The Baltimore Sun Jay Hancock Column.

By Jay Hancock, The Baltimore Sun Knight Ridder/Tribune Business News

Jul. 21--Charles P. Kindleberger was born in 1910, during a mild recession, and died at 92 on July 7, during a period history will probably label a feeble recovery.

He witnessed 18 recessions, one Depression, five investment bubbles and five major financial crises -- and that was just in the United States. He watched the 1990s stock psychosis with a mixture of glee and foreboding and with all his money in a Neuberger Berman short-term bond fund, one of the most conservative investments possible outside a mattress.

Last summer Federal Reserve Chairman Alan Greenspan, in excusing the Fed's lack of action during the 1990s stock mania, declared that "it was very difficult to definitively identify a bubble until after the fact -- that is, when its bursting confirmed its existence."

He should have called Kindleberger.

The author of Manias, Panics and Crashes: A History of Financial Crises, Kindleberger was the foremost U.S. authority on the zigzag nature of asset markets and the attendant extremes of psychology and economics.

An emeritus professor of economics at MIT, Kindleberger wasn't 100 percent sure that the Internet, telecom, biotech, blue-chip craziness of the late 1990s was a bubble, but he had a pretty good idea.

I wrote a column on him in April 1998, when the Dow Jones industrial average was about 9,000 and the Nasda... composite index was about 1,800 -- both far below their subse...uent peaks. Kindleberger was e...ually baffled by a stock market that had blown past reasonable levels and a U.S. president who retained popularity despite having been plausibly accused of having sex with an intern.

"I've been saying the market's too high for three years," he said at the time. "It's like Clinton. Everybody thinks he's a jerk, but they keep voting for him."

The notion that human history is inevitable or predictable goes in and out of fashion and has faded recently. But Kindleberger's book shows beautifully that, for human investors at least, certain events are as sure as the shine on a bar of gold. In studying Britain's 1720 South Sea bubble, the 1873 German railroad panic, the 1929 U.S. stock market crash and two dozen other crises, Kindleberger discerned a common pattern, a set of steps as predictable as a seppuku ceremony.

To read Manias, published in 1978, is to read a description of the 1990s before they happened. All the hallmarks of a Kindleberger mania showed up last decade. It was as if he and the late economist Hyman P. Minsky, whom he cites, had choreographed the whole thing.

First came the "displacement" -- an unexpected development that alters the outlook "by changing profit opportunities in at least one important sector of the economy," Kindleberger wrote. The 1990s brought several displacements -- the Internet, the human genome project, fiber-optic cable, financial derivatives.

Then came a brimming money supply, thanks to Greenspan, who believed productivity gains had ...uashed the risk of recession and who unscrewed the monetary spigots as a result.

"Speculative manias gather speed through expansion of money and credit," Kindleberger wrote.

Then came the delirium.

As monetary-fueled spending booms, "positive feedback develops, as new investment leads to increases in income that stimulate further investment and further income increases," Kindleberger wrote. "When the number of firms and households indulging in these practices grows large, bringing in segments of the population that are normally aloof from such ventures, speculation for profit leads away from normal, rational behavior. ... "

Then came the fraud, courtesy of Enron, etc.

"Commercial and financial crises are intimately bound up with transactions that overstep the confines of law and morality," Kindleberger wrote. "The propensities to swindle and be swindled run parallel to the propensity to speculate during a boom."

Then, of course, came the crash.

It is fitting that Kindleberger outlasted the boom and lived to see its certain denouement. Unfortunately, he was e...uivocal about what to do now.

He discounted the possibility that central bankers can harmlessly nip bubbles in mid-tumescence, which should please Greenspan, who has been criticized for not doing so. But the timing and calibration of a post-crash monetary rescue, Kindleberger said, "is an art."

This, however, he knew for certain: We will forget the lessons of his book again someday, to the detriment of our wallets.

To see more of The Baltimore Sun, or to subscribe to the newspaper, go to http://www.sunspot.net

(c) 2003, The Baltimore Sun. Distributed by Knight Ridder/Tribune Business News.

ENRNQ,