The Money Game - 'Adam Smith' (Random House, 1967)

A witty exploration of the psychology of Wall Street - why people play the game and how they do it.  This is not another investment guide; it is brilliant sociology.  [332.678]

How is the investment world of 50 years ago different from today?  Maybe there are fewer brokers that the client calls to see how the market is doing.  There are fewer old-line investment houses functioning as banks for wealthy clients.  Along with that, the old fixed commission system is gone that supported so many of those old houses.  There are more investment products available, even as some industries (e.g., aluminum) offer fewer companies to choose among.  Certainly, there is more information about prices and markets within easy reach.  The author would argue, however, that one thing has not changed: the underlying motivation for many participants in the market.  Taking a comment from Lord Keynes, the author argues that it is the game aspect itself of speculative investment that draws many players.  Yes, money is useful for keeping score, but it may not be the end in itself that is being pursued.   

George J. W. Goodman, writing under the pseudonym Adam Smith, draws a series of portraits of the players and in sketching them highlights their inner workings.  The cast includes Odd-Lot Robert who is the small investor who always thinks the "Big Boys" are planning something; Charley and Poor Grenville, and the Kids, all fund managers; the professional gang hanging around Oscar's who could have walked off the set for Mad Men; several investors who are patients of Harold the Psychiatrist who reveal all the ways in which money and the market fit into their lives and it usually isn't in the ways economists assume money fits into a rational individual.  They are Chartists, analysts, small investors (in odd lots), irredeemable speculators, and guys who just like to trade information.   One key that the author finds is how many players just want to be in on the game; they want to be where there is action.

For a light diversion, there is a chapter on The Cocoa Game to warn against the very different world of commodity trading.  For a darker chapter, the Gnome of Zurich appears to present speculations about the dollar and trade and gold that a dozen years later would all prove true. 

The writing is bright and clever.  The humor is subtle yet rich like the clubs that Goodman describes.  This is a book to read when one wants to be reminded that the world continues in a great cycle of rising markets, hot prospects, disillusionment, and gloom...and that it always has been that way.

This book is highly recommended.   

Military Misfortunes: The Anatomy of Failure in War - Eliot A Cohen and John Gooch (Vintage Books, 1991)

An insightful analysis of the sources of failure in wars, although the approach holds promise for more general application to management in business.  [355.480904]

Forget for the moment all the business literature that tried to appear deep and subtle by applying writings of Sun Tzu or Alexander the Great to business management.  Their focus on the enemy - that is, the competition - and exploiting his weaknesses to gain victory seemed to appeal to business fantasy  rather than the mundane challenges of keeping everything running smoothly.  Is military strategy even appropriate to apply to business?  It is clear that war and military management present great challenges because the risk of failure involves much more than simply the financial health of the enterprise itself.  At the same time, military management can, or should be able to, rely on tighter chains of command and an ability to marshal resources if they are needed.

Yet, business does present questions that need some innovative answers.  How, for example, could the Edsel be explained? or New Coke? why did money center banks allow themselves to be stuck in the collapse of the market for CDOs? why did the domestic auto industry nearly die?  Not all of these can be explained by costs structures or market forces.  At times, it is necessary to look at the decision-making style of the people leading the organization.  

The authors analyze military collapses form the last 75 years.  After first rejecting analyses based on the psychological or temperamental profile of the man in charge (a variation of the Great Man approach), analysis of the institutional culture, or even the society that failed, they present three principal sources of failure.  These are:

 - Failure to learn.  This is the refusal to look at lessons learned in analogous situations.  Their example is American antisubmarine warfare in 1942.  The horrific losses within the U.S. Merchant Marine fleet in the Battle for the Atlantic were costly in lives and materiel.  The British had developed an effective strategy for convoys and for antisubmarine warfare during their years in the war.  Their success, the authors contend, was not the result of new technology, but of developing an organizational structure that allowed the RAF to make use of all intelligence available and to disseminate it immediately to units that needed it.  It would take some months before the U.S. could do the same with its antisubmarine air patrols.

 - Failure to anticipate.  This is not failure to foresee an unknown future, but the failure to take reasonable precautions against a known hazard.  The authors analyze the failure of Israeli forces to anticipate the Yom Kippur War.  This was not a failure alone of intelligence, that is, a misreading of the facts at hand and a lack of curiosity among Israeli senior officers concerning the data available, but also a failure to comprehend the strategic views of the adversaries.  It could be summarized as overconfidence in understanding the situation confronting the IDF.

 - Failure to adapt.  As events unfold, little can be expected to continue as planned; opportunities present themselves or new information becomes available.  The authors analyze the British generals' failure to adjust their plans in the terrible Gallipoli campaign of 1915.  In the landings on Suvla Bay on April 25, British command failed to recognize a critical opportunity of light resistance on one of the three beaches in comparison to that on the other two.  There was no command to press forward in the area of no resistance.  Troops eventually drifted back to the beach.  The British forces on "Y" beach at Suvla Bay failed to exploit the situation and became part of the forces pinned down in their trenches above the beach.  A similar opportunity would not come again.  Compare this with the landing on Utah beach in 1944, when it became clear that U.S. forces had landed at the wrong place on a lightly defended area.  To quote their commanding officer, BG Theodore Roosevelt, Jr., the opportunity meant that they would "start the war from right here."

There is nothing to prevent combinations of these three failures and the authors examine two cases of such catastrophic failure: the rout of the Eighth Army in Korea in 1950 and the fall of France in 1940.

The analysis is greatly enhanced by the inclusion of an accountability matrix for each discussion.  The matrix cells are defined by columns such as control and coordination, identification of goals, supply or means and rows are defined by levels within the organization from high command to units.  Cell entries list errors or weaknesses with critical or serious failures marked.  The tool itself should be adopted by others tasked with post hoc analyses of events.    

This book will carry additional interest for anyone interested in military history, but it is recommended as an innovative approach to nonmilitary matters. 

The Gold Ring: Jim Fisk, Jay Gould, and Black Friday, 1869 - Kenneth D Ackerman (Harper & Row, 1988)

An account of the attempt to corner the gold market in the early Grant Administration.  The book's portraits of dishonor and double cross are staggering.  Taken as historic evidence, the story contains valuable warnings about markets and regulation.  [332.645]

"A fellow can't have a little innocent fun without everybody raising a halloo and going wild"  - Jim Fisk

It is difficult to conceive of how financial markets operated in an era of no regulation.  The picture drawn in this book is one of stunningly corrupt institutions dominated by wholesale fraud; in fact, perhaps either the term "markets" or "operated' is the wrong word to describe these money exchange forums.  The two of note in this book are the New York Stock Exchange and the Gold Exchange. 

