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