My Review of Andrew Leigh's ""How Economics Explains the World: A Short History......"

History Through the Lens of Economics

Andrew Leigh over-promises and under-delivers in his history of the world through the lens of economics. To be sure economics is particularly important but as Ecclesiastes says, ‘time and chance happens to all.” Economics gives us tools to help understand the world, such as incentives, diminishing marginal utility and sometimes, as behavioral economics has taught us, people aren’t as rational as the classical theory would predict.

He, of course, mentions many of the great economists from Smith to Keynes and Freidman, and Kahneman. There works clearly help explain the world. He also mentions the work of Jared Diamond on the importance of an economy residing along and east-west axis as opposed to a north-south axis. This helps to explain why the northern hemisphere has done so much better than the southern hemisphere, but what does that have to do with economics?

He fails to discuss how human beings can really screw up what apparently looks like a strong endowment. Witness the weakness of Russia and Argentina and the converse of South Korea and Japan.

My bottom line is if you want a very short overview of the role of economics in history, this book might be for you, but it leaves out much.

My Amazon Review of Jennifer Burns' "Milton Friedman: The Last Conservative"

 The Little Giant 

Standing at exactly five feet, Milton Friedman was short in stature, but very tall intellect. Stanford historian Jennifer Burns has written a very readable biography of one of the great intellectual giants of the 20^th century. From humble beginnings in Rahway, New Jersey we witness Milton Friedman scaling the heights of the economics profession as his once controversial ideas move from the fringes to the mainstream of thought that would ultimately have great effect on public policy.

 

In many respects, I am a child of his ideas. While as an undergraduate at Baruch College, I learned of the Friedman-Savage utility function, price theory from his workbook, the permanent income hypothesis, and the quantity theory of money through “A Monetary History of the United States.”  I also studied the works of his graduate students, in particular Gary Becker on human capital and David Meiselman on the term structure of interest rates. That was quite an economics education for an undergrad in the early 1960’s.

 

Friedman was blessed by having great mentors. At Rutgers and Columbia, he fell under the wing of Arthur Burns and at the University of Chicago he was fortunate to learn from Henry Simons and it certainly did not hurt to have Aaron Director, his wife Rose’s older brother in his corner. The University of Chicago was a hot house of ideas standing athwart the New Deal and Freidman was in the middle of it all. Much of this was discussed in George Tavlas’ “The Monetarists” which I previously reviewed.

 

There is much here that I did not know about Friedman. I knew he was involved in crafting payroll withholding at the Treasury Department during World War II, but I did not know he continuously represented the department at congressional hearings. Interestingly Burns makes a strong case that although Freidman took full credit for the permanent income hypothesis, it was really a joint effort of his wife, Rose and economists Dorothy Brady and Margaret Reid. Those three women had worked on family consumption patterns in the late 1930’s and the 1940’s. Perhaps most troubling was an episode in 1955 when his wife was raped in their Chicago home while Friedman was travelling in India. Initially he did not want to return home, but he had to be talked into it by Arthur Burns.

 

His conservative ideas brought him close to power as he advised Republicans Goldwater, Nixon, and Reagan. His conduit to Nixon and Reagan was Chicago dean and high government official, George Schultz. His fame brings him to Chile where his students were leading the charge to reform that nation’s economy. When he was there to advise the government, he turned a blind eye to the atrocities of the Pinochet dictatorship.

 

During the 1970’s heyday of monetarism, Friedman was the most famous economist in the world. His 1967 presidential address to the American Economic Association correctly outlined the thesis that there was no long run trade-off between unemployment and inflation proved to be correct in the stagflating 1970’s. However as financial deregulation changed the definition of money the crude MV=PY equation lost its effectiveness as a guidepost to the economy.

 

The world we live in today is very much the product of Friedman’s ideas characterized by Jennifer Burns as Chicago price theory. Those ideas include floating exchange rates, the volunteer army, the negative income tax, school vouchers and the deregulation of licensing requirements. This is the legacy that she writes so well about.

For the full Amazon URL see: The Little Giant (amazon.com)

 

 

My Amazon Review of Nicholas Wapshott's "Samuelson Friedman: The Battle Over the Free Market"

 

The Clash

 

The theme of Nicholas Wapshott’s book is the clash of ideas between superstar economists Milton Friedman and Paul Samuelson over the role of government in the economy as played out in series of columns in Newsweek magazine starting in 1966 and lasting through the early 1980’s. Although Wapshott quotes from many of the columns, nowhere is there to be found are the full-length columns of the two protagonists. Because I was an avid reader of those columns when they came out, I was looking forward to rereading at least a few of them. I view this a significant failure of the book.

