Some of my readings

1. Alan Greenspan, Age of Turbulence - disappointing. Mostly I was trying to learn something behind his thinking when he looks at numbers. Except for the instance when he was describing the lack of productivity gains from the Internet (which I’m dubious there ever was any) there was very little to be gained from this book.
2. Gary Katzenstein, Funny Business - illustrates how naive an American can be when he is accepted into an internship at Sony. It is a hilarious look at his life in Japan for the short time he was there. It is a story of cultural differences and at times illustrates the ugliness of Americans abroad. He is able to laugh at his own follies which I think is what made this book a fairly breezy read.
3. Peter Lynch, One Up on Wall Street was so self-effacing that I wondered how Peter Lynch ever made any money.
4. John Perkins, Confessions of an Economic Hit Man - appealed to the conspiracy theorist in me but at the end I had to confess that it all sounded just a little too wild.
5. FM Scherer, International High Technology Competition was a little disappointing. I’m not particularly sure what I had expected but the most interesting parts were definitely the narrative portions of how US industries responded to foreign competition in the high-technology sector. The responses were categorized into “aggressive”, “submissive”, “business-as-usual” as well as the outcomes from these responses. Of particular interest was whether firms increased, cut back or did nothing in terms of R&D expenses. The regression analyses can be considered exploratory since there weren’t really any strong conclusions that could be drawn from them (at least from my point of view). This was mainly because there didn’t seem to be real strong patterns in how firms responded although nationality/international experience of managers seem to be an important factor.
6. Arnold Danielson, Consolidation of Banking, or How Five Banks Bought 50% of America's Biggest Business - this book was outdated the moment it was published since the financial crisis of 2007 came in the heels of its release. For someone with little knowledge of the US banking industry this was a good introduction to how inter-state regulation of banking led to the creation of the bank conglomerates that stood just before the subprime mess. The story continues to unfold however.
7. Mario Livio, The Equation that Couldn’t Be Solved was enjoyable and a good introduction to the lives of Evariste Galois and Niels Abel. It was a little too much to expect the book to teach me about symmetry and group theory however. The question of symmetry seems to be the heart of quantum physics today but it was not handled very well for a novice like myself. Like many pop science books the explanations were forgotten after the last page.

Rules based or principles based

Lessons from Enron based on Peter Elkind and Bethany McLean’s The Smartest Guys in the Room and Kurt Eichenwald’s Conspiracy of Fools. One of the reasons I read these books was to understand what exactly it was that Enron did - i.e the structure of the SIVs etc. Neither book helped. Both tried to explain it but it made no sense to me.

And perhaps it is because that they made no sense at all. The accountants (Fastow and Causey among others at Enron and Duncan at Arthur Andersen) really seemed to do what they could to inflate profits using whatever machinations they could under the existing rules at the time. It was all about following the rules and stretching their definitions as far as possible. It really seemed as the Elkind and McLean book pointed out that in order to produce a duck and if they did not have a duck they would get a pig, stick a yellow beak on it, paint its feet yellow and paste feathers on it and call it a duck just because the rules defined a duck as an animal with yellow feet and beak and white feathers.

Two factors seemed play a large role - rules based accounting and the ability to mark to market. The latter allowed the accountants to manipulate cash flow and to use definitions and rules to exclude themselves from being classified as a trading firm. Market failure played a role in this and in this sense I mean failure of free markets. All the information on what Enron was doing was available but analysts (e.g. John Olson) who pointed out Enron’s weaknesses were fired by the investment banks who wanted Enron’s business.

Corporate shenanigans will always occur especially during boom and the answer may be that it will have to be a little bit of both - rules and principles although it’s hard to see how it can possibly work. Both books were a bit of a letdown. I thought that I was reading about two different companies. Eichenwald’s book gives less emphasis on the role of Lou Pai and focuses more on Fastow and Kopper.  This was the book that I thought would provide most insight but it reads more like a diary of their activities. Elkind and McLean’s book provided a broader sweep and the narrative is a little better but I wouldn’t recommend either book. I’m a little ambivalent about the role of Lay and Skilling. Neither book convinced me that they knew what was going on but it is hard to believe that they did not know that nothing was going on in order for Enron to meet analyst expectations quarter after quarter. One thing clear was that greed conquers all. Nothing could get in the way of their greed.

Two pop economist books

The two books Naked Economics by Chris Whelan and The Undercover Economist by Tim Harford seem to have common elements of the authors discussing coffee, beer, and wine. And let us not forget the condescending I know-it-all-because-I-am-an-economist tone that people like me use when we are talking down to those who just don’t understand. There is nothing more annoying to me than to read a book that sounds like myself. If you can stand being spoken down to because you want to learn how economists think then these books are for you.

Unfortunately these two authors are journalists pretending to be economists even though they do have graduate degrees in economics. One of them - I forget which now and I’m not sure I really care anymore - talks about the evils of certification and how it restricts the supply of services by discussing how electricians need to be certified and how this has increased the price of their services. (I’m not disagreeing with the analysis here and I probably would have used the same tone.) He gloatingly points out that people are literally dying because they are now doing electrical work themselves. Of course this is anecdotal evidence - if he truly were an economist he would have said something like this: “The impact of certification of electricians on accidental electricians has increased by a factor of 16 as a result of certification requirements” or something like that - but then again, they’re journalists after all so they do have to make it intelligible to the lay audience and rely on anecdotes rather than statistics.

