Who warned us of the impending financial crisis? They are coming out of the shadows now, prognosticators who six months ago forecast recession when almost no one believed it possible, and they are some awkward combination of bashful, proud and relieved.
The perennial recession-caller A. Gary Schilling is vindicated, after a fashion. Richard Hoey, who had gotten a foretaste of the credit crunch when Drexel Burnham Lambert Inc. collapsed, has enhanced his already remarkable reputation. Kemper Financial Services Inc.'s John Silvia is remembered for a particularly perspicacious analysis published last December. In contrast, the yield-curve types, who search for economic forecasts in the shifting differentials between long-term and short-term rates, seem to have stumbled badly.
But there is one analyst who, more than any other, called the turn. He not only got the elements right, he got timing more or less correct. And he identified before the fact the crucial role of real estate prices as well.
That's Charles P. Kindleberger. Technically, perhaps, Kindleberger doesn't qualify as a forecaster. He's a retired Massachusetts Institute of Technology professor and economic historian, not a Wall Street guru. He doesn't manage money or work for anyone who does. But his "Manias, Panics and Crashes: A History of Financial Crises" probably has been read by more financial practitioners than any book since Walter Bagehot's "Lombard Street," the 1873 essay that established once and for all the importance of central banking. And if Kindleberger has been predicting the current financial distress for a couple of years, well, Roger Babson made his reputation by predicting the Great Depression -- in 1928.
Kindleberger, 80, went to sea briefly as a summer deckhand in the North Atlantic trade, before beginning his education as an economist on the eve of the Great Depression. He worked for a time in the 1930s at the Federal Reserve Bank of New York. During World War II he had a number of jobs in the Office of Strategic Services; after it, he worked for several years on the Marshall Plan. Then he taught at MIT for more than 30 years. When former students threw a birthday party for him last fall, former Fed chief Paul A. Volcker turned up, along with a host of others.
The one great message of "Manias, Panics and Crashes" is that someone, somewhere, has to take the responsibility for the system as a whole in times of financial crisis. As Bagehot put it, there are times when you can't break the rules, and other times when you must. Kindleberger quotes Samuel Jones Lloyd, later Lord Overstone: "There is an old Eastern proverb which said, you may stop with a bodkin a fountain, which if suffered to flow, will sweep away whole cities with its course."
A bodkin is a dagger, an ornamental hatpin or a blunt needle with a large eye. But what a central banker really thrusts into the hole in the dike when the time comes is money, and plenty of it. Kindleberger said that it is simply in the nature of capitalist systems that investors will regularly create fads, that fads will become bubbles, that bubbles will burst and that banks will be threatened with bankruptcy as a result.
When that happens, a willingness to lend, to pay depositors, to supply ready cash where it is most desperately needed is what the "lender of last resort" must demonstrate to save the banking system and preserve as much value as possible.
Usually this lender will be the government, if only because it is the agency that can simply print money to meet the demand for it. Great skill is needed to balance the prospect of inflation and the imminence of cash -- too much money debases the currency, too little fails to defuse the panic of investors and depositors. But "letting it all burn out" is no solution, said Kindleberger; the market requires a stabilizer in dangerous times.
A subsidiary insight came upon Kindleberger unexpectedly, several years after the publication of "Manias, Panics and Crashes," when an old banker friend asked him to put together a list of the 100 business history books that every wise person should have read. Kindleberger tried and found that he could only stretch the list to 50 titles -- books ranging from Charles Dickens novels to biographies of the Rothschilds and Benjamin Strong. He published it.
Shortly thereafter, it was 51. A friend soon recommended "One Hundred Years of Land Values in Chicago: The Relationship of the Growth of Chicago to the Rise in Land Values," by Homer Hoyt. (Can you believe that choice land by the Chicago River was going for $650 an acre in 1833, or more than the cost of a good big farm in Maryland or Vermont?) Kindleberger read Hoyt's book, thought about the unusually long lags involved in getting bankers to mark land prices to their market values, and soon was giving talks around Boston pointing out the dangers of a delayed-fuse crash in real estate prices. Eighteen months later the Northeast was in the throes of a banking panic touched off by a collapsing real estate market.
Today, a certain grim satisfaction is what Kindleberger feels. He remains at the gloomy end of the spectrum of opinion about what comes next, expecting a deeper and longer recession than the consensus of professional forecasts. With the banking system seriously threatened, he said, the choice is between write-offs and workouts -- not an attractive situation either way. David Warsh is a columnist for the Boston Globe.