The narrative revolves around seven people.  Jay Gould and his sometime business partner Jim Fisk engaged in market manipulation while using the treasury of the Erie Railroad as their personal cash source.  Cornelius Vanderbilt, with his New York Central railroad, was a constant competitor of Gould and Fisk.  William Marcy "Boss" Tweed supported Gould and Fisk with lawyers and pliable judges whose injunctions could be used to limit liability or to award custodianship of disputed assets.  Abel Corbin became a partner with Fisk and Gould because he offered a valuable connection - he was the President's brother-in-law.  President Ulysses Grant had been in office only a few months as he and his Treasury Secretary, George Boutwell, worked to move the country back to hard currency after the issuance of Greenbacks during the Civil War.

The author establishes the characters of several of these persons by describing the "Erie Wars" in which Gould and Fisk struggled with Vanderbilt over control of the Erie railroad and on securing a right-of-way to link with Midwestern railheads.  Although both sides were willing to use gangs of toughs on the rail lines and bribery in Albany to get the rights they sought, a novel scene on the stock exchange is more effective.  Once Vanderbilt decided to simply buy a controlling interest in the Erie, Gould and Fisk set up a printing press and simply kept printing stock shares to sell him.  (No regulations regarding registering shares or provisions against watering stock existed.)  When the Erie Wars became too notorious, Gould and Fisk simply holed up in New Jersey while both sides used the courts to get the outcome they wanted.

The central story, however, involves an attempt to corner the gold market.  Gould and Fisk might be able to lock up all the free gold immediately available in New York, but they could not hold out long if the Treasury decided the action on the Gold Exchange was affecting commerce.  Their answer was to recruit Corbin to introduce them to the President and to convince him that higher gold prices would help farmers as they were selling the crops. This would convince Grant to stop Boutwell from his monthly repurchases of outstanding Treasury debt with gold that would enter the market.  As Gould and Fisk began their bull run (lending out to the bears gold as they bought it), the Treasury stayed out of the way, although this may have been because Grant was on extended vacation.  Grant, however, became suspicious when the schemers tried too hard to keep him in by sending a letter from his brother-in-law to him by special messenger at his vacation spot.  He had his wife write back to her sister, Corbin's wife, warning them to stay out of any market schemes.  (How Gould used this response is even more revealing of character.)

Immediately upon his return to Washington, Grant authorized the sale of gold for bonds.  This broke the ring in the infamous September 24, 1869, "Black Friday" collapse of prices.  The issue then was to untangle accounts from the furious trading and to reach net settlement.  At this point, Gould and Fisk decided to repudiate all their trades or to use Boss Tweed's judges to help them do so.  The settlement process itself became corrupt with brokerages favoring their own accounts and not settling with outside parties.  Money was lost, some houses were ruined, and many reputations went with them.  Reforms would still wait 60 years in the future before markets could actually be counted on to act as markets.

This amusing history of unbelievable corruption and its audacity is highly recommended.

Deflation: What Happens When Prices Fall - Chris Farrell (Collins, 2004)

Inflation has been the global experience since the end of WWII, but this may have been the anomalous period in modern economic history in that deflation or stable prices are more likely over the long run.  Since the mid-1990s, deflationary pressures brought about by advances in productivity and technology have moderated the increase in prices and wages. This book looks at causes and consequences and tries to argue that, in the main, this is a good thing. [332.43]

This book was written as an analysis of current economic trends.  With the perspective of the past dozen years, a book such as this becomes interesting for what it appears to have gotten right and for what we now know to have been quite wrong. 

The author's premise is that deflation brought about by a drop in demand, as happened in Japan after its real estate bubble collapsed can be very damaging to an economy.  The Great Depression is another example of such a deflation; it was a rapid drop in prices and, by setting up expectations of further falls in price, encouraged consumers to put off buying goods that would only be cheaper later still.  The fall in demand and economic activity becomes self-perpetuating.   

There is another type of deflation, one that is gradual and results from outward shifts of the aggregate supply curve.  (NB. This is NOT an argument of "supply side" economics nor should it be confused with that specious doctrine.)  Such a shift results from new technology, increased competition, or changes which reduce the costs of production generally.  In this world, wage increases may be severely dampened, but they are more than compensated for by increased purchasing power. 

Farrell argues that our current bout of low inflation, bordering on deflation, is similar to the same phenomenon at the end of the 19th century in that both grew from new technology: railroads, telegraph, electricity or the internet and supply chain management.  In fact, he suggests that most of modern history saw fairly stable prices with the post-WWII period being the true exception.  Such periods of economic transition can be very difficult for many workers and business owners as industries undergo Schumpeterian creative destruction. 

Correctly, then, Farrell expected some social stress as workers are displaced and industries undergo new competition.  He could see free trade as a likely scapegoat for the social cost of a changing global economy.  This clearly is continuing today and it has affected our political process.  The book is colored by the dot.com collapse and its destruction, but that is already fading.  The author cannot anticipate the far more serious collapse of 2008.  This will exacerbate some of the negative trends and will reverse the steps toward income equality that the late-90s boom engendered as employment grew.   And, the consequent deleveraging as credit collapsed would hold back recovery much longer than might have been expected.  Overall, the author has presented a clear argument that better explains what our economy is going through and offers comfort in that we have been here before. 

This book is recommended for its fresh perspective on deflation.

The Day the Bubble Burst - Gordon Thomas and Max Morgan-Witts (Doubleday & Co, 1979)

This is a social history of the Great Crash of 1929.  It weaves together the individual histories of dozens of persons whose lives or fortunes were deeply affected by the Great Bull Market and its subsequent collapse.   [338.54]

Neither of the authors of this book is an economist or a business writer by profession.  The style of the book is quite different from most financial histories in that it spends more of the text on recording the thoughts and feelings of the characters.  In fact, it is more like the style one expects to find in a novel.  The attribution of thoughts or feelings to the main characters would make a reader suspicious of the validity of the accounts except for two things: the book was written forty years ago when many of the principals or their families were still alive and available for interview and the authors cite numerous journals, diaries, and interviews among their sources.

The book covers the last months of the Great Bull Market from New Year's Eve 1928 to October 1929.  It is not restricted to the usual players in the Street, but takes individuals at several levels of society and at venues outside New York.  These individual stories reinforce the narrative by adding a poignancy to human plans overwhelmed by the event.  There are several projects or goals set by the participants for the last week in October that the reader knows will never come to fruition.  The stories include the standard players such as Michael Meehan, the pool operator; Thomas Lamont and George Whitney, partners at Morgan; Richard Whitney, George's brother, embezzling from his customers for one bad investment after another while president of the NYSE; Jesse Livermore,  who often blamed for the Crash because he often sold short; Charles Mitchell, famous for placing bids on behalf of the bankers' group to try to stabilize the market, but who also was selling short the stock of his own bank; and Professor Irving Fisher, the economist whose serious work on the money illusion has been swept aside by his Panglossian pronouncements.  

