Friday, February 23, 2018

My Amazon Review of Benn Steil's "The Marshal Plan: Dawn of the Cold War"


The Cold War through the Lens of the Marshall Plan

Benn Steil, a senior fellow at the Council on Foreign Relations has written a very well researched history on the role of the Marshall Plan as the fulcrum of the Cold War. He previously wrote a history of the 1944 Bretton Woods monetary conference and that certainly prepared him to deal with the economic and geopolitical issues facing Europe at the beginning of the postwar era. He chronicles how the U.S. attitude changed from plans to deindustrialize Germany and to make the U.N. central to foreign policy toward rebuilding Germany and making NATO the focus of U.S. policy in Europe.

The very fact that the U.S. would take part in both the rebuilding of Europe and entering into peacetime multi-lateral alliance represented a revolution in U.S. foreign policy. Steil highlights the role of such key figures as Marshall himself, Harry Truman and George Kennan. More importantly he brings to light the roles of Republican Senator Arthur Vandenberg moved the necessary legislation through Congress and Under-Secretary of State Will Clayton, a former cotton baron, who first articulated the strategic vision of a united Europe.  We also witness the work of former car executive Paul Hoffman running the day-to-day operations of the plan along with General Lucius Clay who acted as America’s proconsul in Germany.  He also noted the important role played by Massachusetts Congressman Christian Herter who led a congressional fact finding delegation to Europe that was influential in generating the political support for the plan.

The Marshall Plan was enabled in Europe by the far sighted leadership of British foreign minister Ernest Bevin and his French counterpart George Bidault. Here we had a socialist politician working hand in glove with a center-right one. Most interesting was the fact that Stalin understood the implications of the Marshall Plan far better than his western counterpart. He knew that it would divide Europe and that in turn would make it impossible for him to neutralize a united Germany. Thus it was the Russian backed coup in Czechoslovakia to prevent that government from participating in the plan that sealed the fate of Europe. From there it was quickly realized that aside from economic support, Europe would need military support. That realization was crystalized by the Berlin Airlift where a logistics wizard, General William Tunner did the nearly impossible task of supplying Berlin by air. NATO would come soon thereafter.

Steil does a service in describing the role of British spies (The Cambridge Five) of informing Stalin of western plans and the role Soviet mole Henry Dexter White in Treasury in his continued support of keeping Germany down. We also see Henry Wallace following Stalin’s line in opposing the Marshall plan in the 1948 presidential race. Although it is not clear the full role Russia played in the 2016 election, it certainly had a candidate in Henry Wallace.

Steil goes on to present his views on the NATO expansion after the Cold War ended in 1991. His take is that the U.S. was far from being clear-eyed in the 1990s of the implications of moving NATO east and the effect it would have on the Russians. I don’t think that was necessary in this book. This topic should be taken up in a future book.

I read Steil’s book with a great deal of sadness. In the 1940s we had brilliant statesmen who rose to the occasion.  Unfortunately our statesman of the past twenty years or so have been found wanting and this is especially true of the current administration.




Sunday, February 11, 2018

My Amazon Review of Andrew Lo's "Adaptive Markets: Financial Evolution at the Speed of Thought"


Biological Finance

I am a sucker for kids from middle-class Queens who become great successes. (I am one, without the success part.) Andrew Lo, a M.I.T. finance professor and hedge fund manager is one of the more notable ones. Aside from being a finance super-star, Andrew Lo is a great story teller. I wish I could take his class. However at times he tells too much and as result his 504 page book in the print edition is too long.

Lo’s thesis, building on the work of Kahneman, Tversky, Thaler and Haidt argues rather convincingly that the home economicus model that modern day financial economics relies on is a special case and shouldn’t be generalized for all markets in all seasons. Thus the physics math that finance uses, while it creates reasonably good heuristics, is not complete. Simply put the efficient market hypothesis works most of the time, but not all of time.  

Lo is an expert on modern finance and he presents a well-documented history as to how it came into being starting with an obscure mathematics dissertation written in French by Louis Bachelier which ultimately became the foundation for options pricing models. He makes one mistake here by noting that Paul Samuelson received his Ph.D. in 1947. It was 1941 while his Ph.D. was formally published in 1947.

Be that as it may Lo brings to the table of modern finance neuroscience, evolutionary biology and behavioral economics. When doing this much of the rigor of physics math goes away but it makes his adaptive markets far more relevant to the real world. After all, despite the rise of the machines, markets are made by human beings who have a multitude of motives many of which are not “rational” and many of which are unconscious. Instead of thinking about the day-to-day chaos that appears on the stock exchanges, think of traders fighting for survival on the African Savannah. This would certainly put the concept of seeking alpha in a different light.

Professor Lo also comes up with a neat idea for mass funding of cancer research through the creation of a $30 billion biotech fund that is following the science rather than the near term dictates of the venture capital market place.

In sum, Andrew Lo has written an important book and it should be part of the curriculum in all serious finance departments.