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Deja vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857

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  • Timothy J. Riddiough

    (University of Wisconsin and Hong Kong Institute for Monetary Research)

  • Howard E. Thompson

    (University of Wisconsin)

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    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.

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    File URL: http://www.hkimr.org/uploads/publication/15/ub_full_0_2_317_wp-no-10_2012-final-.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 102012.

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    Length: 56 pages
    Date of creation: Apr 2012
    Date of revision:
    Handle: RePEc:hkm:wpaper:102012

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    1. Jeremy Atack & Fred Bateman & Michael Haines & Robert A. Margo, 2009. "Did Railroads Induce Or Follow Economic Growth? Urbanization And Population Growth In The American Midwest, 1850-60," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-178, Boston University - Department of Economics.
    2. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, Elsevier, vol. 21(2), pages 265-293, October.
    3. Calomiris, Charles W. & Schweikart, Larry, 1991. "The Panic of 1857: Origins, Transmission, and Containment," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 51(04), pages 807-834, December.
    4. Gary Gorton, 1986. "Banking panics and business cycles," Working Papers 86-9, Federal Reserve Bank of Philadelphia.
    5. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, Princeton University Press, edition 1, volume 1, number 8973.
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