Character revelation

Two books that I really enjoyed were Kazuo Ishiguro’s Remains of the Day and Iris Murdoch’s The Sea, The Sea - the former more than the latter. In both books, the characters’ character as it were are revealed over the course of the books and since they are in the first person narrative, the personality of the narrator is also revealed. In this sense it was page turning because I enjoyed most the character development that was in these books.

I was expecting something similar from Lionel Shriver’s We Have to Talk About Kevin but was disappointed. The narrator didn’t really come off as someone with a superiority complex - perhaps the voice didn’t work to this effect - it took Kevin to reveal to me that his mom had one in an accusation. I was also expecting some evolution in the personalities of Eva and Kevin but right off the bat they were created as rigid unchanging characters which was disappointing to me only because I was expecting some nuance and gray areas as well as some moral ambiguity in the entire story. I was expecting something like this: Eva who didn’t want to be a mother to Kevin grows to love him while Kevin who was born ‘difficult’ rather than ‘evil’ develops attachment difficulties attaching to someone despite the warmth of the family. Overall, the sense was that all the characters were somehow caricatures.

GS, Investment Banking and financial WMD

The blogosphere and the media are all agog over this NYT opinion piece of why some investment banker is leaving Goldman Sachs. (Other NYT coverage here.) I believe that there has been no real moral shift at GS - he calls it a “decline in moral fiber”. Coming off of reading two books on the investment banking industry in the 90s it strikes me that investment banking then is no different than it is now.

In Roger Lowenstein’s When Genius Failed, GS comes off badly. First, it  was alleged that even as they were trying to find a buyer for LTCM, their unprecedented access to LTCM’s trading positions allowed them to dump their own positions ahead of LTCM in case LTCM failed. Second, while participating in the bail out of LTCM, GS was also acting as a banker for Warren Buffet, throwing in a proposal at the last minute after the Fed meeting that Buffet would buy up LTCM. In general, my impression of GS was that while nothing that they have done cannot be explained by rational profit maximization they were in it for themselves rather than saving the financial system (if they actually believed in systemic risk). I have said this elsewhere in this blog but I don’t believe that systemic risk by itself would have irreparably harmed the economy and especially now given that the investment banks themselves already seem to believe that this is the case. I refer to the fact that GS was willing to jeopardize the trust of other investment banks by double dealing given that the agreement to bail out LTCM was already tenuous. (Read the chapter on the bail out and see if you get the same impression). 


Recall also that GS allegedly participated in hiding the extent of financial problems in Greece.

Frank Partnoy’s F.I.A.S.C.O. was a hoot. It was more enjoyable than Liar’s Poker especially his description of some of the deals that they put together to get a AAA rating and then to sell these derivatives as “bonds”. Partnoy left Morgan Stanley after 3 years, compared to this NYT opinion piece banker who stayed for 12 years! My reading from both these books is that atmosphere in investment banking has not changed all that much. The only thing I was surprised about was that GS bankers only wanted to rip their clients off versus MS bankers who wanted to “rip their faces off” and “go out and kill someone” with their deals. In Partnoy’s time the deals investment banks were responsible for led to the derivatives disasters in Orange County, Procter and Gamble and so on.

If derivatives are indeed the financial weapons of mass destruction then investment bankers are committing financial genocide and for this they should stand trial for crimes against the economic community.

Europe at the crossroads

… measurement problems may be the reason why there are differences among the major statistical bases to estimate the level of GDP per capita and their determinants. For the IMF, the Euro Area does not have a productivity problem since, according to its estimates, hourly productivity is higher in the Euro Area than in the US, and all the differences in per capita GDP are due solely to the lower number of hours worked in the EU. For EUROSTAT, based on its structural indicators, however, a completely different picture emerges, suggesting that 45 percent of the gap in living standards between the Euro Area and the US are due to lower productivity per hour, with the 55 percent due to lower number of hours worked. Finally, the OECD estimates suggest a position that lies roughly between the two previous estimates, …, one-third of the GDP per capita difference with the US is due to lower productivity and two-thirds are due to the lower number of hours worked.

What are the measurement problems? Some but not all are due to the use of hedonic pricing in constructing price indices especially in the US where it is applied to ICT and cars and durable goods. Another is the fact that the US uses a higher depreciation for capital in the first year while the EU uses the same rate of depreciation every year.


This is from Europe at the Crossroad by Guillermo de la Dehesa, a summary of various OECD and IMF reports. Less insightful than expected.

Some crisis and economics readings

Crisis Economics by Nouriel Roubini and Stephen Mihm. The NYT review is here and here and another one is here. I was hoping for a radical new economic approach to thinking about crisis but this is not what the book is about. It gives a nice summary of the events and ideas that led to the crisis although it did not shed any new light. I was hoping for something radical on the part about reforms. Unfortunately this was not the place for any radical departure from the current debate.

The only proposal that sounded radical was to break up the big banks but this has already been put forth by different parties, among them Mark Thoma. All in all, I was disappointed by the book but some may find it a good place to start.

The Origins of Financial Crises by George Cooper was where I found the “radical proposal” that  I was looking for which I had hoped that Roubini would be brave and daring enough to espouse. This proposal is that central banks should actively seek to pop bubbles, i.e. take the punch bowl away from the party when the fun is just beginning. Some reviews are here, here and here. The argument that the origins of all financial crises is excess liquidity (or his preferred measure is credit creation or some broad definition of money supply) is nothing new. However, he manages to craft his arguments very simply in terms of the Minsky’s financial instability hypothesis.

