My Amazon Review of James Grant's "Bagehot: The Life and Times of the Greatest Victorian"

The Oracle of Lombard Street

I knew Jim Grant in the late 1980s and early 1990s when he was chronicling the commercial real estate debacle of that era is his eponymous “Grant’s Interest Rate Observer”. Grant, the author of several books, has turned his excellent wordsmithing to write the biography of the mid-19^th Century editor of the “Economist”, Walter Bagehot. During the financial crisis of 150 years later, Bagehot’s “Lombard Street” dictum during a crisis of lending freely at a penalty rate against good collateral was widely quoted by central bankers, most notably by the then Fed Chairman Ben Bernanke. According to Grant Bernanke got the lend freely part right, but it was at low rates against less than stellar collateral.

Grant’s Bagehot is very impressive. A polymath country banker who married James Wilson’s daughter, the founder of “The Economist.” On Wilson’s death Bagehot succeeds Wilson as editor. From that post Bagehot wields great influence in Britain’s Liberal Party becoming a key adviser to William Gladstone who would become Chancellor of the Exchequer and later Prime Minister. Bagehot cut his teeth during the 1866 Overend Gurney bank failure that froze the London money market, then the largest in world. London had three times the deposits of New York and eight times the deposits of Paris. In the teeth of the crisis the Bank of England violated its statutes and intervened in the market to stop the bank run.

In 1873 Bagehot wrote “Lombard Street,” his primer on central banking. Grant is sympathetic to his main critic Bank of England Director Thomson Hankey, who argued that to have the central bank be the lender of last resort you create an environment that large banks are too big to fail. We live with that to this day.

There is far more to Bagehot than central banking. He wrote “The English Constitution” and commented on all sorts of developments including his belief that the South would win the Civil War. Grant has written a worthy biography of this truly eminent Victorian.

The full Amazon URL appears at: https://www.amazon.com/review/R38KJVAABISATI/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Ian Kershaw's "The Global Age: Europe 1950-2017"

From Renewal to Decline

After giving a rave review to Ian Kershaw’s “To Hell and Back” three years ago, I was looking forward this sequel on the history of Europe from 1950- 2017. Unfortunately I was somewhat disappointed. Perhaps it is difficult for historians to write about events they lived through, and like him I lived through many of the events he discusses.

In 1950 Europe was in ruins and the nuclear sword of Damocles was hanging over the continent by the American and Soviet super powers. The Marshall Plan was just beginning to take effect and it remained to be seen whether or not a real recovery would take place. Twenty years later Western Europe was largely booming and in the east a drab poverty was the rule of the day.

To Kershaw Europe’s great success during that period was the establishment of the welfare state. To me, on the other hand, the great achievement was placing the economy largely on a market-oriented footing that enabled the boom. Here much credit goes to the German economic miracle.

Kershaw is a child of 1968, but never mentions his own role in the youthful cultural and political revolution that took place then. He was 25 at the time. Although I experienced 1968 in America it is my understanding that far from being separate, the cultural revolution was part and parcel with the political revolution. Even the most serious of politicos of the day we caught up in sex, drugs and rock ‘n roll.  Nevertheless Kershaw rightly states that to the youth in the East, the western revolutionaries were clueless had had no idea how repressive a state could be. In other words they were spoiled children.

Kershaw gives great credit to Gorbachev in ending the Cold War Personality is important, just as the roles of Hitler, Stalin and Churchill were important in his earlier volume He also rightly gives credit to German prime minister Helmut Kohl However, he fails to credit the very deft handling of bringing about the end of the Cold War to the Bush-Baker team in the U.S.

He is way too critical of Margaret Thatcher’s harsh neo-liberalism. In my opinion Thatcher saved Britain by being Churchillian in reorganizing the economy for economic growth. Kershaw is way too concerned about the collateral damage, but to paraphrase the master builder Robert Moses, “you have to break eggs in order to make an omelet.  

