John Kenneth Galbraith, whose classic book "The Great Crash 1929" provided succeeding generations with the searing account of the biggest stock-market bust on record -- until the October 1987 disaster came along -- has a new book on the entrapments of speculation.
In words that should be read side-by-side with the daily reports of malaise in the stock and bond markets, Galbraith braces the reader who wonders when the next crash will arrive:
"There are no answers; no one knows, and anyone who presumes to answer does not know he doesn't know. But one thing is certain: There will be another of these episodes and yet more beyond. Fools, as it has long been said, are indeed separated, soon or eventually, from their money."
Galbraith's "cautionary tale," which he addresses especially to business men and women is contained in "Short History of Financial Euphoria -- Financial Genius is Before the Fall," one in a series of slender books or essays sponsored by Federal Express Corp.
I suggest you get the book (The Larger Agenda Series, Whittle Direct Books, 505 Market St., Knoxville, Tenn., 37902, $11.95), and then commit it to memory.
The books in this series have been controversial and, until Galbraith's, not particularly distinguished: The concept has been attacked by those who wondered whether the authors would pander to Federal Express advertising contained in the books.
But as Galbraith says, no one is likely to think his devastating analysis of a main weakness of capitalist markets "reflects such concession or persuasion."
Galbraith challenges the conventional wisdom that the market is a "neutral and accurate reflection of external influences" and thus not subject "to an inherent and internal dynamic of error."
He shows, to the contrary, that the free-enterprise economic structure has been riddled by the "mass insanity" of speculation and speculators.
In each speculative event, the blame for boom-and-bust was placed on some aberrant factor or event, never the market itself, because the market was supposed to be perfect.
Thus, in 1929, a finger was pointed at the business downturn of the summer of that year. In October 1987, it was sudden appreciation of the budget deficit problem and "market mechanisms," such as program-trading.
Galbraith hasn't gotten around to the 600-point market slide (so far) of this year, but presumably the excuse will be the villainy of Saddam Hussein.
The fallacy is the notion that -- absent these glib excuses -- "the market presumably would have remained high and gone up or declined gently without inflicting pain. In such fashion, the market can be held guiltless ... ."
The basic elements of the "speculative episode" haven't changed since the "Tulipomania" craze of 1636-37, which wrecked the Dutch economy, on through the American panics of 1873 and 1907.
In their eagerness to strike it rich, Galbraith says, average citizens invest the affluent with the attribute of some special genius.
With his unique (among economists) talent for using words as a stiletto, Galbraith points out what all must have noticed during the savings and loan crisis, but keep forgetting: "In practice, the individual or individuals at the top of (financial) institutions are often there because, as happens regularly in great organizations, theirs was mentally the most predictable, and, in consequence, bureaucratically the least inimical of the contending talent."
Galbraith's credentials for this task of debunking the financial wizards goes beyond his authorship of the 1929 book.
In the spring before the October 1987 crash, the Atlantic magazine published an incredibly prescient article of his foretelling another "day of reckoning." (Galbraith reveals that the New York Times originally had commissioned the article but to its shame turned it down as "too alarming." We in the news business never want to precipitate a run on financial institutions!)
What to do?
Galbraith has too little faith that market regulation can outlaw "financial incredulity or mass euphoria."
That leaves only "an enhanced skepticism" to battle the speculative disease.
"When a mood of excitement pervades a market or surrounds an investment prospect, when there is a claim of unique opportunity based on special foresight, all sensible people should circle the wagons; it is the time for caution," he concludes.
But it's hard to believe that caveat emptor will work: As Galbraith himself sadly notes, financial memory is regrettably short, and disaster soon forgotten.
I can hear the Wall Street touts already: "Have you had a look at these bargains?"