These were the best parts of the book but like many economists, Cooper suffers from the same physics envy that brought the financial profession into the brink of self destruction not unlike the current crisis, dot-com valuation, and LTCM. His proposal that central banks can work to pop bubbles and in fact to manage the economy by creating smaller waves of small booms and busts rather than allowing a bubble to expand to such an extent as to create a systemic risk is very well argued. In fact it is too simply argued using as an analogy (I think) James Clerk Maxwell’s paper “On Governors” which is included as an appendix. Not surprisingly, Maxwell’s paper which is a predecessor to control theory and systems and deals with controlling the steam engine is filled with differential equations again not unlike much of finance theory and macroeconomics.

The weakest link in his argument I think is that Cooper seems to believe that the macroeconomy can respond to various central bank levers such as interest rate within some reasonable uncertainty bounds and is hence “controllable” but in reality monetary policy responds with long and variable lags. However, I am not convinced that his argument can simply be dismissed just because of this. The idea of Keynesian activism however is to smooth out the booms and busts of the economy, not to create booms and busts because of unsustainable booms. Perhaps it is time to revise the ideas of what Keynesian activism should be.

The Road from Ruin by Matthew Bishop and Michael Green was more enjoyable than I had expected. A review is available here. It is a very useful account of various things that have happened in financial history and why we need to learn (or relearn some of the lessons). Unlike Cooper, the lesson they take from history is the bubbles are a result of financial innovations rather than credit creation. For instance, if securitization is to be blamed then it should be banned or more highly regulated. The authors argue however that it was this higher degree of regulation that prolonged the great recession (p. 43). In may ways the authors cheer for free markets and the benefits that they have brought and tend to tread more lightly on the costs.

Plight of the Fortune Tellers by Riccardo Rebonato starts out with the premise that the current state of financial risk management is not working. It is too heavily dependent on measurement when measurement cannot be precise enough and when it can be precisely measured what can be measured is not relevant. A review is available here. This was what grabbed me but unfortunately, the book was not able to hold me. It goes through a discussion of Bayesian statistics and value-at-risk but what he actually wants to say essentially comes down to the fact that risk management is all judgment. We have a lot of tools that can help us make a decision but when it comes down to making some kind of decision it is all judgment and nothing else. We should not pretend that statistics, theory, data and computers are going to be able to quantify the risks and uncertainties precisely because they won’t.

And the Money Kept Rolling In (and out) by Paul Blustein was in some ways belated and in someways timely in light of the current Euro crisis. It is again a reminder of how tenuous the recovery was in Argentina and still is even today. Though the book is not as good as The Chastening it has the same characteristics of access to the cast of characters and internal IMF documents. (The phrase “abc was and still is a confidential internal IMF document” pretty much fills the end notes of the book.)

What I’ve been reading

1. Nineteenth Street NW by Rex Ghosh: The characters were somewhat cliched and the plot predictable but Ghosh writes well. In a way the biggest weakness of the book was to focus more on the financial “thriller” aspect rather than character development. There were flashes of character development that were worth exploring and might have worked better if the book had been turned  into some kind of a “drama” rather than a thriller.
2. The Curious Incident of the Dog in the Nighttime by Mark Haddon: Somewhat enjoyable. I am a little divided on this in that while the plot was predictable I felt baited and switched for some inexplicable reason. There was a somewhat unexpected reference to Malaysia when the protagonist talked about “orang utans” which took me by surprise.
3. Case Histories by Kate Atkinson: I was taken in by all the endorsements, especially Stephen King’s: “Not just the best novel I read this year, but the best mystery of the decade..... I defy any reader not to feel a combination of delight and amazement.” In my case, I felt neither - in fact I felt deceived. This was chick lit disguised as a mystery. If it had been just chick lit I might have enjoyed it but the fact that it was being marketed as a mystery was a huge letdown. What was especially annoying is the device the author uses to keep the reader reading is to withhold key facts to be revealed later. I can take this once or twice in a book but she does this continuously through the use of flash backs and different points of views. Generally I feel that the reader should know what the protagonist knows the same time the character in the book knows it.
4. The Geography of Bliss by Eric Weiner: This was enjoyable and good for a few chuckles. I read this while we were in Yellowstone and it’s a good vacation book.
5. China Mountain Zhang by Maureen McHugh: I had to include the links because I am not quite sure to make of it. It was a good read and I agree with the review that says its a lot like reading Kim Stanley Robinson. Nothing much really happens but the setting and description of life in the future with China being the dominant economic force and America under socialist influences were particularly interesting.
6. The Peace War and Marooned in Realtime by Vernor Vinge: Pretty good reads but not “deep” in the sense of McHugh’s book. Some have described Vinge as “hard SF” but I did not find these to be the case, especially compared to Charles Stross’ Accelerando.

Three books on consulting

The three books are:

1. Consulting Demons by Lewis Pinault
2. Dangerous Company by James O’Shea and Charles Madigan
3. The Witch Doctors by John Micklewait and Adrian Wooldridge

Pinault’s book is a personal look at the consulting industry and was the most enjoyable read. Not surprisingly it is apparently the only one out of the three that are still in print. While the subtitle of the book is “Inside the Unscrupulous World of Global Corporate Consulting”, to me it was no more unscrupulous than say the current subprime crisis. Ah yes, they are only all rationally responding to incentives. There was a surprising reference to Malaysia and Kuala Lumpur in the book while Pinault was in Singapore. He referred to going to a trip as ‘going out-station’. Yes, that was and probably still is the phrase we used when growing up. Surprisingly, management guru CK Prahalad did not come out well in this book. He was caricatured as a “self-help tear-them-down-then-build-them-up’ personality that bordered on messianic and maniacal.