 

You can view this book as a follow-om to Wapshott’s “Keynes Hayek” book of a few years ago where the role of government was debated in the context of the deflationary 1930’s compared the inflationary 1960’s and 70’s. As an aside, it is not as good as his earlier work. Wapshott makes it out as duel, but in fact both Friedman and Samuelson were friends since their college days in the early 1930’s who were very respectful of each other. Wapshott makes Friedman out as an outsider arriviste, when in fact he was president of the American Economic Association in 1968 where his presidential address set the stage for the great debate about economic policy.

As America’s leading Keynesian Samuelson’s neoclassical synthesis was under attack as his paradigm could not explain the stagflation that was occurring in the U.S. and Western Europe. Simply put inflation was existing side by side with high unemployment. Friedman’s answer was monetarism which took the profession by storm in the 1970’s because it accurately explained the inflationary processes that were underway. However, by the early 1980’s it ceased to work and when crises came in 2008 and 2020, it was Samuelson’s Keynesian playbook that was trotted out to save the day.

 

Wapshott rightly characterized Friedman as a politician seeking to get his libertarian views implemented, while Samuelson was far less motivated by politics. Naturally Freidman as a politician rubbed many of Samuelson’s colleagues the wrong way and took his attacks on their views all too personally.  Along the way Wapshott offers up pretty good biographies of both Freidman and Samuelson. The book is a good read for econ geeks, of which I am one.

For the full Amazon URL see: The Clash (amazon.com) 

My Amazon Review of Matthew Klein's and Michael Pettis' "Trade Wars are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace"

Global Keynesians

Barron’s economics columnist Matthew Klein and  Peking University economics professor Michael Pettis have written a widely discussed book bemoaning the global savings glut that they believe to be the cause of the increase in trade tensions over the past two decades. And it is the high rate of savings by the wealthy that reduces aggregate demand globally thereby suppressing output and wages. It is Keynes’ classic under-consumption view of the world. Klein and Pettis try to prove their point by examining the economies of China, Germany and the United States.

But before that they go through a serious history of trade policy and economic crises from the 1820’s on. Unfortunately they make a few mistakes along the way. They admire Henry Clay’s American System of tariffs, internal improvements and national bank. However they ignore the secret sauce of American protectionism in 1800s, that being a tidal wave of immigration. Instead of importing products, America imported labor, much of it skilled. When immigration was cut-off in the 1920s and record high tariffs were imposed, the economy collapsed into the Great Depression. Along the way the authors surprisingly have some nice things to say about the gold standard.

Klein and Pettis early on cite Keynes’ discussion of how well the French economy fared with the payment of an indemnity arising out of their defeat in the Franco-Prussian War. What they leave out is that the excess savings generated by the French economy in the 1850’s and 1860’s was the source of funds. Hence what the Asian nations and Russia learned after the 1997-98 crisis, was the need for central banks to establish precautionary balances. It is those balances that make nation resilient to the vagaries and vicissitudes of the international economy. And as Klein and Pettis rightly note, the Asian and Russian response to the crisis greatly contributed to the savings glut.

The overarching thesis of the book is that capital flows drive trade flows. Simply put a trade deficit in the U.S. requires a capital inflow and a trade surplus in China requires a capital outflow. The authors use accounting identities to make their point. However accounting identities do not define causation because other items are not held constant. For example an increase in government spending, other things being equal increases GDP, but other things do not remain equal as consumption or investment or exports could be simultaneously reduced.

The authors make a very straight forward case that China should reduce its exports, which line the pockets of the Communist Party Bigs and the industrial elite at the expense of the workers. In turn the economy should shift towards domestic consumption through a policy of higher wages and a stronger social safety net. That all makes sense, but the high wage-stronger social safety net policy is inimical for the trade deficit-prone United States. All that would do is increase the U.S’s trade deficit.

Klein and Pettis also offer up other polices one of which is akin to modern monetary theory. Simply put, if the world is short of safe assets, the U.S. should sell all the bonds the rest of the world is demanding. They leave unsaid the impact of that policy on the foreign exchange value of the dollar. They also believe that the Dollar Standard that the global economy is now is instead of it being an exorbitant privilege, it is now an exorbitant burden. They would substitute Keynes’ Bancor, an idea that failed at the 1944 Bretton Woods Conference, but it is certainly worthy of discussion today.

There was one line in the book that really intrigued me. The authors note that the three areas of intense government involvement; housing, healthcare and higher education are the primary drivers of U.S. inflation. I would suggest that it would be in keeping with their concern about the immiseration of the U.S. working class to focus their next book on this topic.

To sum up, the Klein-Pettis book is being taken very seriously in policy circles and it could very well have a real influence on a potential Biden Administration. It is worth a critical read.

