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

Timothy J. Riddiough and Howard E. Thompson
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Timothy J. Riddiough: University of Wisconsin and Hong Kong Institute for Monetary Research
Howard E. Thompson: University of Wisconsin

No 102012, Working Papers from Hong Kong Institute for Monetary Research

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.

Pages: 56 pages
Date: 2012-04
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