In contrast to the up close and personal look of Pinault, O’Shea and Madigan, whose book is subtitled ‘Management Consultants and the Businesses they Save and Ruin’, take a look at a series of consulting ‘projects’ (if you will) or rather what happened to various companies who retained the the ‘expertise’ of management consultants. Some of the cases such as Bain and Company’s relationship with Guiness and the role they played in the Distiller takeover are recounted. This was interesting for me since it was the first time reading it. Likewise an account of how Figgie International went into bankruptcy as a result of too many consultants trying to do too much was also entertaining. Everything else was rather so-so. The authors tried to cover each large consulting firm through the lens of a company it advised and this approach can be interesting or not and mostly it was not. Many of the cases such as Gemini Consulting’s work with Cigna was at the time, too much in its infancy to draw any strong conclusions.

The last book (by which time I think I already had my fill) was subtitled ‘Making Sense of the Management Gurus’. This was written in a historical context beginning with Frederick Taylor but focusing on and Peter Drucker and Tom Peters. In many ways, it is a journalist’s attempt at synthesizing the fads that seem to come and go in management theory. They do an admirable job - and what they say is for the most part sensible. For instance, they don’t condemn all the reorganization fad that consultants sold and companies fell for. They note when it worked and when it didn’t as well as why it worked at this time but not at another time and so forth. However, they also fall into what I consider a journalistic trap of something that is quirky and unexpected must therefore be good. One example is the a company that sends its managers to Disney to be imagineers for a week (or something similar). They don’t say this good or bad, yet their citing it seems to indicate that they think that this novel approach is something to be celebrated. Their attempt is mainly a synthesis by anecdotes or rather management theory by anecdotes which perhaps is all management consulting is.

The shape of the world to come

The Shape of the World to Come by Laurent Cohen-Tanugi was a little disappointing. I was hoping for some bold predictions but instead got some qualified ifs and perhaps. The book mainly delves into the implications of a decline in American and European influence in the geopolitical world, the rise of radical Islam, and the rising economic prowess of BRICs and how the America and Europe still has relevance. The main thrust of the book I thought was his discussion of the globalization of politics which while sounds nice is really about dealing with global issues at a multilateral level. A profile of Laurent Cohen-Tanugi is here. A presentation that he did for his book at the Carnegie Council is here. The book’s website says that “He is a regular columnist for Le Monde and Les Echos, sits on the boards of several international think tanks, and was recently appointed by the French government to reflect on the European Union's strategy in the global economy.” It’s nice to get a job whose description is to “reflect”. (only in France?)

Excerpts from his discussion at Carnegie:
What the book is really about is an analysis of the world we are entering into from a geopolitical perspective and how Americans and Europeans should prepare for it. It is really an attempt to analyze the new geopolitical paradigm that we are witnessing. In fact, it is quite surprising that less than 20 years after the end of the Cold War, the end of the bipolar world that structured international relations since 1945, we are already witnessing another change of historic significance. I think that this succession of two very major changes probably explains why there seems to still be a gap in perception that we are entering into a new world. It is precisely to try to fill this gap that I wrote this book.

… tremendous shift of economic power to non-Western countries that is happening now and will continue to happen in the next decades. What is worth noting is that this rebalancing of economic hierarchies is the product of globalization, as you were saying. That is, it is through the liberalization of international trade and investment, through the decision of India and China—China first, India ten years later—to open their borders, that these countries finally took off. That takeoff of massive importance is the origin of this transfer of wealth to the East.

What we are seeing is that globalization is no longer purely an economic and social phenomenon. It's not only about job creation or job destruction. It is also the most significant transformative force of global geopolitics. Not only that, it is a return of traditional geopolitics in the global economy.

… The main argument that the book is making in that respect is that, contrary to the liberal view of commerce as an instrument of peace and harmony among nations—which remains true, of course—the world we are entering into is, in fact, not so flat. It's not the flat world that Tom Friedman is advertising. It is much more complex than that. Liberalization is producing as much conflict as it is producing harmony, as much fragmentation as it is producing homogenization.

I found the book less interesting than the overall ideas and the book itself does little to advance these ideas.

Reading Posner on the financial crisis

The books are The Crisis of Capitalist Democracy, which preceded A Failure of Capitalism: The Crisis of '08 and the Descent into Depression. Here is Robert Solow's reading of the latter. Both books have a feel of being written in a hurry and as such sounds disjointed in its narrative. The first book is essentially an impression formed as the crisis evolved and is light on prescription and heavier on description though not quite as moving as other books on the crisis. I detected a shift from the earlier book in terms of causes of the financial crisis. The first book concludes as most onlookers did at the time that excessive leverage was one of the prime causes of the crisis. While not blaming leverage per se, Posner discusses this as well as other factors that may have brought about the crisis. In the latter book, he argues that the causes of the crisis stem from low interest rates which caused a bubble to form, as well as lax supervision in the belief that markets would be self-regulating since the ideology of efficient markets had taken hold.

At least, this is my reading of it and I am surprised that Solow did not touch on this aspect at all. (See also a review from the NYT which has a similar interpretation as this.) Coming from Posner who is a well known conservative and from the bedrock of free markets of the University of Chicago, I found this to be quite a turn around and in parts of the latter book he admits this freely. All the other 'causes' such as greed, CEO pay, excessive leverage, creation of new derivatives can be explained rationally from these two factors. (See also here.) In this sense, the second book is better than the first and what is also refreshing is his admission that he really does not see anything from current or pending legislative reforms that would avoid another crisis. While he admits there are many good ideas out there such as counter-cyclical leverage requirements, he is not optimistic that these will come to pass.

