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

Author

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  • Timothy J. Riddiough

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

  • Howard E. Thompson

    (University of Wisconsin)

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

  • Timothy J. Riddiough & Howard E. Thompson, 2012. "Deja vu All Over Again: Agency, Uncertainty, Leverage and the Panic of 1857," Working Papers 102012, Hong Kong Institute for Monetary Research.
    • Handle: RePEc:hkm:wpaper:102012
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    References listed on IDEAS

    as
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    3. 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.
    4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters, in: This Time Is Different: Eight Centuries of Financial Folly, Princeton University Press.
    5. Gorton, Gary, 1988. "Banking Panics and Business Cycles," Oxford Economic Papers, Oxford University Press, vol. 40(4), pages 751-781, December.
    6. Kay Giesecke & Francis A. Longstaff & Stephen Schaefer & Ilya Strebulaev, 2010. "Corporate Bond Default Risk: A 150-Year Perspective," NBER Working Papers 15848, National Bureau of Economic Research, Inc.
    7. Calomiris, Charles W. & Schweikart, Larry, 1991. "The Panic of 1857: Origins, Transmission, and Containment," The Journal of Economic History, Cambridge University Press, vol. 51(4), pages 807-834, December.
    8. 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.
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    Cited by:

    1. Markus K. Brunnermeier & Isabel Schnabel, 2014. "Bubbles and Central Banks: Historical Perspectives," Working Papers 1411, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 31 Oct 2014.
    2. Freeman, Alan, 2016. "The Whole of the Storm: Money, debt and crisis in the current Long Depression," MPRA Paper 84394, University Library of Munich, Germany.
    3. Zvezdin, Nikolay, 2019. "Tranched Value Securities," MPRA Paper 92302, University Library of Munich, Germany.

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