Charles P. Kindleberger

[Louis Proyect <lnp3@xxxxxxxxx>]

WSJ, July 25, 2002

A 91-Year-Old Who Foresaw Selloff
Is 'Dubious' of Stock-Market Rally

By JON E. HILSENRATH

Staff Reporter of THE WALL STREET JOURNAL

LEXINGTON, Mass. -- In a well-manicured Boston retirement community,
Charles P. Kindleberger has watched the stock-market turmoil unfold during
the past two years with a sense that he has seen it all before.

Mr. Kindleberger, a retired economist, wrote the 1978 economics classic
"Manias, Panics, and Crashes: A History of Financial Crises." The book,
required reading for many Wall Street trainees and students of economic
history, documents four centuries of boom-and-bust financial cycles. It
ranges from a fleeting bubble in the market for Dutch tulips in 1636, to
rampant speculation and subsequent collapses in railroad shares in 1847 and
1857, to the Depression in the 1930s, to the rise and fall of Japan's
property market in the late 1980s and early 1990s.

At the age of 91, Mr. Kindleberger, who taught economics at the
Massachusetts Institute of Technology for 33 years, is one of the few
retirees unshaken by the current market turbulence -- with the Dow Jones
Industrial Average down 18% from the start of the year, despite Wednesday's
big rally. "I'm ashamed to say I enjoy the decline in the stock market," he
says. "It is what we call schadenfreude, a joy in the troubles of others."
Mr. Kindleberger is gloating because he warned readers in the foreword of
the third edition of "Manias, Panics, and Crashes," released in 1996, of
what looked "suspiciously like a bubble in technology stocks." Paul
Samuelson, a colleague and Nobel prize-winning economist, admonished
readers on the book's cover, "Sometime in the next five years you may kick
yourself for not reading and re-reading Kindleberger's [book]."

"It is one of the most important books for people on Wall Street to read,"
says Richard Sylla, who teaches a course on financial history at New York
University's Stern School of Business and has his students spend two weeks
examining the book.
Just knowing that he was right is reassuring, says Mr. Kindleberger. "You
get to sleep easier." Mr. Kindleberger said he was "very dubious" that
Wednesday's rally signaled much of anything. Investors might rush in to a
market in the midst of a downturn, he says, but it takes a more sustained
rally to signal a real bottom.

Mr. Kindleberger's own savings are in certificates of deposit, money-market
funds and bonds. His fortunes are also helped by a recent uptick in sales
of his book, according to John Wiley & Sons, the book's publisher. A fourth
edition was released in late 2000, in the wake of Asia's financial meltdown
in 1997 and 1998.

Mr. Kindleberger says he would love to write a fifth edition full of
details from the latest corporate scandals, or a book about a housing-price
bubble he sees developing, but he doesn't feel up to it. Still, he hasn't
stopped working. In November, he wrote an essay on how to invest when
you're 90 and contemplating death. As you get older, he says, it makes
sense to become more risk-averse because there is less time to ride out
market volatility. His advice: "subtract your age from 100, and that is the
percentage you should have in equities."

A widower with four children, he still drives a 1989 Ford Escort, which he
uses to visit the barber and friends such as 94-year-old former Harvard
University professor John Kenneth Galbraith, another giant among economic
historians and author of "The Great Crash of 1929." A few weeks ago, he met
with Mr. Galbraith. "I said, 'What should we talk about?' and he said,
'Enron! Enron!' " Mr. Kindleberger says, adding: "I love that. We all love
talking about Enron." Mr. Kindleberger says that history offers little
consolation for victims of swindles such as Enron because the victims
rarely get their money back. "Lawyers get most of it," he says.

"Manias, Panics, and Crashes" lays out the familiar pattern of boom-bust
cycles. They start with a fundamental change in the real world, such as a
war or new technology, which creates new profit opportunities in some
sectors. Investment expands, often fed by easy bank credit. Before long,
however, investment becomes speculation, then becomes totally detached from
reality and turns into mania, sometimes spreading internationally.
Ultimately, he says, it ends in a crash and "revulsion" in which investors
flee falling markets. Authorities are left to wrestle with how to stabilize
and then fix the financial system.

Mr. Kindleberger's stories of financial crises feature legendary swindlers
such as Robert Knight, who helped cook the books of the South Sea Company.
The 1720 British equivalent of an Internet stock, it had no profits but big
plans for trade in slaves to Latin America. Its shares soared more than
fivefold in four months' time and then flamed out as copycat companies
multiplied and insiders started selling shares. Knight fled England, ended
up in an Antwerp jail and then broke out.

The Dutch tulip bubble offers another example of how these cycles have
played out. It started with the development of exotic new breeds of tulips
and was fueled by a booming Dutch economy. At its height, investors traded
land, houses, farm animals, paintings and gold for colorful tulips. One
Viceroy tulip bulb, writes Mr. Kindleberger, commanded a down payment of
eight pigs, a dozen sheep, two oxheads of wine, four tons of butter, a
thousand pounds of cheese, a bed, clothing, some wheat and rye, and a
silver beaker.
Some great crashes of history, such as the one during the time of the
railroad boom, did set off recessions. The severity and depth of the
downturn, Mr. Kindleberger says, depends a lot on how aggressively
authorities fight it.

Federal Reserve Chairman Alan Greenspan has done a masterful job fighting
off previous crises, including the 1987 market crash and the 1998 collapse
of hedge fund Long Term Capital Management, Mr. Kindleberger says. Today,
he's not convinced the Fed is up to the job because the bubble was so big
and consumers are heavily indebted after bingeing on loans tied to equity
in their homes.
"I think we're going to bounce along the bottom for a while," he says.

The object of his greatest fascination today is the real-estate market. For
weeks, Mr. Kindleberger has been cutting out newspaper clippings that hint
at a bubble in the housing market, most notably on the West Coast.
Nationwide, median home prices are up about 7% from a year ago, even though
the stock market has tanked and the economy has floundered. Over the long
term, economists agree, housing prices can't continue to outpace growth in
household incomes. Mr. Kindleberger says he isn't certain there is a
housing bubble yet, "but I suspect it is."

The trick with spotting real-estate bubbles, he says, is that they don't
always spread. In 1925, for instance, real-estate prices in Florida soared
and crashed, but that didn't spread to the rest of the country. Yet he
notes that something is distinctly different about the nation's housing
market today, when compared with 1925. Fannie Mae and Freddie Mac, two
large government-sponsored enterprises, own or guarantee nearly $3 trillion
in mortgages, helping to keep the mortgage market liquid with cash. That is
a boon to homeowners, but Mr. Kindleberger says he fears that Fannie Mae
and Freddie Mac's deep nationwide presence in the market is fueling a
speculative fire.
"Banks will make a mortgage and sell it to them. It means that the banks
are ready to mortgage more and more and more and more. It's dangerous, I
think," he says.

A Fannie Mae spokeswoman describes the argument as "preposterous," and
notes Mr. Greenspan dismissed the chances of a housing bubble in testimony
to Congress last week. Robert Van Order, chief international economist for
Freddie Mac, says home prices might decelerate in the months ahead, but
they're unlikely to crash because interest rates are so low, the inventory
of unsold homes is also low and the economy has proven surprisingly resilient.

Yet Mr. Kindleberger isn't convinced. "If I was 30 years younger," he says,
"I'd write a small book on Fannie Mae and Freddie Mac."



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