The authors go further and include other characters to give a broader sense of the easy riches mania that seemed to carry away the country.  There are also Henry Ford, eccentric and living in an America that is fading into the past; Joseph Kennedy, snubbed in his visit to the House of Morgan, but having a better sense of the market than his "betters"; John J. Raskob, focused on his plans to build the Empire State Building; A. P. Giannini, laboring against the fear that his Transamerica Corporation might become a tool for speculators and also seen as an upstart by the J. P. Morgan firm; the "league of gentlemen," fifteen clerks and officers of Union Industrial Bank of Flint, Michigan, each of whom was embezzling from the bank to invest in the stock market; and the Vargo family, immigrants in Flint and bootleggers who trusted their savings to the Union Industrial Bank.

By following each of these stories, the reader is reminded that the Crash did not happen on just one day; the market's collapse took place over several days.  At the end of each of those days, there was a hope that the rally might undo the damage.  The reader will likely feel a pang of sympathy for the characters because we know the end of the story.  That is something too often missing from economic history: the sense that no one at the time knew how the story would end.  We can empathize with their frail hopes.

This book is recommended for a sense of the mania for easy money that swept through society during this period.

Last Call - Daniel Okrent (Scribner, 2010)

A thoroughly entertaining history of Prohibition: the motivations of its proponents, its social impacts, and how government policies were implemented.  [363.41097309042]

Prohibition has a certain image in the popular mind: Elliot Ness, passwords at speakeasy doorways, terrible liquor.  This book provides a comprehensive and highly readable history of one of the strangest legal periods in US Constitutional history.  The author also gives a very different view of our history - how quickly the population gave up on enforcement, how little it was wanted anyway.  It is ironic that Prohibition became truly unpopular generally once President Hoover took enforcement seriously.  

He also examines the very modern interest group dynamics that led to the 18th Amendment and places them in the context of a much broader platform of social legislation.  Women's suffrage was supported by the dry forces because of the certainty that women would vote for dry candidates.   Prohibition was intimately linked to tax policy, for example, with the income tax a necessary prerequisite.  Alcohol could not be banned unless an alternative source of revenue could be found to make up for the loss of liquor excises.  (No wonder the author, in a book discussion, once mentioned that his original title might have been "How the Hell Did This Happen?")  This same argument would lead to the drive for repeal of Prohibition by classes hoping to end the income tax. 

In a certain sense, Prohibition is seen as the last struggle by a disappearing America - rural, WASP, and religious against a tide of change to the modern, urban and ethnic culture that America was becoming.  The fighting went to the last ditch when the "Dry" forces delayed re-apportionment of Congress after the 1920 Census until 1929 because they knew that the composition of Congressional representation would change radically when urban, ethnic districts began to appear. The parallels to social legislation driven today by the same fear of change makes this more than just a history of a curious period deep in the past.   

This book is highly recommended. 

Fool's Gold - Gillian Tett (Free Press, 2009)

The other side of the story that ends with The Big Short.  The history of the development of CDS and their limits as tools for risk and how those limits were overlooked in pursuit of profit buy some banks with catastrophic consequences.  [332.660973]

The Financial Times columnist offers a history of the development of the credit default swap (CDS), the derivative financial instrument that cost so many banks so much in losses as to bring on the financial collapse of 2008.  Gillian Tett focuses on the derivatives team at JP Morgan while tracing developments at other banks to create new financial instruments. 

Along the way, Ms. Tett points to the pieces of the history that combined to make the disaster.  She recounts the efforts by the Wall Street banks to leave the derivatives business essentially unregulated (or, at most, self-regulated.)  She covers the work by industry committees to draft ISDA rules, including avoiding creating a third-party clearinghouse, as a way to put off regulation by the Federal Reserve and their further work to lobby against four separate bills in Congress in the 1990s to regulate derivatives trading.   

The other great problem was how to keep these instruments from impairing the balance sheet: if they carried any risk for the bank, the bank would have to maintain adequate reserves behind them.  By breaking the CDS into separate tranches according to the risk implicit in the underlying securities, it would be possible to find buyers who matched the level of risk of each tranche with their own preferences for a balance between yield and risk tolerance. There was, however, a particular problem with the "riskless" tranche, the most senior and lowest risk tranche since it was difficult to imagine that this tranche would ever be at risk.  Fortunately, the insurance giant AIG was willing to take on this instrument as an asset.  The return would be small, but with sufficient scaling up, the total would be significant.  Eventually, lobbying by the industry convinced regulators that the senior tranche was sufficiently safe that it didn't need to leave the balance sheet or impair operations by requiring reserves behind it.  Since there was much to be made by selling CDS, the banks went into it fully and this meant they were accumulating a lot of the senior tranche.  Thus both AIG and the banks were set up to take on risks they could not measure.

The key problem was whether the underlying logic of the instruments was correct; there was no way to be sure.  The assumption was that each security (mortgage) had an independent probability of failure.  Even if they were not perfectly independent, the correlation among the constituent securities was assumed to be low.  Experience with corporate failures made the assumption seem safe; the assumption was on far shakier ground when new instruments were designed to use only mortgages.  It was difficult to calculate the probability of general collapse in real estate.  The problem was ignored or assumed away.

The collapse came, quietly at first, but with increasing fury as derivatives began to melt on the balance sheet.  When it was over, few banks were left standing firmly.   Although there were heroes whose rationality and ability to avoid jumping in to the risk pool saved their banks much grief (and Jamie Dimon appears to be one of Ms. Tett's heroes), most banks were caught by the very instruments that had been paying them so well.  The cost in wiped out value reverberated throughout the markets and into the real economy.  The recovery continues eight years later.

This book is highly recommended.

The Match King - Frank Portnoy (Profile Books Ltd, 2009)

In a time of economic exuberance, even sophisticated investors, bankers, and brokerages were not too interested in where the dividends came from.  This is the story in detail of one of the greatest collapses - or was it fraud - of the 20th century.  [364.1680924]

It would seem that every book about the 1929 Wall Street crash makes passing reference to Ivar Kreuger and the collapse of his "Match Empire."  Although, his name is often teamed in such histories with those of Samuel Insull and Charles Ponzi, there is a critical difference.  Ponzi's scheme was limited and had no hope of being a legitimate investment; Insull's network of utilities and holding companies was merely regional; Kreuger built an international enterprise that was capable of lending funds to sovereign governments, that developed new financial tools (such as nonvoting Class B shares and convertible debentures), and that could rival the House of Morgan.  Ivar Kreuger and his match monopolies were in a different league - almost appropriately the same league as the South Sea Bubble.

This book is more than a recounting of some facts; it is the biography of an enigma.  How much about Kreuger's life or business dealings was real?  how much was sleight of hand?  Further, why would a old banking house like Lee Higginson participate so willingly in raising funds for International Match or the firm of Kreuger and Toll when they really knew so little about the business?  How could the most cursory of financial data be trusted as a guide to understanding a complex firm?  Here is a look at how financial markets operated before requirements for audited financial statements or registration of securities became standard.  In good times, as many subsequent market booms have shown, investors do not really want to look too carefully under the hood of the engine that is generating profits.  It did not seem to trouble investors that their investments paid a 25% dividend on money lent to Germany for 6%.  In  the absence of solid accounting data, funds could be raised and shifted among a number of off-balance sheet vehicles and firms without the knowledge of investors or the firms' bankers.  Today, an investor will study the 10-Ks and 10-Qs of prospective investments.  These tools only came into being after, and partly because of, the collapse in 1932 of Kreuger's empire once the search for remedies for the losses that all came with the end of the 1920s bull market began. 

