Bagehot's Giant Bubble Failure

35 Pages Posted: 6 Sep 2019

See all articles by Andrew Odlyzko

Andrew Odlyzko

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center

Date Written: August 30, 2019

Abstract

Walter Bagehot is remembered today primarily as a proponent of the doctrine of lender of last resort, in which central banks pump money into the economy to ameliorate the damage from a financial crisis. But none of the growing number of publications about him appear to investigate in depth whether, as the editor of "The Economist," he warned his readers about the bubble that collapsed in the famous Overend crash of 1866. This paper shows that while Bagehot did express serious misgivings about that bubble in its early stages, he did not understand just how large it was, and he did not succeed in penetrating the depths of "financial engineering" that concealed the ugly reality that led to the crisis. Since none of the other prominent observers of the time appear to have done better, this may not have been a giant failure, but it was a failure to identify a giant bubble. It suggests we should not expect regulators to be able to detect bubbles in the future.

Keywords: Bagehot, bubbles, panic of 1866

JEL Classification: E44, G10, G24, L92, N23, N73, O16, O33, O38, R42

Suggested Citation

Odlyzko, Andrew, Bagehot's Giant Bubble Failure (August 30, 2019). Available at SSRN: https://ssrn.com/abstract=3445450 or http://dx.doi.org/10.2139/ssrn.3445450

Andrew Odlyzko (Contact Author)

University of Minnesota - Twin Cities - School of Mathematics and Digital Technology Center ( email )

127 Vincent Hall
206 Church St. SE
Minneapolis, MN 55455
United States
612-625-6413 (Phone)
612-626-2017 (Fax)

HOME PAGE: http://www.dtc.umn.edu/~odlyzko

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