In all, the second book is better than the first though it could have been a better book had it been more tightly edited. In some passages, he sounds as though he is rambling and going off on a tangent.

Two books on dot-com businesses

One was Blown to Bits by Philip Evans and Thomas Wurster which is an overblown gimmicky book about how to take advantage of the dot com boom back in 2000. (I'm a little late to the party.) It's filled with hyperbole and one liners that management consultants use to peddle their trade to unsuspecting CEOs: How do you think we should take advantage of the Internet? Their response: First, you have to take your current business and blow it up, dude. Then you have to think like an insurgent and blow your competition up. (Hence the title of their book.) Any question is answered by: Blow it up.

The second more useful book is by Patricia Seybold, Customers.com with detailed case studies of what works and what doesn't. The book is very informative but unfortunately what she describes as cutting edge then is average now and unfortunately, for web sites and companies that have achieved the level of penetration and implementation that she describes have nowhere to go but down.

Some of my recent experiences: A tree fell on our phone line and I tried to get Verizon to come out to hang it back up. The web offered no help after drilling through all the pages on Tech Support, I couldn't come up with a phone number to call except the main phone number (more on this later.) So I submitted a form for advice which came back with a response that said we cannot help you, please call the main number. So I do and to actually schedule a service is next to impossible with the obtuse menus which only gave me my account balance. Seriously! After calling the number five times and going through different paths of the system I finally stumbled on an actual live person. It really couldn't get any harder.

Trying to use miles on a partner airline is incredibly is impossible on the web – yes, you have to call someone! In this day and age, can you imagine! While scheduling flights, hotel reservations etc by web is a no-brainer, the technologies do not scale down. Yes, I would love to be able to do this for dentists, doctors, etc. Imagine, having to talk to some one for something as simple as this!

What is also interesting to note is that while companies like Dell have been successful selling over the web they have also begun reselling via big box stores again and while companies like Gateway who used to be successful with a web presence have been 'blown to bits' by Dell and HP so that they are now selling exclusively in stores. In some ways this reflects the fact that buying computers is no longer as complicated as it used to be and requires less customization than it used to.

Two books on crisis events that I never even heard about

The first is by The Greatest Trade Ever by Gregory Zuckerman. This is essentially a story of how a group 'mavericks' who believed that the country was gripped in a frenzy of the housing bubble were determined to short the market and how they figured out how the way to do it. The title of the book refers to the short selling done by John Paulson a hedge fund manager with very little knowledge of the mortgage market although it is also a story of market incompleteness – mortgages couldn't be shorted directly, nor could their securitized versions. Neither could credit default swaps until the contracts became more or less standardized (at least that was my reading of it) and the emergence of the ABX index eventually made it easier to short the market. Those who were able to profit from the subprime crisis believe of course that had they been able to directly short the market, the bubble would not have been quite as frothy. This is also a story of how Deutsche Bank led by Greg Lippman shorted the market even as his counterparts were going long. There are also other stories of traders trying to stay liquid as the markets moved against them in their short positions. All in all a good read.

The second is The Quants by Scott Patterson. It details the meltdown they suffered in August 2007 (something that I wasn't even aware of) as well as the history of hedge funds – mainly Ed Thorp's role in developing quantitative methods to exploit mispricing in the convertible bond market for corporate bonds. I view the role of the quants as peripheral to the crisis although the book explains how stock prices can rise in the midst of a crisis as the Dow was doing. The quants have to buy massive amounts of stock to return to the prime brokerages the stock they borrowed as they attempt to unwind their positions, if I understand this correctly. The book also offers small glimpses into the their world and it would seem that all of the characters have a penchant for gambling (card counting in Vegas seems to be an induction rite while in college) and graduating to high stakes poker after they have made their billions. The book started off really badly (for me) though:

Peter Mueller stepped into the posh Versailles Room of the century- old St. Regis Hotel in midtown Manhattan and took in the glittering scene in a glance. It wasn’t the trio of cut-glass chandeliers hung from a gilt-laden ceiling that caught his attention, nor the pair of antique floor-to-ceiling mirrors to his left, nor the guests’ svelte Armani suits and gem-studded dresses. Something else in the air made him smile: the smell of money. And the sweet perfume of something he loved even more: pure unbridled testosterone fueled competition.

Fortunately, the prose got better (or at least not worse) later.

These two events caught me somewhat by surprise, especially since I thought I was keeping tabs on the crisis. I had heard of John Paulson's trade long after the fact when he had to testify

Lehman books and others

The “other” is Charles Gasparino's Sellout: How Three Decades of Wall Street Greed and Government Mismanagement Destroyed the Global Financial System and the Lehman books are Vicky Ward's Devil's Casino and A Colossal Failure of Common Sense by Lawrence McDonald.

Unexpectedly, of the three, the Gasparino book was the better. Unexpectedly also, the argument of the sub-title that government mismanagement destroyed our lives was not pushed as hard as I thought it would be, i.e., I thought that Fannie and Freddie would be denigrated and blamed but they were not blamed as loudly as I had expected. There is a trend throughout the book that the government actions essentially sowed the seeds for the next bubble – that when regulation clamped down on sector of the market e.g. junk bonds and Mike Milken, Wall Street merely moved on the the dot-coms and when that sector went bust, they just moved on to MBS. I thought that this book was actually a pretty good overview of the entire crisis.

