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Why crashes always expose Madoffs and Stanfords

One of the truly foundational texts for understanding the present mess is the late Charles P. Kindleberger’s Manias, Panics, and Crashes: A History of Financial Crises, which was originally published in the late ’70s and is now in its fifth edition, updated of late by Robert Aliber. Give or take Hyman Minsky, no one else is cited as often or as glowingly these days as Kindleberger.

The book devotes an entire chapter to “Frauds, swindles and the credit cycle,” the thesis of which is summed up thus:

“The implosion of an asset price bubble always leads to the discovery of fraud and swindles…. The supply of corruption increases in a procyclical way much like the supply of credit. Soon after a recession appears likely the loans to firms that were fueling their growth with credit declines as the lenders became more cautious about the indebtedness of individual borrowers and their total credit exposure. In the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest.”

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Comments (2)

  1. Submitted by Beth Wright on 03/03/2009 - 12:39 pm.

    I think that third sentence needs a little editing for clarity and tense consistency:

    “Soon after a recession appears likely, the loans to firms that were fueling their growth with credit decline as the lenders become more cautious about the indebtedness of individual borrowers and their total credit exposure.”

    The way it appears in your post, which matches the book (I checked Amazon.com), it’s difficult to read (it was unclear first how “likely” fit in), and the subject-verb disagreement (“loans…declines”) and the sudden, anomalous appearance of past tense (“became”) don’t help!

  2. Anonymous Submitted by Anonymous on 03/03/2009 - 06:52 pm.

    Beth, you’re right. I had the same problem when I was reading the book. “Credit decline” scans like a noun phrase, but “decline” is the verb. Read it as such and it finally makes sense.

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