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

  • Timothy J. Riddiough

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

  • Howard E. Thompson

    (University of Wisconsin)

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    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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    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. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
    2. Calomiris, Charles W. & Schweikart, Larry, 1991. "The Panic of 1857: Origins, Transmission, and Containment," The Journal of Economic History, Cambridge University Press, vol. 51(04), pages 807-834, December.
    3. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-81, December.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
    5. 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," NBER Working Papers 14640, National Bureau of Economic Research, Inc.
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