After every collapse, there is a desperate search for a single, simple cause or villain to blame and widespread human greed or blindness is never really an acceptable explanation because it spreads guilt too broadly - it might include ourselves.  Although the International Match shares held their value for almost two years after the crash of most other share prices, when they fell, they became the focus of blame.  Suddenly, the now-dead Kreuger could not defend himself against harsh, self-interested accusations.  Some of these charges are believable.  (The forged Italian treasury bills that Kreuger had used argue that.)  Time, however, would reveal that many of the assets of International Match and its associated companies were genuine.  The author leaves his conclusions mixed: part blameworthy, part exculpatory for Ivar Kreuger.  That is, perhaps, the most satisfactory approach.

This book is recommended with the note that some readers may wish to reconstruct some basic accounting statements to better understand the whole.

  . 

 

Good to Great - James C Collins (Harper Business, 2001)

A big ideas management book that attempts to identify the basis for some companies' market success.  [658]

I cannot really recommend this book.  I question the methodology and I question the conclusions.   I have the sense that the methodology depends on "survivorship bias" the way books like The Millionaire Mind do.  That is, we choose a group of "winners" and ask how they differ from others.  Although one may identify a difference, it is a great leap to argue that that difference is necessarily the critical factor.  Further, it must be shown that the identified factor is both necessary and sufficient for success.  That is, no firm which also had this same factor must be seen to fail and all that do must succeed.

Further, I do not accept the criterion for identifying winners.  Collins appears to use stock prices as his guide.  Although there may be a justification for this, it also must ignore random stock price movements; in any such cohort, there will always be a winner regardless of the cause.  (Just as any competition among individuals tossing coins as to who can toss the most "heads" will certainly produce a winner.)  I am not convinced that stock total returns tell the whole story sufficiently to play the critical role they do in this study.  

As a final note, this book was published just 15 years ago.  The title would imply a certain durability over that period of the firms that made the "great" category.  Of the eleven companies in the list, one - Circuit City - went bankrupt and disappeared within five years of publication.  A second "winner" is Fannie Mae, about which nothing more need be said since eight years ago.  I will agree that Walgreens and Wells Fargo have shown continuing strength, but the list is now wrong at least 20% of the time.

This is a management book aimed at CEOs.  Even if its conclusions are valid, it is unclear how this helps 99.9% of the potential readership to make the fundamental changes needed in their place of employment.

This book is not recommended - except for those who wish to compare the other winners against their current track record.

Exit, Voice, and Loyalty - Albert O. Hirschman (Harvard University Press, 1970)

Societies build systems and entities to meet social and individual demands.  What do we know, or what can we hope to know, about how members of society react when those constructs fail to meet their goals?  The answer may be beyond economic reasoning.  [302.35]

In this book (written in the late 1960s), Hirschman contrasts two ways of resolving customer dissatisfaction with performance by an organization. 
These are 1.) the way economics see the solution - exit, as in buy from another seller, and 2.) the way political science does - voice, as in protest or complaint. 

In the past forty years, the intellectual and policy trend has been to interpret more and more social issues as fundamentally questions to be addressed by market-based analysis.  We now generally take market solutions as the answer to almost any public policy issue.  We do so even when the basis for a market analysis is weak or provides no guidance.  For example, even if a perfectly competitive market exists, using it as the basis for analysis provides no information about how outcomes or products might be improved.  A firm with higher costs or a defective product should, according to the competitive model, immediately loses all customers and ceases to exist.  Nothing can be done.  Further, in those situations not characterized by the idealization known as a competitive market, forcing the analysis to rely on that model can miss critical aspects of the problem.  It is in the most acute case, a pure monopoly, that a different approach is called for.  Most such monopolies are often thrown into the hands of governments to manage, such as school systems and utilities. The author reminds the reader of the value of the alternate analysis and its broad applicability in many cases where markets may fail.  The author attempts to analyze the means by which customers may respond to failure to deliver satisfactory outcomes: by exit or by voice and how loyalty may impact those decisions.  

The book is worth reading as a reminder of the complexity of public policy and our responses to organizations.  It provides a useful counterexample for mindless application of microeconomic principles to situations that cannot support the required assumptions.  (It should be noted that Kenneth Arrow endorsed this book.)

The book is recommended for anyone concerned about public policy who can accept a noneconomic analysis.

Deluxe: How Luxury Lost Its Luster - Dana Thomas (Penguin Books, 2008)

A history and criticism of the transformation of luxury goods from its traditional role of social demarcation based on quality and design to another mass market niche driven by advertising, cost control, and mass market appeal. [338.47]

Luxury goods are, in general, no longer the province of ateliers and small, family-run factories.  The old houses of Chanel, Dior, and particularly Vuitton, represented the tradition of well-made goods in the Parisian market.  Globalization, however, has created a market beyond the capacity of the old production system and with a potential for great profit from sales to rising elites worldwide.  Only corporations can procure the financing and capacity needed to meet this demand, but corporations have a different focus than the traditional family atelier.  The great fashion houses and designers have been democratized through the development of corporate marketing that stresses brand awareness and packaging.

As conglomerates have taken over old houses, cost control has become critical.  This has moved many workshops to China and other emerging markets and placed their goods on assembly lines next to pedestrian goods.  It has led to the development of the outlet mall where goods are sold that were made specifically for the outlet shop.  It has led to the creation of cheap goods, such as tee shirts and key rings, bearing only the trademark or logo of some fashion house.  The intent was to widen the market to households who could not justify the expense of traditional designer goods; now, they too can buy into the dream.  And, of course, the growth of a mass market for luxury brands has encouraged counterfeiting. 

Now one may ask oneself if the appeal of the product lies in its exclusiveness, its quality, or its solely its brand marketing.  The clearest sign of decline must be that for many goods, the distinctiveness of the product is not necessarily to be found in the quality of materials and workmanship or execution of design, but in the label which has moved from inside the item to the outside for all to see.

I found this book irresistible and as I read on, it radically affected my views on luxury goods. 

It is strongly recommended.

Hamilton's Blessing - John Steele Gordon (Walker and Co., 1997)

Ostensibly, a history of the national debt; unfortunately, the narrative devolves into a diatribe against an economic straw man and into an extended speculation about a flat tax.  A promising start that loses sight of its worthy goal. 
[336.340973]

This book begins as a needed history of the National debt.  The first half of the book explains what benefits the national debt provides and, with less detail, why it was part of Alexander Hamilton's fiscal plan for the new nation.  The author particularly likes to focus on individual incidents such as the compromise that set the capitol in Washington, DC and the assumption of many states' Revolutionary War debts.  The book then addresses the general problem of financing the young United States.  That brings in topics such as our first two central banks, the First, and Second, Bank of the United States, the difficulties caused by a taxation system reliant almost exclusively on customs duties, and the costs of Jackson's Specie Circular.  The selling of the government's debt during the Civil War and the currency adjustments in the post-War period are also well-written.   

