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Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857

HKIMR Working Paper No.10/2012

56 Pages Posted: 19 Apr 2012  

Timothy J. Riddiough

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Howard E. Thompson

University of Wisconsin - Madison - School of Business

Date Written: April 18, 2012

Abstract

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.

Suggested Citation

Riddiough, Timothy J. and Thompson, Howard E., Déjà Vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857 (April 18, 2012). HKIMR Working Paper No.10/2012. Available at SSRN: https://ssrn.com/abstract=2042316 or http://dx.doi.org/10.2139/ssrn.2042316

Timothy J. Riddiough (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-3531 (Phone)
608-265-2738 (Fax)

Howard E. Thompson

University of Wisconsin - Madison - School of Business ( email )

975 University Avenue
Madison, WI 53706
United States

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