My favorite books on financial crises

A classic account of an extraordinary 18th-century British financial and political scandal. The South Sea Bubble centred on the joint-stock South Sea Company, which was founded in 1711. The South Sea Bubble was an ambitious scheme to simultaneously pay off the British government's enormous debts while simultaneously getting rich in London's newly created stock market. The company was given a monopoly of trade with South America but had little prospect of success. The Bubble was an early Ponzi scheme that promised vast returns to early and well-connected investors.

Its collapse in 1720 ruined thousands of shareholders from all walks of life, many of whom had bought their shares on credit, and caused huge problems to banks and goldsmiths unable to collect the loans they had made to speculators to purchase stock. A public uproar ensued and the subsequent investigation revealed widespread fraud by insiders and corruption in the Cabinet.

A gripping portrait of a Dickensian financial scandal that led to the last English bank run before the run on Northern Rock in 2007. Founded in 1800 and controlled by Quakers, the firm that was to become Overend and Gurney grew to become London’s leading discount house, specialising in the safe business of discounting bills of exchange. In the 1850s, it became more aggressive and was eventually investing depositors’ funds in highly speculative ventures that promised spectacular profits that never materialised. When market conditions became adverse, Overend and Gurney found itself in dire straits. The Bank of England refused to bail it out and Overend and Gurney was run out of business in 1866. Its failure led to a major financial crisis, the ruin of many investors, and the directors being put on trial in the Old Bailey for fraud.

A classic on one of history's best-known financial dramas. Once in Golconda provides a fast-paced account of the greed and euphoria of the '20s Wall Street bull market, the subsequent crash of '29, and its painful aftermath, not just for those investors who got caught up in the speculative mania and became victims of their own cupidity, but for many others too. Focusing on the lives and fortunes of some of the era's most memorable financiers, its main protagonist and anti-hero is Richard Whitney, the Wall Street aristocrat who became president of the New York Stock Exchange and ended up doing time in Sing Sing for embezzlement.

How financial rocket scientists were bested by financial markets. When Genius Failed is the rise and fall of the giant hedge fund Long-Term Capital Management. Its principals involved the best of Wall Street and two of the inventors of the Nobel-winning option price formula. Famed for its expertise in financial modelling, the firm leveraged its bets to make large returns but only for a while. It became unstuck when Russia defaulted on its debts in the summer of 1998 and was only saved from failure by a Fed bailout, which thereby set a bad precedent for the future: favoured Wall Street firms that take excessive risks could expect to be bailed out at other people’s expense. The LTCM fiasco shows the limits of academic modelling of financial markets, not least because even if the academic modelling is initially correct, it fails to account for the ways in which markets adapt to strategies based on that modelling and thereby undermine it.