26 July 2023
The Great Crashes
Lessons from Global Meltdowns and How to Prevent Them
2023, Penguin Business, 256 pages,
Reviewer: Bridget Rosewell
It’s about assets, isn’t it? Yueh uses a series of crashes to illuminate the issue and they are the crash of 1929 – well of course – followed by the Savings and Loan Crisis of the 1980s, Japan’s real estate crash in the 1980s, the dot com crash (2000), the Global Financial Crisis, dated here to 2008, the Euro crisis of 2010 and Covid-19 crash of 2020. With the exception of the Covid-19 events, all of these are asset-related. Euphoria, exuberance, call it what you will, pushes asset prices higher in the expectation that they can never fall. The bets are all one way and there is enough apparent liquidity in the system to all this to happen.
In other words, to get a crash you must first have a bubble. There have been many other examples. Long ago I made a series of radio programmes about bubbles (with Michael Blastland whose much greater claim to fame is founding ‘More or Less’ on Radio 4). We looked at railway mania, pier building, tulips and the South Sea bubble. Lots of borrowing, lots of leveraging, and all coming to grief when the assets turned out not to be worth the inflated values.
One of Yueh’s main points belies the title. She argues there will always be crashes. Indeed, her final chapter is about the next crash, probably emanating in China. The challenge is to identify lesion which enable the authorities to mitigate the impact in an effective way.
The most important is to act quickly and on sufficient scale. The devastating impact of the crash of 1929 resulted at least in part from the slowness of the response and its limited nature. This lesson was learnt when we reached 2008, although the sub-prime collapse had already started in 2007. September 2008 marks the failure of Lehman Brothers. The ramifications of that failure were not well understood beforehand as the intersections between Lehman and other banks became apparent. I hope UK readers will be familiar with the unwillingness to prop up Northern Rock and how that triggered the first bank run in the UK for 150 years with pictures of people queuing to get their money. That dash for cash and the closure of money markets due to uncertainty in turn led to the failure of RBS, already over-leveraged and over-ambitious.
From this reviewer’s point of view, the most interesting chapters were those about crashes I knew less (or had forgotten more) about. The Savings and Loan crisis of the 80s, and Japan’s crash in the 1990s were full of fascinating detail and well worth reading. I hadn’t understood the role of regulated interest rates in the Savings and Loan debacle driving the so-called thrifts into riskier assets that they didn’t understand – which sounds all too familiar. In Japan, there was an unhealthy exchange of personnel between the regulator and the banks which limited the ability or willingness to speak truth to power – also sounding all too familiar.
All of which raises the question of whether it is ever possible to get the reaction right. It appears that all crashes have their idiosyncrasies. Their origins differ, the personalities and the institutions differ, and the culture of engagement also differs. In the UK, we are about to have an enquiry into the management of the Covid-19 pandemic. The worst previous pandemic was a century earlier in the wake of the first world war, happening in a very different world. The methods necessary for dealing with a new one were not immediately apparent. International comparisons and standards appeared to suggest the UK was well prepared. In the event, the materials needed were not those for which preparation was made. Equally, hospitals were built in record time and speed but never needed.
I hope that the Inquiry will not engage too heavily in hindsight and will try to manage a balance between the pros and cons of various policies. For example, it is beginning to appear that the impact of lockdowns on education and on the socialisation of children may well be more damaging and long-lasting that was originally thought. That is a lesson to be learned but not necessarily a lesson that could have been known in advance – or could it? Furlough programmes and guaranteed loans to businesses certainly mitigated the worst effect of lockdown and we all learnt to work from home. Understanding the long-term impacts, both good and bad, of this is still playing out. Yueh’s conclusion that the ability and willingness of authorities to act also implies that such authority is accepted and acted upon. This is not always the case.
This is a well written book and full of insightful detail. Whether it will help when the next crash comes remains to be seen.