TheStreet.com
Lessons From 'The Panic of 1907'
Saturday September 8, 10:40 am ET
ByMarek Fuchs, Special to TheStreet.com


When The Business Press Maven first cast his eye for business journalism onto business books, it was with the ultimate hope of familiarizing investors with historical insight, which is more common in books than what is demonstrated in newsrooms and trading floors -- where yesterday's news and trades qualify as fixtures from a bygone era.

This short-term orientation has a long-term drawback: When journalists or traders try to make a parallel with history, they invariably pick the most recent time that something similar happened. But while history repeats itself -- as many losing military generals can attest -- it hardly does so tidily. Many errors are born assuming that it does.

That is why I am going to grant The Panic of 1907: Lessons Learned from the Market's Perfect Storm, a resounding "Help" label from The Business Press Maven, putting it in the probable running for Top 10 Business Press Maven Books of 2007. In case you still don't get it, this is very high praise.

It even starts with a quote attributed to Mark Twain that should be the guiding light of every investor and journalist: "History may not repeat itself, but it rhymes." The Panic of 1907 was written by Robert F. Bruner and Sean D. Carr. Bruner is dean of the Darden Graduate School of Business Administration at the University of Virginia and Carr is director of corporate innovation programs there. But try not to hold their academic pedigree against them.

They don't lard clause upon clause and write a decent, if slightly stiff, yarn.

Moreover, the book -- released 100 years after the liquidity crisis, which encompassed everything from high-profile earthquakes to suicide -- makes the implicit case that we may be headed for the same. (Not the earthquake and suicide, but the crisis of coming from good times into a lack of liquidity.)

The book also lays out the benchmarks for what causes such liquidity panics. And whether you agree with their assessments or not, they provoke thought in investors, which is a whole lot more than you can say about most business books.

Bruner and Carr show that to reach back in history to make a compelling case for a parallel, you need a historian's nose. For doing that, the book becomes an important read, despite its flaws -- which show themselves most glaringly in those benchmarks, essential from an investor's standpoint as they are the most directly useful portion of the book moving forward.

Now, about those benchmarks. The authors make the case at the start of the introduction that market crashes and banking panics happen for a grab-bag of reasons and work back toward this theme in the book's all-important final chapter called "Lessons." Bruner and Carr dress this up as a tilt against conventional wisdom, claiming that too many believe crashes happen for one big reason or a bunch of them, all specific to that point in time.

I'm not sure many with actual knowledge of financial panics really believe they are the product of one cause -- like greed or venality, as they note, referencing a single book on the stock market bubble of the late 1990s. By the same token, I don't believe many experts feel they are solely the product of time-specific causes. There is general acceptance of the forces of historic repetition. The only questions are when and how.

In the "Lessons" chapter, Bruner and Carr lay out some parameters, but unlike the story of the actual panic -- which is told in detail -- this important premise, meant to impart wisdom going forward, is drawn too widely, a little like a horoscope.

What is described as "adverse leadership" ranks as cause No. 4 in the chapter. But defined as "mistakes of leadership" that can "help to create an environment vulnerable to shocks," the authors typically don't mention how mistakes of leadership, so prevalent in our history, only rarely spark full-fledged panics.

"Unequally distributed information" is also noted as a contributor to the advent of financial panic. But take this as fact and there might not be any panics in our future. Information is now distributed for free online. Few investors lack access to it. In fact, the smarter observation might be the fact that with information now distributed so equally, widely and freely -- conventional wisdoms congeal quicker than ever, setting the stage more than anything for a future panic.

Even the first item highlighted by the authors as a stage setter for panic -- "system-like architecture" -- an interconnectedness of financial institutions must be seen in more complex terms today when international businesses and investors are probably the major cause of the U.S. economic system not falling into liquidity crisis.

This is a lot of criticism for a book I highly recommend, and I won't even let the writing off scot-free. Though good by business book standards, The Panic of 1907 can be a bit wooden, with awkwardness that jumps out at you in spots.

Bruner and Carr actually include this stiff advertisement for themselves two-thirds of the way through the book, in the section on how dispersing information accurately can help to avert economic crisis. Write the authors: "In-depth case studies, such as our history of the events of 1907, can illuminate the behavior of financial systems in crisis."

Thing is, they are right -- even if annoying. But stick to reading the actual story of the panic and, in the end, do yourself the favor of drawing your own conclusions about what does and does not lay the framework for financial crisis.


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A journalist with a background on Wall Street, Marek Fuchs has written the County Lines column for The New York Times for the past five years. He also contributes regular breaking news and feature stories to many of the paper's other sections, including Metro, National and Sports. Fuchs was the editor-in-chief of Fertilemind.net, a financial Web site twice named "Best of the Web" by Forbes Magazine. He was also a stockbroker with Shearson Lehman Brothers in Manhattan and a money manager. He is currently writing a chapter for a book coming out in early 2007 on a really embarrassing subject. He lives in a loud house with three children. Fuchs appreciates your feedback; click here to send him an email.