Bad Penny Again

Lewis has been good with timing before. Shortly after a stock-market crash in 1987, he wrote the definitive trader8217;s eye view of it. 8220;Liar8217;s Poker8221; is one of the many texts that is extracted or reprinted in full in Panic: in its description of the slow spreading shock on the Salomon Brothers trading floor as the stock market 8220;fell, paused, then fell some more8221;, it remains a peerless testament of its time.

And not just of that time, Lewis hopes, but of ours. The idea behind this collection is that previous crashes 8212; the 1987 crash, in which Wall Street suffered the largest single-day percentage fall of its history; the 1997 Southeast Asian crisis, which then spread to Russia and other emerging economies; and the burst of the dotcom bubble in March 2000, which some on these shores still remember with a wince 8212; have something to tell us about the troubled times in which we find ourselves, if only that we8217;re incapable of learning. Lewis is not an unbiased observer 8212; as he will happily admit, 8220;he is a historian of financial folly8221; 8212; but he has tried to be fair in this selection.

It is because he is fair that he is able to make his point: in each case, a clear narrative can be built up by reading between the lines. First, unrealistic expectations are created that are not even addressed by those who should be doing the examining 8212; business journalists, rating agencies or the media; second, something forces market participants to accept that they are wandering around with their eyes shut, to deal with their cognitive dissonance; third, once one set of people realises that, everyone has to; and fourth, everyone blames Wall Street8217;s or the IMF8217;s, or Silicon Valley8217;s 8220;culture8221;; and fifth, nobody does anything about it.

Consider the 1987 crash, which occupies the first of Panic8217;s four sections. We8217;re introduced first to the pre-crash situation through a representative piece about what wonderful shape finance is in, in this case a cover story from Time magazine. And then, we are thrown in the deep end: the detailed next-day analysis provided by the Wall Street Journal on October 20, 1987, on why share prices had gone into free fall the previous day. This is then supplemented by the Brady Commission report, NYT pieces, and by Lewis himself. These make good reading not only because they explain what happened, but also because of the amusing U-turn in how the markets8217; guiding principles are described by business journalists.

Similar stories are told about the other crashes: in each case there are little-understood financial instruments and some form of technical innovation currency arbitrage, the 8220;new8221; economy that makes the crash worse, but, in the final analysis, aren8217;t really responsible. So what did? People. In each case, someone goofed up: regulators in 1987, developing-country leaders and international advisors in 1997, venture capitalists and rating agencies in 2000. They still are. Oh, and major economists, each time, of whom Nobel winners Merton and Scholes, whose hedge fund collapsed while making bets on the rouble, are the most famous. Oh, and in each case, Alan Greenspan and the group of fundamentalists he led was there making it worse and making sure nobody learned the right lessons. Panic doesn8217;t preach. You have to learn your own lessons from it. The only thing Lewis wants to press on you is that there are lessons to be learnt.