As it shifts to the beginning of the 20th century, the narrative drifts far from an analysis of the debt.  The author discusses the income tax amendment and invests some effort in covering the differences between the corporate and personal income taxes.  Although this is an interesting topic, it is a digression from the main subject and, even worse for the book, becomes a springboard for the author to go in a new direction.  No real rational for an income tax is presented; the author doesn't acknowledge that the gathering momentum of the Prohibition movement will mean that the government will need an alternative to the alcohol excise taxes that helped fund the government.  Instead, the author becomes fixated on thinking of the graduated tax as an experiment in social engineering.  Forward from that point, questions about the debt fall to a secondary topic. 

Much of the last section of the book becomes an extended critique of Keynesian economics.  The usefulness of any observations is thrown away, however, because the author focuses on a caricature of Keynes' thought.  It is treated as a policy spending and borrowing no matter what the economic situation.   (The bibliography reveals that the author has consulted some free market economists who are unlikely to give an unbiased critique of Keynes.)  The rest is a description of the benefits of the Flat Tax, particularly as a means of avoiding what the author refers to as "social engineering" or using the tax code for progressive taxation as a means of combatting income inequality.

This book advertises itself as a history of the national debt.  In truth, with its forays into central banking and a central government with the ability to tax, it summarizes more of Hamilton's design for the United States than just the debt.  The entire plan may be Hamilton's Blessing.  If only the author had maintained focus.

The first half of the book is recommended as a useful summary.

The Big Short: Inside the Doomsday Machine - Michael Lewis (W W Norton, 2010)

An engaging story of the challenges facing a few individuals who bet against common wisdom  to profit on the 2007-8 housing market collapse. [330.973]

One path to good storytelling when dealing with complex issues is to report from the point of view and actions of someone involved in the events.  This doesn't necessarily make the event itself any clearer; instead it trusts that the reader may appreciate the challenges the protagonists face and it conveys a feeling about the events.  This look at the financial implications of the housing market collapse in 2008 attempts to explain events by following three hedge funds and a banker as they try to make sense of what appears to them to be an asset bubble and to find a way to take the opposite side of the trade.  It takes great self-confidence, or foolhardiness, to take a short position when the world is convinced prices can only move upward.

The uninitiated reader is unlikely to come away from this book with a clear understanding of derivatives trading, credit default swaps, or collateralized debt obligations, but this book is not intended as a CFA textbook on derivatives.  In fact, this book should be read alongside Gillian Tett's book Fool's Gold to really understand how such a market developed.  The pair of books gives a richer context to the trading.

Michael Lewis is, nonetheless, a talented writer.  The traders and bankers he describes are complex personalities.  They are not heroic; they see an opportunity to make money and have to develop a way to exploit the situation.  They have to keep their financial backers and investors behind them while the action they propose violates accepted wisdom.  They have to abandon any faith in the leading names in the financial community.  Once events begin to run their way, they have to decide how long to hold the trade before it becomes worthless.  Here is Lewis' talent: giving the reader a sense of the inner workings of these people.

We are still living with the results of the crisis.  It still plays a role in the political campaigns this year because it has affected how we interpret the work of Wall Street, the government, and the markets in a broad sense.  This book is still timely even as it describes events that are a decade ago.

(NB.  The movie of the same name is equally enjoyable and should be watched in conjunction with Margin Call to see both sides of the story, but it has fictionalized some parts of the story and simplified other parts.)

This book is recommended although with the suggestion that the experience improves if one takes time to learn more about the derivatives and the securities discussed.

The Paradox of Choice: why more is less - Barry Schwartz (Harper Perennial, 2005)

We live in an economy capable of generating countless variations of a product to meet individual tastes.  The problem arises when we find that we are not capable of managing mentally so many choices.  [153.83]

This book poses an interesting paradox: we live in a world that offers us ever more choice in even our most mundane goods, yet they ability to choose from such a variety makes us less happy with our choices.  Every decision disappoints.  This is particularly true for persons who seek to optimize based on their actions rather than to satisfy some need.

The author invokes a broad range of research in highlighting how too broad a range of choice can lead us to regret decisions because we had unrealistic expectations of the outcome or to constantly compare them with choices not made.  The impact of this paradox is greater stress in our personal lives. 

It also has implications for marketing where product line extension has become the norm (contrary to the warnings of Ries and Trout in the book Positioning of thirty years ago.)  What is a Coke today?  Is it Classic Coke, Coke Zero, Diet Coke...  Schwartz hints that we may become paralyzed by our inability to choose.  Thus, by offering more selection, we get consumers who take no decision or are ultimately dissatisfied with the product they have chosen.

This book is recommended to anyone interested in our consumer society.

Tulipmania - Anne Goldgar (University of Chicago Press, 2008)

A serious review of one of the iconic financial bubbles in European history.  The author suggests that legend has largely shaped our views on its origin, extent, and impact on Dutch society.  [330.949203]

This book re-examines the Tulip bubble of 1636-7.  Its premise is that everything we all have read in Extraordinary Popular Delusions, in Burton Malkiel, and elsewhere is based on flawed documents.  All of these derive from a single 18th century source (or from MacKay who used this same source) that drew its information from 17th century pamphlets.  The pamphlets were written with didactic or moralizing intent rather than as actual history.  They exaggerated the spread of the speculation in society and its economic impacts of the Dutch economy. 

The book asserts that the Tulipmania we all know never really happened.  There was a rise in prices, but the trade was confined to a fairly small community of traders with a high concentration within the Mennonite religious sect.  The records indicate few bankruptcies resulting from the collapse in prices.   The plague in Holland in 1636 led to inherited wealth and a new attitude toward earthly pleasure also encouraged the bubble. 

One interesting financial aspect to the actual trade is that for seven months of the year, the bulbs stay in the ground.  The trade depended heavily on forward markets and prices.  That is why the collapse led to some problems of honor among the merchants - with a forward contract the temptation to renege is high when prices fall.  There is also the problem we saw in the repo fails situation in 2008 when contracts are daisy-chained; one failure to deliver disrupts an entire series of trades. 

The book can be a bit of a long read.  Goldgar, the author, is fairly detailed on the development of tulips as objects of beauty, for the newly prosperous merchant class of Holland in the Golden Age.  She goes then into the society that engaged in the tulip trade and how small this group was and how disputes were settled.  Finally the book begins to address the tulip market.  The main point is that the pamphlets that misled later readers reflected uncertainty about the new social mobility, the rise of new classes and the impact on traditional notions such as value and honor made all the more severe by the stress of dishonored contracts. 

In the end, however, such revisionist history is satisfying.  The book's subtitle "Money, Honor, and Knowledge in the Dutch Golden Age" explains the breadth of the argument.  It makes more sense of what is usually cited as simply the madness of crowds.

