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.