The Lehman books were a bust. Vicky Ward's was better written and only the first half covered the crisis, with the latter part of the book devoted to Lehman's rise after its spinoff from American Express. It largely follows the lives of Tom Tucker, Joe Gregory, Dick Fuld, Chris Pettit whom she tries to portray as the person who was most responsible for its rise and the demise of Lehman was a rejection of Pettit's values. Its mostly a tale of betrayal as Pettit's demise set off a power struggle resulting in the rise of Dick Fuld and Joe Gregory who begin to live large. This was a nicely paced book and easy to read. MacDonald's book was a disappointment since I had expected an “insider” view. Unfortunately, MacDonald was one of maybe 5000 vice presidents in Lehman and was fired before the full Lehman crisis. His claim that Paulson hated Fuld's guts was not substantiated by other accounts (e.g. Ward, Wessel or Paulson). He also depicted the exit of Joe Gregory and Erin Callan as being a coup led by Bart MacDade which is not substantiated either. So much for insider views.

Financial crisis event books

These are two: David Wessel's In Fed We Trust and Henry Paulson's On the Brink. Wessel's book is a much better read but the Paulson book complements the former. For instance, Wessel claims that George Bush was largely absent during the crisis as it unfolded but in some ways Paulson's book contradicts this. Paulson also provides the political drama and backdrop that were largely absent from Wessel's book. In many ways, his book highlights the political elements that were absent in many considerations of my earlier posts on the crisis. The only thing I found unbelievable was his claim that all along he thought that TARP would be used for asset purchases and the only reason he had not proposed it was it was politically unpalatable (at least that was how I read it).

One thing that both books made extremely clear to me was that despite the fact that I thought that the Fed and Treasury had powers to take over failing banks and replace management, they clearly thought they didn't. The role of lawyers in the Fed and Treasury was emphasized at critical points. Bernanke and Paulson sought their opinions even on whether bailing out AIG by invoking a clause in the Fed charter that allowed the Fed to step in when it deemed it was absolutely necessary was legal. Mark Thoma concurs:


“Since the government didn't have resolution authority for banks in the shadow system, it only had two choices when faced with the collapse of a large bank like Bear Stearns or Lehman. Let the bank fail and risk a domino effect that brings the entire system down and potentially creates a depression, or bail out the systemically important bank -- including management and equity holders (investors). [Some claim the government did, in fact, have other choices, but I don't think the key players in the Fed and Treasury believed that they had the authority they needed to take over the large banks, remove management, and put them through traditional FDIC-like procedures that impose losses on investors.] By choosing to bail out the banks, they also bailed out those who created the mess. This left the appearance that the wealthy and well-connected get bailed out, while the middle and lower classes get the bill. Typical households really can't see what they gained from the bailout since, for many, the counterfactual where the system melts down without a bailout is either hard to imagine or not believed. They don't understand, for example, why the government helping them to pay off loans wouldn't have helped banks just as much as a direct bailout. "Where was my bailout?" they wonder.”

Wessel's book was more enjoyable perhaps because it was more economics than politics. Characters like Jeff Lacker and Charles Plosser come out looking like naysayers – crying that the the crisis was not something to be worried about. Wessel seems to think that Bernanke's consensus style was sometimes a hindrance to getting things done. He refers to it as a economics seminar approach to decision making. I don't know which economics seminars Wessel has been attending (or Bernanke for that matter) but most of the seminars I was at in Rochester were nothing short of contentious. One speaker even refused to continue talking because he kept being challenged by an attendee. For instance, here's Andrew Gelman in his tribute to statistician Arnold Zeller (emphasis mine): “No matter who the speaker was, Zeller was always interrupting, asking questions, giving his own views. Not in that aggressive econ-seminar style that we all know and hate ...”

What I was looking for in both books however was severely missing and is highlighted in the Thoma's piece. Neither Bernanke nor Paulson could clearly articulate what would have happened to the economy if the investment banks (and AIG and Fannie/Freddie) were simply allowed to fail. Intoning “God help us all” if the financial system collapsed is not a scenario. So in some ways, while I appreciated more the nuances of the bailout and why they did what they did I am still far from fully convinced that the bailout was necessary.

I think that when you are a participant you are biased toward believing in your priors. There is no doubt in my mind that both Bernanke and Paulson felt that the bailout was necessary. Likewise, I believe that if there were a crisis in sociology for instance, that there is a possibility that the entire field would collapse because fewer and fewer people are becoming sociologists, the field would be crying for a bailout as well (as would makers of horse drawn buggies or automobile makers – all intoning “God help us all”).

Nor were any of the books very good at linking how the collapse of the financial system affected Main Street via the unemployment rate. Were the effects psychological? E.g. “Oh my God, the financial system is collapsing, I better lay off all my workers!” or was it direct? E.g. “Oh my God, the commercial paper market has frozen solid and I better lay of all my workers!”

Stiglitz and Davis reading

I found Freefall by Joseph Stiglitz more of a rant than anything else although some times buried within the chapters there would be a nugget of information or two. Unfortunately, they must not have been very valuable nuggets since I can barely recall what they were. I thought that overall the book was too much of score-settling than a rational discourse of the events. In one book (but fortunately not the same chapter) he criticizes the authorities for adopting a too big to fail policy but at the same time criticizes them for letting Lehman fail. This inconsistency annoyed me more than anything else and I found it hard to get through the rest of the book after that.

The tenor of the writing improves half way through the book and I think the few chapters or so hit the correct note on what the book should have sounded like. These are the chapters on policy recommendations and what the administration could have done better. I really wish he would stop beating the IMF tree and bringing up the Asian crisis. Yes, we get it but it really is beside the point here. I had thought that he would delve more deeply into the intellectual debate within economics and how free markets triumphed and even converted some one like Larry Summers but he didn't get into the academic part of the debate. This would be left to two other books (reviews of How Markets Fail and The Myth of the Rational Market later.)