This book is recommended and highly recommended for readers with an interest in art history and Dutch culture.

End the Fed - Ron Paul (Grand Central Pub., 2009)

A rant by an author who does not accept the basics of banking and uses selective history to advance an argument of pure Austrian school theory.  [332.110973]  

This short book takes only a few hours to read.  To do so, however, is to waste those few hours.  If you know something about banking, money, macroeconomics, or the Federal budget process, you will not learn anything from this book.  If you do not know these things, you will not learn them here.  The more disturbing fact is that the author was the chair of the House Subcommittee on Monetary Policy and Technology.  

The book presents no logically constructed model or argument as to why the economy would be more stable without the Fed.  He generally ignores historic periods when the U.S. did not have a central bank.  His only argument is that prices have gone up since 1913 - a post hoc, ergo propter hoc argument blind to price movements before then.  He has a fascination with the Exchange Stabilization Fund, a $20 billion Treasury fund (small by the standards of the U.S. economy - the Treasury often borrows 3 to 4 times that amount in Treasury bills each week) that he suspects is being used to manipulate global markets.  A lot of the book is a string of hypotheses and conspiracies.  He opposes the use of fractional reserve banking; a concept that dates to the Renaissance. 

The book seems to be quite popular, but I have no idea why.  To read this book is to feel trapped at a family Thanksgiving dinner at which your great uncle, who has recently discovered the internet, holds forth for hours on things he has learned online.  There are too many "it could be that ..." types of assertions.  This book is for true believers who have no need of reason or facts.

This book is not recommended at any level.

Making Sense of the Dollar - Marc Chandler (Bloomberg Press, 2009)

The Chief Foreign Exchange Strategist at Brown Brothers Harriman takes a critical look at ten myths about the balance of trade, the labor market, and globalization and the dollar. [332.4560973]

Marc Chandler takes the reader through a critical review of ten myths about exchange rates, the dollar, and international trade in a well-written 200 pages.  The book might have been suitably named, "Against the New Mercantilism."  The author completely takes apart the commonly held picture of a world in which the U.S. runs huge trade deficits that lead to an accumulation of dollars overseas that will weaken the U.S. standing in the world and that its manufacturing can be saved only by a weak dollar policy.  In every point, Chandler presents a fresh perspective to show how the common view is wrong.  

His first key point is that trade statistics do not capture how American firms compete in global trade.  Rather than producing everything in the US and shipping finished goods, US firms establish foreign subsidiaries to produce locally.  Much of what is measured in trade statistics is actually intra-firm movements of goods in production.  This means that trade data understate US competitiveness.  His second point is that dollars overseas serve more functions than simply being used to purchase goods made in the US.  This strikes at the commonly held notions of the proper exchange rate or the role of the dollar in the world economy.  Finally, he addresses the impact of institutions on the development of markets in modern societies.  This includes an insightful look at the myth that there is only one way to capitalism. 

The book is a fresh and much-needed antidote to the facile assertions about the US economy and its future in global trade.

This book is highly recommended.

And the Money Kept Rolling In (and Out) - Paul Blustein (PublicAffairs, 2005)

A history of the collapse of the Argentinian economy during its currency crisis of 2001.  The question is how could a country that seemed to live by the Washington consensus and was the darling of investment banks suddenly fall so far and so fast?   [330.98207]

Over the course of ten years, Argentina went from being the darling among emerging markets to a shattered economy.  The author suggests that much of the damage may have been self-inflicted, but that it was greatly helped along this path by policy decisions and interference by the IMF, the US Treasury, and the financial markets and banks.  These policies helped keep Argentina on an unsustainable path for too long before switching to a wrenchingly painful policy about face.

Argentina came out of the ruinous inflation of the late-1980s by adopting a rigid convertibility scheme of 1 U.S. dollar per 1 Argentine peso and committing to maintain that convertibility.  (In some ways, this action might be likened to going on a gold standard.)  The selection of the dollar for convertibility was odd because there was little tie between the two economies; that would mean that Argentina had fewer means of acquiring dollars as foreign reserves.  In the early 1990s, the economy took off with 10% annual growth and low inflation.  It cannot be said, however, that these were the necessary result of convertibility.  Worse, Argentina did little to change its fiscal policies; it ran deficits of significant size.  Because it was issuing so much debt, its weight in international indices for investment grew (a perverse aspect of indices such as EMBI) and that attracted foreign funds, sometimes justified on the grounds that the very marketability of so much debt was itself a sign of economic strength.

The crises of the mid-90s, in Mexico, Thailand, South Korea, and, worst of all, Russia, shook financial markets.  At this point, the IMF began to prepare for the end of peso convertibility, but Argentina would not budge.  The denouement comes to IMF loans trying to save the situation, the U.S. Treasury changing course to a tougher position, the flight of foreign capital, the uneven adoption of austerity that only slowed economic growth so as to make Argentina's debt burden more unsustainable, and the sudden withdrawal of IMF support.  The financial system collapsed as convertibility was only then ended. 

In sum, unwise policies were held onto for too long.  The global financial forces were too accommodating of the situation and abetted the maintenance of policies such as convertibility and fiscal looseness for longer than was wise.  When the international accommodation ceased, it came at the worst time and too swiftly.  The result was the sufferings of millions.

This book is recommended for its readability and the relevance to other bubbles.

A Short History of Financial Euphoria - John Kenneth Galbraith (Penguin Books, 1994)

A look at three hundred and fifty years of speculative bubbles and the common characteristics of the major events.  The same dynamic, the same belief in something new appears in surprisingly short cycles.  "The world of finance hails the invention of the wheel over and over again, often in a slightly more unstable version."  [332.645]

This very slim volume (113 pages) is written with Galbraith's wit and sharp insight.  During speculative periods one may note the belief that either some new asset has arisen which can be expected to rise in price for an extended time or that others may be fooled, but it will be possible for the shrewd individual to know when to get off the ride, and that doubters are to be condemned.  Common to the rise of bubbles are the shortness of financial memory (previous episodes are forgotten) and the specious association of money with financial genius.  Unfortunately, the financial innovation that arises is usually some variation on leverage which works wonderfully in rising markets and extracts a terrible price in falling ones.  Those enjoying the benefits of leverage are hailed as financial geniuses.  When the crash comes, something other than greed or stupidity is blamed.  In the past, crashes have been blamed on program trading systems, or government reports, or small changes in GDP.  Certainly, the market cannot be at fault because that would violate the central tenet of the faith in the perfect market.  The last crisis covered is the 1987 savings and loan fiasco and the market collapse.  What gives credit to Galbraith's analysis of the common factors in crashes is that the reader can see the same factors and reactions in the dot com bust and in the great collapse of 2008.   

The author then follows major speculative bubbles from the Tulip mania (a review of another, better work on this will appear here eventually) and the South Sea Bubble through the 1929 crash and the 1987 Meltdown.  Because he is trying to cover 350 years in so few pages, the descriptions are useful only as a reminder of other works one might read of these events.  That becomes the weakest part of the book.  The book's real value lies in the common threads it finds.

