I first read this book, a perfectly-worded reflection on the most iconic (if I may use such a word!) speculative episodes in human history, after studying the Great Depression and the New Deal at school. I am fascinated by the mass insanity and “the associated financial deprivation and larger devastation” of every speculative episode; the infectious boom, is always accompanied by “desperate and largely unsuccessful efforts to get out”. There is almost no doubt in my mind that “speculative episodes end not with a whimper but with a bang”. In this post I will try to highlight a few insights I picked up from this brief and impactful must-read.
- There is no such thing as financial innovation - only credit. “The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version. All financial innovation involves in one form or another, the creation of debt secured in greater or lesser adequacy by real assets.” This is why Galbraith advises, “when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution.”
- Any association of money with intelligence is nothing short of “specious”. People are entranced “by the great financial mind” because there is a “feeling that with so much money involved, the mental resources behind them cannot be less.” This belief leads to the bidding up of asset “values [and] confirms the commitment to personal and group wisdom. And so on to the moment of mass disillusion and the crash”.
- Crowd behaviour and FOMO spread the infection. “Anyone taken as an individual is tolerably sensible and reasonable - as a member of a crowd, he at once becomes a blockhead. - Friedrich Von Schiller, as quoted by Bernard Baruch.” When irrational herd behaviour sets in and a mood of excitement (or god forbid, euphoria!) ripples through the market, speculation (quite literally!) “buys up...the intelligence of those involved.”
- The financial memory is extremely brief. “Dementia comes forward to capture the financial mind” every ten years (rule of thumb?). This “is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius”.
- As Buffett says, “What the wise do in the beginning, the fool does in the end.” Booms often begin because there is a kernel of truth in the so-called innovation, but they quickly escalate into episodes of mass insanity.
- I am fascinated by the way in which we seek to apportion blame after the inevitable bang that marks the end of a speculative episode. Instead of looking at the way in which market participants were foolish, we instead seek to fault governments, banks, and institutions (to blame the public's mass insanity would be cruel, cold-hearted, and politically incorrect).