On the other hand, Managed by the Markets by Gerald Davis was a very nice historical overview of how finance has managed to dominate the economy. I found it easier to read than expected and actually enjoyed it more than I thought I would. (Usually, history! Uggh!)

Summer reading

I'm not sure why certain books are considered summer reading versus non-summer reading but let's just call these what I managed to get through over the summer.

1. Arlington Road by Rachel Cusk
2. Mitford series by Jan Karon
3. Under the Tuscan Sun by Frances Mayes
4. Penelopiad by Margaret Atwood
5. China Road by Rob Gifford

Rachel Cusk's Arlington Road about one day in the lives of four women was riveting even though nothing really “happens”. This is truly the most remarkable example of what my writing professor always advised: “Show not tell” and through the events of the day, and how the women react to them, Rachel Cusk was able to show us their personalities and biases. I had this recommended via Half Changed World who unfortunately isn't blogging as much anymore.

The first four books in the Mitford series were enjoyable. (I bought the pack.) I kept having this strange nagging thought though: What if “terrorists” did not come from the mountains of Hindu Kush but from from places like Mitford, and instead of saying “God is Great” they would say “Peace be with you”.

Frances Mayes' Under a Tuscan Sun was disappointing though it's hard to say what I was expecting. Her tale of renovating a house in Tuscany and all the obstacles that came up were delightful yet it is difficult to say how really difficult it is – is language really that tough a barrier? From what I can tell it can't be all that difficult otherwise the renovation would have been even harder. In all the book left me feeling rather flat. Perhaps I'm just not as enchanted with Tuscany as I thought I would be.

Penelopiad was funny in parts (she calls Odysseus a liar) and enjoyable (and it was short!)

China Road is the only book I've read so far on China's transformation and it was extremely interesting. I had heard some of Gifford's podcasts/broadcasts on NPR and knew that he was a fluent Mandarin speaker. (I had caught the segment where he stands in for a preacher in a small town and delivered the Sunday sermon in Mandarin.) His travels across China and his recounting of his experiences were very well written. The only issue that I had was his very Western perspective on the plight of Uyghurs. While its true that the Uyghurs are being assimilated at an increasing rate – in order to move socially within the Han Chinese society, as well as due to Han immigration into traditionally Uyghur towns, their plight really isn't that much different from what happened to the Welsh or the Scots as Gifford points out. Yet why does he feel that the Uyghurs are being oppressed by the Chinese but the Welsh or Scots are not oppressed by the British or the Anglo-Saxons (or whatever?) What does he think of immigrants who begin to 'lose' their culture as they assimilate into the population of their host country? In many ways, I thought that his take on the Uyghurs was not so much an appreciation of these issues but more of a way to criticize the Chinese government.

Pre-vacation trip reading

1. John Burdett (Bangkok 8, Bangkok Tattoo and Bangkok Haunts) – Enjoyable although less so with each subsequent novel. Burdett starts from gritty to weird to supernatural. I don't know about Thais but if I were one, I'd be insulted by his portrayal of Thai society – all cops are corrupt with the Army being worse than the police and all women in Bangkok are either prostitutes or are downtrodden maids. Men are either drug addicts or pimps and all farang are johns or of dubious character. Do Thai detectives really use regular and motorcycle taxis to get around? Burdett is either an astute observer of Thai society or has an inside track (probably the latter) – Thai society is extremely hierarchical though to the Western observer it is not entirely obvious. How long one wais to another signifies their rank in society, likewise in the way one person addresses another. One of the first things that Thais do when they meet each other is to try to determine who has seniority, theyby earning the honorific 'Pi'. Sometimes they try to do this discreetly by asking a friend of a friend or when all else fails, the direct method is used.

2. Mai Pen Rai means Never Mind by Carol Hollinger. Almost 50 years old, this book was still extremely enjoyable. Self-effacing and humorous, I get the impression that Carol Hollinger is not as helpless as she makes herself out to be – and this is true because as a farang in Bangkok who does not speak the language, she somehow manages to get a teaching job at Chulalongkorn University, drives herself all over Bangkok as well as goes on trips outside Bangkok without her husband while enjoying parties almost every weekend. She only devotes one chapter to raising her 7-year old daughter who was put into a British school and it almost seemed like her daughter spent more time in the company of maids and nannies than with her. I suppose this was what a liberated woman in the 60s was supposed to do.

3. Bangkok Days by Lawrence Osbourne. It's hard to tell how much of this dark travel writing is true but this book was more enjoyable than I had expected. It opened up a whole new view of Bangkok - drug addicts (ya ba), the seamier side of Klong Toey by the river where the slaughterhouses for poultry is, the relationship between Bangkok hi-so and their maids, Sukhumvit Road in a way that I would never have seen it.

4. Christopher Moore's Minor Wife. I picked this up on one of our trips and have only just gotten to it. Unlike Burdett, Moore's characters seem more real and gritty and depicts a harder, more scrabbled life of ordinary Thais (albeit from a farang view) than Burdett does. Burdett's characters and scenes seemed more air-brushed while Moore's are somewhat darker. His farang detective is more Sam Spade and at least the Thai police (while political and fight over jurisdiction), are not all corrupt or dishonest – just regular folks trying to do their jobs.

5. A Malaysian Journey by Rehman Rashid. This book brought back a lot of memories growing up although the author preceded me by 10 years. It also made me realized how sheltered and naïve I was growing up. Not surprisingly, a large chunk of the book deals with race relations and the New Economic Policy and the bumiputras. I am less optimistic than he is about race relations in Malaysia. This book cries for a sequel but does not appear to be in the offing.