This book is recommended with the caution noted above.

And the Wolf Finally Came - John P Hoerr (University of Pittsburgh Press, 1988)

A history of the steel industry in the United States and the policies and decisions by management, by labor, by government, and by markets that led to its collapse in the early 1980s.  [338.4766914209]

In the 1980s, the domestic steel industry collapsed rapidly and devastatingly in the Monongahela valley near Pittsburgh.  Steel was not the first major domestic manufacturing industry to wither so severely, but it stands as the forerunner of the collapse of manaufacturing in the United States more broadly.  Then and now, the question of why and who was responsible for the failure has been a difficult and contentious political issue.  The author argues that there is sufficient blame to share by all parties. 

The government, particularly the Reagan Administration, was hostile to unions and worked hard to reduce their influence in the workplace.  The Administration adopted a laissez faire view that could accept the end of the domestic steel industry if that was what the market ruled.

The steel industry had adopted in its early years a disregard for the skills of labor.  They were taken as an undifferentiated mass with nothing to contribute except muscle to the process.  This is best exemplified by the statement of one of US Steel's presidents, "I have always had one rule.  If a workman sticks his head up, hit it."  From 1901 forward, the company strove to keep out any unions that did not already exist in plants.  Wages were kept low.  Local governments and police forces assisted the companies in maintaining labor "peace."  The USWOC labor organizing movement of the 1930s led to brutal struggles and that set the mindset for the years to follow.  Management adopted the attitude that its prerogative was to state how work was to be performed.  When combined with a Taylorite breakdown of tasks into simplest steps, this reduced the role of labor to organic machines and little more.

Labor responded by ceding the decision-making to management.  It concentrated on adherence to the contract.  Labors' job became one of grievance.  It showed little interest in improving work processes and the prevailing culture of the workmen enforced this indifference.

When steel finally came to its crisis, the industry had no tools to cope with a changing environment.  Management could not accept labor's input into decisions, but was willing to call for wage concessions.  Labor, after forty years of success at the negotiating table could not accept wage cuts.  In a period of deep recession, a strike ensued that meant the death of the mills.

The culture of one-sidedness even crippled the communities being impacted by this loss of industry; each community had always acted alone and there was no tradition of cooperation among them.  The depth and breadth of high school sports rivalries throughout the valley reflected the "apartness" of each town. 

The conditions that lead to the closing of manufacturing in each industry may be unique.  Still there is much to learn from every case about the real workings of economics.

This book is recommended.  Anyone familiar with the region should find it very readable.

The (mis) Behavior of Markets - Benoit Mandelbrot (Basic Books, 2004)

One of the pioneers of fractal analysis reviews the role of randomness and turbulence in nature with particular emphasis on financial markets.  [332.01]

This is an important and useful text.  Too often, analysts have swept everything under the rug of the Gaussian (i.e., Normal) distribution.  It represents the victory of ease over analysis.  Assuming the Normal distribution puts tables and easy computations of probability at hand.  Mandelbrot presents evidence that taking the Normal curve as given in many cases when distributions have tails that follow power laws is to err seriously.  In this regard, he presents a critique of much of modern finance that hinges on the Gaussian distribution.      

In fact, one might argue that the real nature of the Black Swan problem is one of misspecification of the underlying probability distribution.  If one reasonably assumes that one probability distribution holds, then an error in selection of that distribution can have significant consequences, especially at the extremes of the distribution.  The Normal distribution, in particular, has quite thin tails: the probability of an event six standard deviations from the mean (the 6 sigma criterion) at 3 per million events is small beyond any plausibility.  All that is guaranteed under Chebyshev's rule, however,  is that the probability of an occurrence at that extreme in no more likely than about 3%.  The difference represents an increase by 10,000 times in probability.  What is assumed rare might, indeed, be disastrously common.    

Unfortunately for this book, its author's personal problems  and history detract from the text.  He insists on reminding the reader that he was a pioneer in the field of fractal analysis.  He revisits previous positions where he was denied tenure or a chair or recognition for his achievement.  Dr. Mandelbrot's reputation is secure; he is not alone in having some of his best work overlooked.  The repetition of these old hurts adds nothing to the text.

This book is recommended with some reservations.

The Great Bull Market - Robert Sobel (W W Norton & Co., 1968)

A history of the economic and financial conditions that drove the bull market of the 1920s.  [332.642097471]

Most histories of the 1920s stock market (and there are some excellent ones) focus on the Crash as the central theme of the book.  This book is refreshing in that it treats the collapse as significant, but not the whole story.

Sobel begins with a description of the immature financial markets of the end of WWI.  Wall Street was not yet a major topic of daily discussion in America.  New York had not yet eclipsed London as the world's financial capital. 

The author looks at a number of individual events that would contribute to the economic growth of the 1920s that fed a real growth in equities and those which added to the speculative frenzy that gave the market its froth.  There were new technologies that were spurred by a new approach to consumer credit that generated, through a macroeconomic multiplier effect, more disposable income in society.  The Washington Naval Conference of 1922 led to some disarmament and a relaxing of tensions following the First World War to further spur consumer confidence.  There was also Winston Churchill's foolish decision to return the United Kingdom to the gold standard at the pre-1914 level.  To help the British prop up the pound, the New York Federal Reserve lowered money market rates that fueled the call money market and buying stocks on margin.  Finally, there was the growth of trusts and informal collusion among major firms, such as steel companies, that increased profits that justified higher stock prices.

What Sobel has done is to re-examine the economic conditions of the 1920s.  He investigates how changes in American society contributed to the forces that created the great bull market.  Although we have a tendency to see the Crash of 1929, in retrospect, as the inevitable result of those forces, Sobel argues hard against that viewpoint.  The reader will find himself reviewing tables of stock prices and other data rather than hearing the famous old stories.  The new insights are worth having.

This book is recommended.

When Genius Failed - Roger Lowenstein (Random House, 2000)

The story of the rise and painful fall of Long-Term Capital Management.  The hedge fund boasted of its ties to Nobel prize-winning economists as a new approach to efficient markets.  The denouement almost brought down several major Wall Street houses.  [332.6]

It is very human to enjoy a tale of hubris and arrogant certainty when the end of the story comes to ruin; such stories have entertained us since the Greeks gave a word for it 2,500 years ago.  The collapse of the Long-Term Capital Management hedge fund fills that same role.   

Because it is a drama of pride and its hazards, the narrative must invest a large share of its print on the individuals involved and their personalities: the traders, the academics, and the bankers.  In this regard, it is much like the work of writers such as Michael Lewis.  The risk in such writing is that the author will become so focused on the personalities that the book flirts with biography rather than with documenting for understanding the events themselves.  It is assumed that the reader will understand the nature of the trades being undertaken, although a brief explanation is given in many cases. 

