Published by EH.Net (June 2022).

William Quinn and John D. Turner. Boom and Bust: A Global History of Financial Bubbles. Cambridge UK: Cambridge University Press, 2020. viii +288 pp. $24.95 (hardcover), ISBN 978-1-108-42125-6.

Reviewed for EH.Net by Mary Tone Rodgers, Professor of Finance, State University of New York at Oswego.

In this easily read book, William Quinn and John D. Turner of Queen’s University Belfast do not identify new explanatory variables as causes of bubbles, booms and busts—instead, they find a way to categorize variables already well established in the literature to make the causes more easily understood. Indeed, the primary contribution of the work is the creation of a fire metaphor to understand financial bubbles and the thorough application of the metaphor to twelve episodes in history of financial bubbles, booms and busts.

Dozens of metaphors and analogies were used during the 2008 subprime crisis, as financial adviser Gary Karz (2014) has described. Karz quotes the following from Tim Geithner’s book Stress Test:

“One afternoon that summer, I tried to lighten up the mood at the New York Fed with an impromptu contest for the best metaphor for what was happening to the financial system. \”I\’ve heard \’the wheels coming off the bus\’,\” I said. \”We\’ve talked about the engines falling off the plane.\” The usual suspects were wildfires and earthquakes, hundred-year storms and hundred-year floods. We also discussed cancer and contagion, sweaters unraveling and boulders rolling down a hill. I relayed one I had first heard from Goldman Sachs CEO Lloyd Blankfein: ‘The rivets are coming off the submarine.’”

So why do Quinn and Turner select fire as their metaphor? Because, they argue, unlike natural phenomena such as storms, hurricanes, or floods, fires can be extinguished by humans, just as financial bubbles, once underway, can also be extinguished by humans.

Deirdre McCloskey (1995) has written about the importance of the metaphor as an effective literary device for economists. “Metaphor is often a serious figure of argument, not an ornament” (p. 215). As she puts it, metaphors depend upon similarities between knowledge domains. By carrying knowledge about two different domains, a metaphor is likely to carry more information than a literal direct equivalent (Noveck, et al., 2000). Because metaphors can be more convincing than their literal equivalent, the choice of metaphor is consequential. In the case of Quinn and Turner’s book, the metaphor powerfully transmits the authors’ intention to say that just as fires are dangerous, so too are financial bubbles dangerous.

The authors use the fire metaphor to ask and answer analogous questions: what does it take to start a fire (how do bubbles start), what does it take to extinguish a fire (how do bubbles burst), and what are the consequences of a fire (are the net effects of a bubble good or bad, big or small). Just as oxygen is necessary to support a fire, marketability of securities is a necessary condition to start a bubble. Just as fuel is necessary to let a fire burn, money or credit is necessary to let a bubble expand. Just as heat is necessary for fuel to combust into flame, speculation is needed for the bubble to enlarge. The authors argue that the catalyst to ignite the fire is a spark; the catalyst to start a financial bubble is technological innovation or a change in government policy. They argue that to extinguish a fire, one must remove one of the three legs of the triangle: oxygen, fuel or heat. Similarly, to burst a bubble, one removes marketability, money or credit, or speculation with either policy tools or introduction of new information to market agents.

To estimate the consequences of a burst bubble, the authors move from summarization and categorization to data gathering and analysis. For each of the twelve episodes, they estimate the size of the burst bubble’s effect on the real economy and suggest ways the bubble may have done both harm as well as good to the real economy.

The secondary contribution of the book is the systematic coverage of the twelve bubbles in ten chapters with each chapter formatted using common sections: history, causes, and consequences of the bubble. The British bicycle mania of 1896-1898, the Australian land boom of 1888-1893, and the Chinese stock market bubble of 2015 are likely less well known to the EH.Net audience, so the coverage by the authors may present suggestions for further research, whereas for the better-known episodes like the dot-com bubble of 2000 and the sub-prime bubble of 2008 the metaphor mainly summarizes a familiar academic literature.

The book clearly appeals to a wide audience; it won a Best Book of 2020 award from the Financial Times and by 2021 was already in its fourth printing. But our unique EH.Net audience might find some sources of dissatisfaction with it. It\’s hard to neatly categorize all the explanatory variables developed in the academic literature about bubbles into each of the three legs of the fire triangle. It’s plausible, for example, that information asymmetry, a condition associated with bubbles (Asako, et al., 2017), could fit into any of the three legs of the fire triangle, not just one leg. It could be understood as a reduction in marketability, or a reduction in credit to borrowers, or a reason speculation ends. While the broader public might not think twice about such issues, our audience might puzzle over them. Additionally, EH.Net readers would likely miss a review of how banking institutions evolved over the centuries covered in the book. A chronicle of changing institutional context might shed light on how the fire metaphor could itself have evolved over time.

In conclusion, the value of book’s metaphor is its simplicity, the hallmark of any useful model. While not all the causal variables studied in the literature necessarily fit into the metaphor, the authors include enough of them so that readers can make more sense of how bubbles form, expand, and burst. On the whole, the fire metaphor proves to be a very useful way to simplify complexities of bubbles.

References

Asako, Yasushi; Funaki, Yukihiko; Ueda, Kozo; and Uto, Noboyuki. “Asymmetric Information Bubbles: Experimental Evidence.” Federal Reserve Bank of Dallas, Globalization and Monetary Policy Institute. Working Paper No. 312, April 2017. Accessed June 5, 2022. https://www.dallasfed.org/~/media/documents/institute/wpapers/2017/0312.pdf

Karz, Gary, CFA. “Global Financial Crisis Analogies, Metaphors and Vocabulary.” Investor Home. October 8, 2014. Accessed June 5, 2022. investorhome.com/crisisanalogies.htm

McCloskey, Deirdre. “Metaphors Economists Live By.” Social Research 62(2): 215-237 (Summer 1995).

Noveck, Ira; Bianco, Maryse; and Castry, Alain. “The Costs and Benefits of Metaphor.” Metaphor and Symbol 16(1&2): 79-91.

Mary Tone Rodgers, DPS, CFA, is the Marcia Belmar Willock Professor of Finance at the State University of New York at Oswego. She is currently working on a book with Jon R. Moen for Cambridge University Press, working title J. P. Morgan: Architect of the Modern American Response to Financial Crises.

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