The novel “The Panic of 1907: Lessons Learned from the Market's Perfect Storm” is written by Robert F. Bruner and, Sean D. Carr and it pertains to the events leading up to, during, and following the events of the economic panic of 1907. The decades prior to the panic were filled with economic growth, especially in New York City banks and their financial assets in the trusts consolidation many industries like railroad and oil. The panic occurred during a recession and many runs on banks and trust companies happened further crippling the system. The panic started in New York City but spread throughout the United States and many businesses went bankrupt, because of the retraction of market liquidity in the banks in New York City and the loss of confidence.
There were two major events that set up the panic, the first was the when the Bank of England came calling for the financing of the selling and harvesting of cotton in Egypt. The Bank of England wanted gold deposits to be able to give the credit, so it had to increase their interest rates. The next event that helped lead to the panic was the earthquake in April in San Francisco, because of the massive property damage that needed credit to rebuild. The demand by the British and the earthquake caused a shortage in gold, doubling interest rates leading to the panic. However, these two events alone did not cause the panic; there were seven different ideals that also helped cause the panic.
In the book, Bruner and Carr present the forces of complexity, buoyant growth, inadequate safety buffers, adverse leadership, real economic shock, undue fear, greed, and other behavioral aberrations, and finally the failure of collective action. At that time the United States did not have a centralized bank, the system had over 15000 banks which is about double the number today. The treasury controlled the currency supply and banks were national and could receive deposits from the Treasure when the economy needed liquidity from the government. So this contributed to the complexity in the United States, “the market for financial services was highly fractionalized and localized” (153). For buoyant growth the authors said, “a rapidly changing environment is a precursor to financial instability” so when the change in the economic growth is dangerous because it creates false optimism towards the stability of the markets and institutions, and every major panic occurred after great economic growth (159). The inadequate safety buffers were caused because, “some banks, eager to make profits, unwisely expand their lending to less and less creditworthy clients as the boom proceeds (161). So when a random external shock occurs the everything crumbles, the less creditworthy candidates cannot take the burden and the loan is defaulted. The lack of safety buffers allowed this to occur in 1907, and as Burner and Carr point out, similar to what occurred prior to the recession that began in 2008.
To add to the storm of 1907,...