In the case of LTCM, however, the basic trade was quite simple.  It was a true hedge fund when its trades involved taking two positions on one security to exploit small differences in actual price from theoretical prices.  An example might be selling the instrument short while buying the future of the same instrument when there is a difference that allows arbitrage of these two.  The key problem was that the differences could be so small that the only way to make money on the trades was through massive leverage.  Money would eventually be borrowed from several large banks and those loans would become the problem for the financial markets.  (I find it ironic that economists of the stature of Merton or Scholes could argue for the efficiency of the market - and that same efficiency would force prices to converge eventually - while not recognizing that the momentary inefficiencies might argue  that the entire theory may be imperfect.)  That became the problem.  After the collapse of the Russian ruble in 1997, prices were not converging fast enough.  Every bank which had lent LTCM money was in danger of taking large losses that could destabilize the system.  Wall Street had to find a way out, but it was a close call.

This book is highly recommended.

Devil Take the Hindmost: a history of financial speculation - Edward Chancellor (Penguin Putnam, 2000)

As long as markets have been part of Western society, there have been periods of frantic speculation - of bubbles - that have destroyed some of their participants when the world suddenly changed.  This is a history of some of these events.  [332.645]

A colleague who worked as a financial advisor once told me that he gave a copy of this book to every new client.  In looking over this book again, I must admit that he was acting in his clients' interest if his intention was to warn them about the likely tears that would follow any enthusiasm for the next sure thing. 

The text covers the major speculative frenzies from the South Sea Bubble to the Asian crisis of 1997.  In each, one meets knaves and swindlers and deluded crowds who are driven to get rich easily with their, usually, small capital.  The story always ends up the same, but often in new ways each time.  The catalogue of disasters is long; it includes the South Sea Bubble, the railway mania of the 1840s, the market manipulation of the Gilded Age, the Crash of 1929, the shady trading of the 1980s, and the Japanese collapse of the 1990s.

The author does more than recite the sequence of events.  He adds a commentary that brings many of these stories to bear on current attitudes.  For example, Chancellor draws a set of parallels between the attitudes and approach of the investor in the 1920s bull market and those of the investor of the 1990s.  Such texts remind us of why history is so important.

This book is highly recommended.    

Business Adventures - John Brooks (Weybright and Talley, 1969)

A collection of Brooks' articles published between 1959 and 1969 covering stockholders' meetings, stock market fluctuations, insider trading, non-compete contracts, and a marketing fiasco. [650.0973]

Can there be a better business writer than John Brooks?  The clarity and verve of his articles, many from The New Yorker, convey a sense of a world that now seems long gone: the corporate world of the late 1950s and the 1960s.  This is the age before hedge funds and lords of finance; it is the dying end of the era of white shoes, good clubs, and good schools. 

Among the choices are "One Free Bite" about an engineer being recruited by a competitor and the effort his current employer invested in keeping him from accepting new employment while also reminding him that his career with the current firm was now destroyed.  The article looks at the legal basis of noncompetitive clauses in employment contracts.

Another fine piece is "A Reasonable Amount of Time" which looks at the SEC's difficulties in proving insider trading in a case at Texas Gulf Sulphur.

"Stockholder Season" looks at the culture of the shareholders' meeting and how corporate boards use them to maintain the status quo.

Perhaps the prize of the collection is "The Fate of the Edsel."  The piece asks how one of the world's largest manufacturers with decades of experience in marketing consumer goods could fail so miserably in introducing a new product within their own markets.   Brooks takes the reader through the entire development process from identifying a need, creating a design, setting up a distribution network, and planning a marketing campaign.  The entire project failed miserably within three years of product launch.  Brooks' insights into why are the most surprising.

Confederate Finance - Robert Cecil Todd (University of Georgia Press, 1954)

How a lack of financial infrastructure and policies to avoid taxation led to inflation and the collapse of the Confederate treasury.  A bit detailed on individual bond or note issues or tax methods. [336.75]

The American Conflict of 1861-65 has a large and devoted following of readers and enthusiasts.  The number of books available on individual battles or the character of individual leaders published each year must account for a significant share of American nonfiction.  There are far fewer books, however, that examine the Confederacy as an experiment in government under the principles that led those states to rebellion.  (Two good examples are The Confederate Nation, 1861-1865 by Emory M Thomas and The Confederacy edited by Albert D Kirwin.)  In these works, the financial problems of taxation and financing a war are rarely addressed; the effects of fiscal policies, such as inflation, barter taxation, and consumer goods shortages are described without linking them to any cause.

Todd's book focuses exclusively on the fiscal operations of the Confederate treasury: taxation, currency, debt, and tariffs.     The details, including exact amounts raised by each bond issue or the amounts of currency emitted by the treasury, can obscure the larger themes if one does not read carefully.  Todd allows the messages of Secretary of the Treasury Memminger to the Confederate Congress to carry the impact of each policy decision.

Taxation.  The new government handicapped itself from the start.  There was no mechanism or network of agents to collect direct taxes in 1861.  This led the treasury to defer taxes as a means of finance and to begin financing the government with a loan instead.  When taxes were finally imposed after a year into the war, it was necessary to replace the separate state systems that had each been created.  The first taxes were collected as a quota imposed on the states to make up however they might.  Since many of the later-imposed taxes were direct taxes on assets, a network of assessors was required to value property (including slaves), as well as a network of agents empowered to collect the taxes.  A tax-in-kind was also introduced to collect food and resources for the army.  When an income tax was introduced in a legislative bill, the Senate cut the rates in half.  In the end, adequate taxes were only approved by the Congress in March 1865.  

Coinage.  Each governmental agency was required to pay its own way.  Although Federal mints in Charlotte North Carolina, New Orleans Louisiana, and Dahlonega Georgia had been seized with their stocks of bullion, there was no continuing flow of precious metal that would allow the mints to continue to earn seigniorage that would keep the mints open and provide a more stable means of exchange for the country.  Instead, the bullion was sold for immediate war materiel needs.  Currency, including interest bearing notes, would serve as the medium of exchange.  The treasury would continue to worry about the growing number of notes in circulation - and the risk of inflation - but could not bring about meaningful reductions in the stock of currency.      

Debt.  The Confederate government seemed to prefer debt as a means of finance.  In the first years, even its circulating currency were interest bearing notes issued under successive acts of Congress.  The intent of later loans often included a mechanism for reducing outstanding currency.  By late 1863, this reached the point of compulsory loans as a means of removing currency from circulation.  Almost no foreign loans were available after 1863 and the burden of financing the war fell on an rapidly shrinking geographic base.  Offers of payment in cotton or specie (at the government's discretion) for loan repayments point to a collapsing financial system to be replaced with a crude barter.   

War stresses a nation's economic system and draws heavily on its resources to destroy or waste them.  Todd highlights policy choices and options that weakened the ability of the fledgling government to undertake a conflict with a better organized and fiscally integrated power.  The outcome, if not decided in months, was too easy to foresee. 

This book is recommended, but it may not appeal to a general audience.