For the full Amazon URL see: https://www.amazon.com/gp/customer-reviews/R4B7PKBQT8DPR/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=B087TJKJRQ

My Amazon Review of Robert Shiller's "Narrative Economics: How Stories Go Viral & Drive Major Economic Events"

Telling Stories

My UCLA colleague Ed Leamer always reminds me that human beings are story telling animals. Here Yale economics professor and Nobel Laureate Robert Shiller has written a whole book on the subject as to how convincing narratives, whether true or false, can influence economic behavior. Some of the narratives he discusses are:

·        Housing prices can only go up.

·        Technological advancement leads to unemployment.

·        “New Era” booms in the stock market.

·        Gold is the only true store of value.

·        It is socially unacceptable for wealthy people to be extravagant in hard times.

When these ideas go viral they obviously can effect economic behavior. In order to track how viral an idea can be Shiller uses the science of epidemiology to track its rise and fall counting its appearances in publications or in the case of today how it trends over the internet.

Although Shiller doesn’t really give us a formal analytical framework as to how we can integrate a narrative into making predictions about economic behavior, he certainly makes the case that economists have to take into consideration prevailing narratives when trying to understand the macro economy where both booms and slumps can get exaggerated by the presence of mass psychology. This concept is far from new, but Shiller expresses it in a different way.

The full amazon URL appears at: https://www.amazon.com/review/R4XHVF8GCEJOX/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Adam Tooze's "Crashed: How a Decade of Financial Crises Changes the World"

The World in Crisis

Columbia history professor Adam Tooze, an authority on the inter-war years, has offered up an authoritative history of the financial crises and their aftermath that have beset the world since 2008. He integrates economics, the plumbing of the interbank financial system and the politics of the major players in how and why the financial crisis of 2008 developed and the course of the very uneven recovery that followed. I must note that Tooze has some very clear biases in that he views the history through a social democratic prism and is very critical of the congressional Republican caucus and the go slow policies of the European Central Bank under Trichet. To him the banks got bailed out while millions of people suffered as collateral damage from a crisis that was largely made by the financial system. His view may very well be correct, but many readers might differ. Simply put, to save the economy policy makers had to stop the bleeding.

He starts off with the hot topic of 2005; the need for fiscal consolidation in the United States. Aside from a few dissidents, most economists saw the need for the U.S. to close its fiscal deficit and did not see the structural crisis that was developing underneath them. Although he does mention Hyman Minsky a few times in the book, he leaves out Minsky’s most important insight that “stability leads to instability” as market participants are lulled into a false sense of security. It therefore was against the backdrop of the “great moderation” that the crisis began.  And it was the seemingly calm environment that lulled all too many regulators to sleep.

The underbelly of the financial system was and still is in many respects is the wholesale funding system where too many banks are largely funded in repo and commercial paper markets. This mismatch was exacerbated by the use of asset-backed commercial paper to fund long term mortgage securities. It was problems in that market that triggered the crisis in August 2007.

The crisis explodes when Lehman Brothers files for bankruptcy in September 2008. In Tooze’s view the decision to let Lehman fail was political, not economic. After that the gates of hell are opened causing the Bush Administration and the Federal Reserve to ask for $750 billion dollar TARP bailout of the major banks. It was in the Congressional fight over this appropriation where Tooze believes the split in the Republican Party between the business conservative and social populist wing hardens. We are living with that through this day. The TARP program passes with Democratic votes. Tooze also notes that there was great continuity between the Bush and early Obama policies with respect to the banks and auto bailout. Recall that in late 2008 and early 2009 nationalization of the banks was on the table. Tooze also correctly notes that the major beneficiary of the TARP program was Citicorp, the most exposed U.S. bank to the wholesale funding system.

Concurrent with TARP the Bernanke Fed embarks on its first quantitative easing program where it buys up not only treasuries, but mortgage backed securities as well. It was with the latter Europe’s banks were bailed out. Half of the first QE went to bail out Europe’s troubled banks. When combined the dollar swap lines with QE, Europe’s central banks essentially became branches of the Fed. Now here is a problem. Where in the Federal Reserve Act does it say that the Fed is the central bank to the world? To some it maybe a stretch.

Tooze applauds Obama’s stimulus policy but rightly says it was too small. There should have been more infrastructure in it. To my view there could have been more infrastructure if only Obama was willing to deal with the Republicans by offering to waive environmental reviews and prevailing wage rules. He never tried for fear of offending his labor and environmental constituencies. Tooze also gives great credit to China with it all out monetary and fiscal policies. That triggered a revival in the energy and natural resource economies of Australia and Brazil thereby helping global recovery.

