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.

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.

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.