In his absorbing new book, A History of the United States in Five Crashes, Scott Nations chronicles five financial collapses through the prism of the people and institutions that caused the ruin and those who helped restore order and prosperity.

Nations’s stylish writing gives these stories of greed and fear a cliffhanger momentum. He provides many stock quotes and opening and closing market numbers from each crash, but balances the numbers with ample social and historical context, plus colorful portraits of big and small players.

The five crashes are the Panic of 1907, when the Dow lost about half of its value in a few weeks; Black Tuesday, in 1929, which leveled the Dow and brought the Great Depression; Black Monday, in 1987, when the Dow dropped 22.6 percent in one day.

And the Great Recession, in 2008, when the banking system, the market and much of the economy collapsed; and the Flash Crash (2010), plunging the Dow down 998.5 points, about a trillion dollars in valuation, in minutes.

“Just as every modern stock market crash has an external catalyst,’’ (assassination, oil spill) ‘’each collapse has been fueled by a new, poorly understood financial contraption’’ (credit default swaps, high-speed trading) ‘’that introduces leverage into a system that is already unstable.’’

In 1907, it was “ungoverned and piratical’’ trust companies with an “absolute lack of reserves, much of the collateral securing trust company loans was illiquid and couldn’t be easily sold to pay off the loans.’’ As 50 brokerage houses were about to fail, banker J.P. Morgan cajoled banks to commit $25 million in bailout money. The Dow lost 37.7 percent, “still the second-worst loss ever.’’

To temper inflationary growth and speculation, and then halt collapsing prices and a recession, the Federal Reserve “embarked on a course of (discount) rate cuts as wild as the hikes they’d instituted at the end of 1919 and throughout 1920.’’ At 7 percent in 1920, the rate was cut to 3 percent by 1924, leading to “the unrestrained speculative frenzy that ignited the Great Depression.’’ Lowered discount rates and increased outflow of gold to Europe (which shrank the money supply and made “call money’’ loans more expensive) created “a new and supremely dangerous phenomenon—the growth of stock speculation in call money,’’ $3.3 billion in 1926 to $6.5 billion in 1928.

The 1929 contraption was $1 billion in inflated leveraged investment trusts. Some stock shares were trading for about double the value of the securities contained in the trust. Selling surged and blue chips plummeted. The Federal Reserve injected $132 million into the money market, replacing ‘’call money’’ pulled from circulation.
 
Next contraption: “Put options, the right to sell stock at a predetermined price, were considered dangerous and un-American.’’ But two academics created “portfolio insurance,’’ and changed investors’ minds. Nations says put options grew too large to be safe, and its inventors “failed to accept that if liquidity were poor, their own selling might drive the stock’s price down in a cascade.’’

The cascade happened: “Oct. 19, 1987 remains the worst day the American stock market has ever had.’’ Other culprits in Black Monday were the leveraged buyout, with investors borrowing “a mountain of money to do a takeover’’ but committing small amounts of capital, and the “junk’’ bond franchise, whose purveyors lobbied Congress, which failed to pass 30 bills to regulate takeovers. “The 1987 crash tempered the greed of the Me Decade,’’ Nations says.

The 2008 meltdown originated 30 years earlier with the government creations of Ginnie Mae and Freddie Mac, mortgage-backed securities. Institutional investors, such as pension funds, bought in “because even though they were extremely safe, they paid more in interest than Treasury bonds.’’
 
Then JP Morgan, holding a $4.8 billion loan to Exxon for its 1989 oil spill, created the credit default swap—paying a third party a fee to assume risk of Exxon defaulting. Morgan extended the swap concept to its $9.7 billion in commercial loans and freed $512 million in reserves formerly needed to cover the cost of default. Swaps became the rage.

Nations says the 2008 crash, propelled by “a frantic search for yield on the part of investors around the world,’’ was caused by ill-conceived adjustable rate mortgages; credit default swaps failing when housing prices dropped, overly leveraged mortgage-backed securities, subprime lending and the Fed’s failure to set realistic interest rates. When insurance giant American International Group (AIG) embraced credit default swaps, its $79 billion exposure in mortgage derivatives caused its collapse and it needed a government bailout to survive.

“It was easy to stand behind the false belief that complex and sophisticated means accurate,’’ Nations writes, saying that “fiber-optic lines and microwave towers that banks and trading firms installed are intended to transmit messages at nearly the speed of light.”

“But one hedge algorithm confused volume with liquidity in 2010 and the illusion of liquidity would cause the flash crash of 2010.’’

The contraption: Believing the collapse of Greece’s economy imperiled its assets—87 percent in stocks—a Kansas asset management company sold 75,000 futures worth $4.1 billion on May 6. The “weaponized algorithm,’’ selling in spans of a few milliseconds, caused the Dow to drop more than 1,000 points in minutes, with three million shares trading 90 percent below previous day prices; more than 200 securities lost 100 percent of value before the algorithm finished its wreckage. Order was restored.

“Crashes might not repeat themselves, but they rhyme. It’s not about money or numbers or individual stocks but about fear and greed. There is almost always too much greed. There is rarely enough fear,’’ Nations concludes.

A History of the United States in Five Crashes, by Scott Nations. William Morrow. 336 pages. $35.99.

Eleanor O’Sullivan is an award-winning freelance journalist who writes for Financial Advisor magazine.