October 05, 2009

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

Wow! Back to back awesome books. Just a nice little thing about availability of books. This book and the one that I am just reading was something that I have been searching for over a year. I would have atleast asked three bookshops from where I normally buy my books but all replied last year that were no copies available in India and one had to buy them from abroad. However, two weeks back I see a "heaps" lying all over the place at one of these places. Today publishers have become a lot more intelligent willing to give customers books that they need. I should be lucky to see a crash in stock markets and subsequent references made by many leading analysts comparing these crashes from a historical perspective forcing publishers to publish these outdated books. There are a few drawbacks too. The current book is not the exact reproduction of the earlier book. The publisher has comfortably added one chapter to give a newer perspective to the public, which kind of gives a feeling that you are being cheated of given a tampered book and probably overcharged for no reason.
Being a fast reader has its own advantages and disadvantages. There are so many times when I have wished I could slow down my reading to enjoy the few finer moments that the story is evolving into. Alas, it never happens. The same thing happened to me in this book too. This book restricts itself to only that one year "1907" and I was just coming off from reading "The House of Morgan", where surprising this section was dealt in lot less detail but yet discussed. Given the speed at which I normally read, I could not understand how important certain events played out during the crisis of 1907.
Today, I take a lot of things for granted.
Credit and availablity of capital: Today, being in the 21th century, and having witnessed one of the worst credit and liquidity crisis, I was never too concerned of countries falling into this trap for a long time. But imagine in 1907, there is no central bank to direct (barring Mr. Morgan himself). There are so many fall-back mechanisms that central banks have which was not available and importantly no GOLD standard. Honestly, moving out of these standards bring better flexibility on controlling money supply.

Bank falling like nine pins: Again, look back at reactions which we do today compared to what was happening 100 years back. Imagine seeing your bank going bankrupt and along with it goes your life savings. There are no central bank nor any government body that is insuring your services. That was life then. No guarantee on your money. The run on banks are faster leading to complication of an otherwise economic downward spiral. 1907, was a banking crisis and failure of one bank saw the sharp drop in customer confidence leading to sharp runs on banks. Non regulated entities like trust companies might have created the problem, but a lack of central bank was highlighted in this crisis and finally needed the help of Mr Morgan to unlock this crisis.

Promoter holding and control on lending: When I look at RBI and look at the single investor holding norms, voting rights, lending to group companies and more importantly lending to sensitive sectors, we should take our hats off. These were something that experiences tell us are important and critical things to understand else it can create havoc to depositors.

A perspective of any book is that it helps bring the drawback of another book. I thought the "House of Morgam" gave me a lot of insights into the life of Morgans. However, there was very little that was negative in this book. There are times when I saw a few exchanges made by Morgan and his partners, that they were living in darkness, hoping for things to become allright.

I can go on and on... The authors writing is unique, fast paced with little required to imagine/understand. Issues and implications of certain events are not only unfolded well but emphasised with due respect giving readers an opportunity to weigh the importance of these events. Imagine, there was a time when New York city found it difficult to raise ~USD 30 mn.

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