accounts the authors seem to figure it was triggered by the SF earthquake, but without any context or data it is hard to trust their logic at all. Then, about 30 pages in, the good part begins, but it tells a story, not per se a case study. The story is well crafted and moves right along, taking you through 2 months in late 1907. This continues for 100 pages, and then the story ends and the authors go off drawing conclusions as to what happened and why, with no context whatsoever. And I have to say, one reason for the crash they list is that financial markets are complex. Really? If I had submitted this as a paper in college, my professors would have made me re-write it.

    I guess to put it into today's terms, it would be like trying to determine why Merrill Lynch failed in the fall of 2008 by starting with the failure of Bear Sterns in the spring of 2008. There is a fair bit of history that should be communicated probably starting in 1996 onwards. This book looks only at a very short time frame.

    If you want to read a nice story of this sort, "The Great Crash of 1929" or "Reminiscences of a Stock Operator" would be much better purchases. If you already read both of those, then go for this one, but it will not be as good.

    If you are looking for a detailed study as to why the panic of 1907 happened, this is not the book. ...more info

 

 
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