Descent into Chaos

On NATO deployment:

... the list of caveats about what countries would and would not do grew to the size of a telephone directory. ... The Germans had the most bizarre list of caveats. Their troops could not operate after dark; Afghan soldiers could not travel on German helicopters; and an ambulance had to accompany every patrol, thereby making it impossible to conduct foot patrols in the mountains. ... To Western and Afghan aid workers on the ground, these NATO troops acted like scared rabbits rather than professional soldiers. Aid workers cynically commented that the first ones into a dangerous region were the aid agencies, followed by the UN and other international organizations while the last ones in were the heavily armed NATO soldiers, who were then disallowed from protecting any of the above.

To be fair, Rashid points out that it was mainly the politicians back home who constrained the soldiers and disproportionate lives were lost by the Americans, British, and Canadians in the NATO deployments in Afghanistan.

This book was a good follow up from Steve Coll's Ghost Wars but not as riveting perhaps because the author keeps interjecting with his opinion. In any case, it was extremely interesting to view the Afghan war/conflict/counter-insurgency, whatever it should be called from a non-American perspective. That Afghanistan could be viewed as a strategic geo-political struggle between India and Pakistan never entered my mind. Of course, it is this view that drives the ISI support for the Taliban. I don't envy the Pakistani government - whose attempt to juggle the balance between support for Islamists/Taliban and the U.S. and Pakistani secularists make them appear haphazard, half hearted and erratic.

All the twists and double crosses that the Pakistani military, Musharraf, the CIA, and the White House play with one another would be a great movie plot if it weren't so real and tragic. I am sympathetic to the constant assertion that if the US and NATO had focused more on securing Afghanistan (rather than hunting for al-Qaeda) and disarming the warlords the outcome would have been different. However, I am not convinved that this would really occur. The U.S. has a history of being a naive interloper in all the countries that it chose to interlope in and if it had devoted more arms and money to the development and security of Afghanistan I think the failures would just have been greater. The corruption and the waste would have been more visible, and the backlash just as great. It would probably have been drawn into an ethnic and tribal score-settling in an even larger scale that it is now.

There is a myth that if a Marshall Plan of sorts had been implemented, Afghanistan would have lifted itself out of the current crisis. I am unconvinced that throwing money at Afghanistan would have solved the problem. The crisis has its roots in tribalism and ethnic differences. Hamid Karzai is not Konrad Adenauer. Germany had functioning institutions before Hitler, Afghanistan has not functioned properly in more than a generation. It has nothing to fall back on except warlordism and tribalism.

In all, the book brings to light all the problems that are still current in Afghanistan and the frustration of the author is evident. It will take a generation to solve even a fraction of the problems. I agree that the Iraq war cost America some opportunities in Afghanistan but I am not fully convinced that Afghans would have been better off with more American hands on board.

Two by John Barrow

1. The World Within the World (TWWTW)
2. Theories of Everything (TOE)

Of the two TWWTW was more enjoyable, thought provoking and revealing than I had anticipated. It spanned philosophy, science, physics, cosmology and religion and from the Greeks to the present (circa 1990).

It revealed that physicists such as Maxwell, Einstein, and Newton were more religious than I had thought. (Of course, Einstein was already known by his remark to Bohr that he did not believed that God played dice.) It was thought provoking in that it asked questions that I never really thought much about:

Why are the Laws of Nature mathematical? Are there Laws of Nature? Does mathematics (differential equations) describe the laws of nature because the laws are mathematical or is nature inherently mathematical? What is accuracy and error?

One might think that the answer ... is increased accuracy of observation. The more accurate our present knowledge of the world, so the more reliable will be our future predictions. Unfortunately, increased accuracy does not really help us, because the uncertainty about the future grows so fast that it very easily overcomes our paltry attempts to improve our specification of the present (pg. 276)

To the scientist the term [error] means two other things. The first is straightforward: the limiting accuracy to which a quantity can be measured. A simple example is experimental error ... [which] is not terribly interesting, but it is obviously one of the goals ... to make it as small as possible. ... We have already seen that the Heisenberg Uncertainty Principle ... ensures that there are inevitable errors associated with the measurement of all quantities even if the measuring instruments are perfect ... This strange limitation arises becase the very process of observation is inseparable from the state being measured. Perfect knowledge of the Universe is impossible because the act of knowng influences the Universe in an unknowable way. It is as if, by the time we record its state, it has changed slightly.

... The second form of error ... [is] more serious in its consequences because one can never be certain that it has even been identified, let alone minimized or eradicated. This species of error we call a 'selection effect' or 'systematic error'.... Experimental arrangements and observational procedures have built-in propensities to gather certain types o facts more readily than others. In order to be sure that you are observing what you think you are observing, it is always necessary to have some theoretical understanding of the wider spectrum of phenomena that could be biasing your observations. [e.g. only stars of a certain brightness can be measured]
(pgs. 339-340)

TOE was less satisfatory - it seemed more of a rehash of TWWTW and combined it with chaos theory and sensitivity of things to initial conditions and hence read more as a critique then a description that more entertaining in TWWTW.

Both books are sprinkled with delightful quotes, some of which I extract here:
From TOE:
If everything on Earth were rational, nothing would happen. FYODOR DOSTOYEVSKY

From TWWTW:
As far as the laws of mathematics refer to reality they are not certain; as far as they are certain, they do not refer to reality. ALBERT EINSTEIN

Physics is mathematical not because we know so much about the physical world, but because we know so little: it is only its mathematical properties that we can discover. BERTRAND RUSSELL