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.