Although the E.U. started with great promise, its survival is open to question. The first failure was its lack of intervention in the Yugoslavian Wars, a humanitarian disaster that required U.S. military force and diplomacy to bring it to an end. The E.U. failed to listen to the anti-immigrant stirrings in the late 1990s that would come to a full boil in 2015. To all too many Europeans the E.U. is being run for the elite by a group of nameless and faceless bureaucrats. That is one reason why the U.K. wants to leave. Kershaw is part of that elite. And to top it off, Europe remains unwilling to fund its own defense.

He rightfully calls out unregulated finance capitalism to for causing the 2008 financial crisis. Although the crisis had its origins in the U.S., Wall Street was aided and abetted by greedy European banks chasing yield. Further, while the U.S. required its banks to recapitalize, Europe did not. Hence the crisis lingers today where negative interest rates are becoming normal.

I don’t think Kershaw was harsh enough on the communist governments of the East. I was in East Berlin and Moscow in the spring of 1990. The contrast between East and West Berlin was striking. Simply put the West was alive and the East was dead. In Moscow such common drug store items as Bayer Aspirin and Tampax was not available even for upper middle income consumers.

I have two other quibbles he leaves out data on the collapse in birthrates across Europe, especially in the East, Italy and Spain. That is evidence of the lack of a future orientation and it will make the welfare state promises made to elderly untenable. Lastly he completely leaves out the rise of antisemitism, the scourge of Europe in his first volume.  It is not only coming from the far right, but we see it in the Moslem immigrants and in Britain’s Labour Party.

Despite my criticisms, Kershaw has given us a very usable history of how modern Europe came into being and for that he deserves credit.

For the full amazon URL see: https://www.amazon.com/review/R1AIX5VT8R7ZF4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Laurence M. Ball's "The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster"

Killing the Chicken to Scare the Monkey

Johns Hopkins economics professor Laurence Ball has written an extraordinarily well-researched book on the demise of Lehman Brothers. At the very least he seriously questions the official response to the Lehman bankruptcy which states that Lehman was insolvent and lacked adequate collateral on September 15, 2008 and at maximum he completely debunks the Fed and the Treasury. Although I am not in the complete debunking camp, Ball has certainly changed my views on the subject.

Specifically Ball calculates that Lehman was borderline solvent at the time of the bankruptcy filing. In my own view based on Ball’s numbers I would have them more in the insolvent category because of the way Ball values Lehman’s Level 2 assets. Be that as it may, Ball is convincing when he argues that Lehman had sufficient collateral for a loan under the Primary Dealer Credit Facility (PDCF) at the time of the filing and it certainly had the collateral when the requirements were eased two days later. Ball cogently argues that Maiden Lane rescue of Bear Stearns and the subsequent AIG rescue were far more risky for the Fed than a short-term loan to Lehman would have been.

Then why didn’t the Fed at least temporarily bail out Lehman. To Ball it was pure politics with Treasury Secretary Hank Paulson leading the charge against any hint of a bailout.  Put simply a Lehman bailout was viewed as politically toxic. And in fact, the consequences of letting Lehman go allowed the Congress to go forward with TARP and for the Fed to open the floodgate of cash under Section 13(3) of the Federal Reserve Act. A year later New York Times columnist wrote “Lehman Had to Die, So Global Finance Could Live” (September 11, 2009). Put bluntly the chicken had to die.

Ball argues that if the Fed intervened and kept Lehman alive, at least temporarily, the deluge that followed would have been averted. Here I respectfully disagree. AIG was already a goner and the markets would have immediately turned their attention to the severe problems at Morgan Stanley and Citigroup. Clearly stated, there were too many toxic assets awash in the system. All bailing out Lehman would have done would have been to delay the inevitable, which in my mind would have been far worse.

