The financial Crisis of 2008 and its economic consequences have spawned an enormous academic literature across the spectrum of empirical and theoretical scholarship. Yet the number of rigorous works of historical analysis that take financial discontinuities as their focus is limited. The two that stand out are Charles Kindleberger’s Manias, Panics and Crashes: A History of Financial Crises, originally published in 1978 and updated in 2011 by Robert Aliber, and Carmen Reinhart and Kenneth Rogoff’s recent contribution, This Time is Different: Eight Centuries of Financial Folly. The former indicates by means of its subtitle that its authors evaluate “manias” largely in terms of the panics and crashes that follow. The latter is the definitive chronicle of currency debasement, debt default and banking failures. Bubbles, recent and long ago, have attracted less attention.

Manias and the credit system

A first step toward comprehending the dynamics of bubbles is to distinguish the consequences of speculative excess in the credit markets from the effects of speculative excess in the equity markets. Manias that infect the credit system generate the great financial crises and subsequent contractions in real economies. Such contractions are inevitable when – as is necessarily the case in the real world – markets are incomplete and effective hedges are unavailable. As Franklin Allen and Douglas Gale conclude in Understanding Financial Crises: