Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857
56 Pages Posted: 19 Apr 2012 Last revised: 25 Jul 2022
Date Written: April 18, 2012
Abstract
This working paper was written by Timothy J. Riddiough (University of Wisconsin) and Howard E. Thompson (University of Wisconsin).
The panic of 1857 is revisited with the benefit of hindsight provided by the panic of 2007-08, where a number of parallels are identified between the two panics. We present new evidence on causes of the failure of the financial institution that triggered the panic of 1857 and conduct a detailed analysis of railroad financial and accounting practices. New financial innovations are also studied — the railroad farm mortgage and farm mortgage-backed security — which had similarities to the modern sub-prime mortgage loan and MBS. Neglected risks and Knightian uncertainty appear to be fundamental reasons why investors continued to participate in a boom market that was also extremely fragile.
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