Ball’s encyclopedic sources include all of Lehman’s SEC filings, the Valukas report, testimony before the Financial Crisis Inquiry Commission, the books by Bernanke, Paulson and Geithner and Andrew Ross Sorkin’s “Too Big To Fail.” One failing is that he should have talked to Lehman’s CEO Dick Fuld. In my view Fuld was so full of himself that he refused to see the writing on the wall and held out for too high of a price in his failed attempt secure financing for Lehman in 2008. Further exacerbating the situation is that Fuld was hardly the most agreeable person around and likely rubbed his regulators and the other major firms the wrong way. In the interest of full disclosure I was a managing director at Lehman from 2000 – 2005.

Ball’s book is very detailed and the writing leaves out the high drama of the situation making it very text bookie and slow going. Nevertheless the facts speak for themselves.

The full Amazon URL appears at: https://www.amazon.com/review/R61722ZNJ3XFH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Mervyn King's "The End of Alchemy: Money, Banking and the Future of the Global Economy"

Fixing the Banks

Mervyn King, the former governor of The Bank of England, has written a very readable book on the interaction of money and banking on the global economy. He offers his insights as a practical banker and a serious economist for the way forward from the financial crisis of 2007-09 that we are still reeling from.

Although he discusses a host of topics relating to how people make decisions in practice compared to how economic theory suggests they behave, the problems of the fixed exchange rate regime within the European Union, and the difficulties of making policy within a framework of competing nations; I will focus on two issues that he raised.

The first is his suggested reform for the banking system. His reform is a modified “Chicago Plan” of the 1930s which called for 100% reserves. Under that regime bank deposits would be matched with cash and short term government securities. Hence no risk and no potential for bank runs. In contrast the current system is based on fractional reserves where banks hold a small portion of their deposits in reserves and lend out the balance. This process is King’s alchemy where short   maturity deposits are transformed into long term assets. In the jargon of economists this process is called “maturity transformation.” 

This system is inherently unstable because the cash is not there to pay off depositors if they want all of their money at once. To deal with this contradiction the central bank acts as a lender of last resort to meet the demands of anxious depositors. This gives rise to the issue of “too big to fail.” King’s compromise is to turn the central bank into a “pawnbroker for all seasons.” Under his proposed system banks must hold sufficient reserves, liquid assets and discounted long term assets to meet all deposit and short term borrowing liabilities. The discounted assets would be valued at a “normal times” value with an appropriate “hair-cut”  to allow for risk and those asset could be pawned at the central bank should the need arise. Any lending above this threshold would have to be funded by additional equity and long term liabilities. Thus depositors would feel secure that their money be there when they needed it.

All this is fine and good, except there would be very little incentive for banks to make risky loans. Why is that bad? It is bad because new businesses, new ideas and new construction have to be funded if the economy is going to achieve the growth that most of us desire. To undertake King’s reforms we would need new institutions to undertake those risks. King is silent on this question.

The other issue that King raises that I would like to discuss is that the universal answer to all financial crises is to throw central bank money at it. We have been doing this for nine years. The problem that King rightly raises is that if the problem is structural rather than liquidity, throwing money at the crisis will delay solving the structural imbalances. To King’s mind central bankers in this environment may set interest rates too high to permit growth, but too low to allow for a structural adjustment.

The issue in the West is that savings are too low, while in the East consumption is too low. For example in order for the U.S. to cure its chronic trade deficit the savings rate has to rise and consumption has to fall, while China’s huge trade surplus has to be cured by higher consumption and lower savings. Politically asking people to reduce consumption is a hard sell so the easy way out is to keep interest rates low that works to keep consumption up.

All told Mervyn King has written an important book that will play a significant role in the ongoing debates over banking reform and monetary policy. He also offers a well done primer on current thinking on monetary policy that is accessible to the lay reader.

For the full Amazon URL see:
https://www.amazon.com/review/R2QKZ627F6QZRL/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Ben S. Bernanke's "The Courage to Act: A Memoir of a Crisis and its Aftermath"

Only in America*

This is an American story about the rise of the son of a Jewish druggist from the backwater town to Dillon, South Carolina to the commanding heights of the global economy. When he is writing about his boyhood and personal life Bernanke writing shows the benefits of the creative writing course he took in his freshman year at Harvard. Unfortunately when he writes about policy making the writing becomes more guarded and academic. Nevertheless it remains a very lucid account of the financial crisis and its aftermath.

He chronicles his early life in the segregated South to his working construction and as waiter at the very touristy South of the Border rest stop off I-95 to his arrival at Harvard and graduate school at MIT. From there he goes on to teach at Stanford and Princeton establishing his reputation as a leading scholar of the depression (See his “Essays on the Great Depression”)

He leaves academia first to become appointed a Governor on the Federal Reserve Board by President George W. Bush, to the chairmanship of the Council of Economic and then in early 2006 to the chairmanship of the Federal Reserve Board. To my mind the Fed including Bernanke and other regulators flunked in failing to see the onset of the financial crisis brought about by reckless lending not only in the housing markets but through the creation of an array of toxic financial products. However with the onset of the financial crisis in August 2007 through mid-2009 the Fed and others did indeed have the courage to act. Here Bernanke and crew get an A in throwing everything but the kitchen sink at the crisis. In my mind their actions avoided the Great Depression 2.0.

Bernanke argues, correctly in my opinion, that Lehman Brothers, my former employer, could not have been saved. At the time it looked Lehman’s balance sheet was too toxic for any private sector party to handle. It is easy to second guess, but you have to put yourself in the shoes of the decision makers when they made the decision. However, while spending quite a bit of time on Lehman, Bernanke gives short shrift to the two wards of the Fed, Citi and Bank of America/Merrill Lynch. Were they just as insolvent as Lehman, who knows, but Bernanke doesn’t tell.

With the high drama of the financial over Bernanke covers his defense of the Fed in the writing of the Dodd-Frank Financial Reform Act and his growing friendship with Democrat Barney Frank, the Chair of the House Financial Services Committee. He also highlights his growing dislike of what I call the “wrecker caucus” within the Republican Party. This animosity causes him to leave the Republican Party. Who can blame him?

He then goes on to discuss the very sluggish recovery and the very low rate of inflation. He brings the reader into the internal Fed debate involving the policy choices to expand the Fed’s balance sheet with QE2 and QE3 and the continuation of the Zero Interest Rate Policy throughout his entire term and beyond.  As a result the Fed’s balance sheet quintuples during his tenure in office. He gives himself high marks in promulgating these policies. Further he contrasts the relative success of the U.S. economy when compared to Europe and Japan where more orthodox monetary and fiscal policies were followed.

In this judgement Bernanke is premature. It is far too early to judge how the 8 year policy of zero rates and the explosion of the Fed’s balance sheet will look to a future Ben Bernanke writing in 2025. Remember in 2005 Alan Greenspan looked like a genius and three years later not so much.

*-With apologies to another Jewish South Carolinian, Harry Golden.

See the full Amazon URL at:

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My Amazon Review of Charles Calomiris' and Stephen Haber's "Fragile by Design: The Political Origins of Banking Crises and Scarce Credit"

Banking in a Political Context

According to Professors Calomoris and Haber banking does not exist in a political vacuum. In fact banks are product of a bargain between political coalitions and bankers; a social contract, if you will. In a very long book, too long in my opinion, the authors delve into the history of the banking systems of the United States, the United Kingdom, Canada, Brazil and Mexico and the political coalitions that underpin them.

Calomoris is a self-described Hamiltonian; he likes large banks with extensive branching systems. He credits Canada where a bank bargain between the political elites enabled a crisis free banking system. In contrast the United States with its agrarian populist combining with local banks created a crisis ridden small unit banking system. That system ended when a new coalition of mega-banks and urban activists enabled the creation of the banking system we have today. Simply put in exchange for supporting mega-mergers, banks channeled trillions of dollars into urban mortgages, some of which being of dubious quality. One thing that comes through is that lending on illiquid real estate lurks behind most of the banking crises experienced in the U.S. and U.K.

The political context rests on the fact that politicians need banks to fund government debt, support favored activities and to make it easy to finance government though an inflation tax. Brazil and Mexico are prime examples of using inflation to fund the government. In the United States banks and government sponsored agencies exist to fund housing programs off the budget.

This is more a history book than an economics book. Nevertheless it is very important for economists to understand the milieu their models are operating in.

The full Amazon URL is:

http://www.amazon.com/review/R2PL4PN97RNSVP

My Amazon Review of Barry Eichengreen’s “Hall of Mirrors: The Great Depression. The Great Recession and the Uses-and Misuses-of History

Barry Eichengreen, an economics professor at UC-Berkeley, is a scholar of the first order on The Great Depression. His “Golden Fetters” on how the operation of the gold standard during the inter-war years was a significant cause of The Great Depression is a classic. He argues in the Keynesian tradition on what the crisis managers of 2008 learned, perhaps too well, the lessons of 1929-33. Thus readers who prefer the views of James Grant’s “Forgotten Depression…” will differ greatly with this history.

The analogues between the 1920’s and 30’s with the 2000’s are many. Here are only a few highlighted by Eichengreen:

·        *Bernie Madoff was the equivalent of Charles Ponzi.

·        *The Euro of today works the way the gold standard of the 20’s worked.

·        *The bailout of the Dawes Bank (Central Republic Trust) was similar to the Bear Stearns bailout.

·       * Letting Lehman fail was analogous to the moral hazard issue associated with allowing the Ford controlled Guardian Group of Banks to fail in 1933.

·        *There were real estate booms in both eras.

The lessons our modern day policy makers learned were to flood the system with liquidity, bailout the banks, engage in fiscal stimulus policies, avoid protectionism and avoid debacles like the London Economic Conference of 1933 through international cooperation. However, unlike the 1930s the problem in the system was not really in the banks, but rather in the shadow banking system that grew up in the 1990’s and reached full adulthood in the 2000’s.

Perhaps more important instead of four years of grinding lower in the 1930’s the economy began to recover after two years and most governments and central banks began to pull back on stimulus policies which in Eichengreen’s opinion is the reason for the slow growth the global economy has experienced since 2010. Further by preventing another Great Depression the impetus to fully reform the financial system waned and we ended up with a watered down version of financial reform with Dodd-Frank. Eichengreen is a reformer in the Polanyi tradition. Unfortunately as Keynes contemporaneously noted reform is the enemy of recovery. Reform took place in the 1930’s because the old order collapsed, but as many have noted the New Deal reforms delayed recovery. Even Eichengreen concedes that National Industrial Recovery Act of 1933 was an economic disaster.

In reading Eichengreen’s book one has to sympathize with the policy makers of the early Great Depression. They were operating in real time with inadequate information, much as Bernanke et al were doing in 2008. Eichengreen is sympathetic to New York Fed President George Harrison’s “direct pressure” approach to the stock market boom which he characterizes as an early version of “macro-prudential” policies. Unfortunately “macro-prudential” policies have yet to be tested and I suspect they might have failed in the 2000’s in halting the sup-prime mortgage boom. Why? The policy makers would have been accused of racism by preventing Blacks and Latinos from buying homes.

I have a few factual quibbles with the book. He understates the role of Hoover Treasury Secretary Ogden Mills in being the true author of Roosevelt’s early banking reforms; he fails to note the importance of the fiscal drag or tax on labor, depending on your point of view, of the introduction of Social Security taxes in 1936 without benefits being paid out until 1939. Remember at the time social security was not included in the federal budget. Lastly he sometimes confuses being long a credit default swap with being short the swap.

All told Eichengreen has written an excellent book, especially The Great Depression portion. However, because it is probably too long and towards the end he pontificates too much on the Europe of the past years, which is too recent for real history, I give the book four stars not five.

The Amazon Review appears at the following url:

http://www.amazon.com/review/RSNFHDGWS9JUB