He then turns to the slow responses in Europe and the political wrangling over the tragedy that was to befall Greece. It came down to the power of Angela Merkel and her unwillingness to have the frugal German taxpayer subsidize the profligate Greeks. As they say “all politics is local”. The logjam in Europe doesn’t really break until Mario Draghi makes an off-the-cuff remark at a London speech in July 2012 by saying the ECB will do “whatever it takes” to engender European recovery.

As a byproduct of  bailing out the banks and failing to directly help the average citizen a rash of populism, mostly of the rightwing variety, breaks out all over  leading to Brexit, Orban in Hungary, a stronger rightwing in Germany and, of course, Donald Trump. But to me it wasn’t only banking policy that created this. The huge surge in immigration into Europe has a lot more to do with it. Tooze under-rates this factor. He also under-rates the risk of having a monetary policy that is too easy and too long. The same type of Minsky risk discussed earlier is now present in the global economy: witness Turkey, for example. Thus it is too early to tell whether or not the all-out monetary policy of the past decade will be judged a success from the vantage point of 2030.

Adam Tooze has written an important book and I view it as must read for a serious lay reader to get a better understanding of the economic and political policies of the past decade.

The full Amazon URL appears at: https://www.amazon.com/review/R3N14CMQU8F3OF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Nassim Nicholas Taleb's "Skin in the Game: Hidden Asymmetries in Daily Life"

Not another “Black Swan”

I was disappointed with Nassim Nicholas Taleb’s “Skin in the Game.” It is more a stream of consciousness than a path breaking work. It would have been much better as a long magazine article. That, at least, would have avoided his ceaseless repetitions as to why he hates academics, economists, Robert Rubin, Goldman Sachs and Monsanto.

That said there are real kernels of the book that are important. First as the title suggests that advice coming from those who have who have no skin in the game is, at best, useless and at worse harmful. Simply put those advisors suffer no consequences if they give bad advice. Simply put this is Taleb’s “BS” detector. He next notes how tiny minorities have the ability to enforce majoritarian preferences. For example making most foods in the West Halal compliant is very important to Moslems but is not material for non-Moslems so non-Moslems have no problem eating Halal compliant foods.

Finally, and this is really important, Taleb notes the difference from what I would characterize as inter-temporal probability with cross sectional probability. His example is Russian roulette. If 100 people played Russian roulette for a million dollars the expected value of the individual payoff would be $833,000 (5 chances in 6 of surviving and thus winning). However if one person played the same game with the same payoff 100 times, he/she would be dead. Thus the risk of ruin is understated in most financial models. In other words you have to stay in the game in order to ultimately win.

Thus if Taleb edited down his book into a much smaller format I would have rated it much higher. However in its current form it is a slog.

The full Amazon URL appears at: https://www.amazon.com/review/RBI1HVLIZVAY4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

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.

The full Amazon URL appears at: https://www.amazon.com/review/R195W82T8ICM10/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Richard Bookstaber's "The End of Theory: Financial Crises, the Failure of Economics and the Sweep of Human Interaction"

Stuff Happens

Richard Bookstaber a long time finance practitioner/risk manager who has worked for Morgan Stanley, Salomon Brothers, Moore Capital and Bridgewater as well as the Financial Stability Oversight Council and the Office of Financial Research has written a broad-based attack on financial economics and the DSGE models now used by most central banks. Trust me he knows what he is writing about and in the interests of full disclosure I interacted with him when I worked at Salomon Brothers.

Although not cited he is writing in the tradition of Nicholas Nassim Taleb (“The Black Swan”) with his fundamental disagreement with the theoretical underpinnings of financial economics. Simply put in a world of radical uncertainty we don’t know the underlying probability distributions of future financial returns and we don’t even know the potential states of the world needed to calculate a probability distribution. He argues that modern finance theory is built around top down axioms based on deductive reasoning where an all knowing representative individual calculates the future probabilities for all of the known states of the world. And importantly the future probability distribution is based on historical evidence. Under radical uncertainty that simply does not work.

Instead he argues for agent based models built upon inductive reasoning where the actors are “reflexive” in the word used by George Soros, in that they respond to the actions of others. As much as economists envy physics, Bookstaber turns the Heisenberg uncertainty principle on them. Thus while financial theory works in normal times, in a crisis all bets are off as “stuff happens.”

What Bookstaber would like is to use agent based models that are used to model automobile traffic and schools of fish, for example, through the use of complexity theory. All this is fine and good, but aside from a narrative Bookstaber does not offer up a formal model for the financial markets. Perhaps he has one, but it is not here. Nevertheless he offers a road map for future research.

At times Bookstaber’s writing style is clear and lucid with analogies from literature motion pictures and military combat. He is a student of “OODA”, observe, orient, decide and act. He is particularly acute in his discussion of the origins of the financial crisis and is highly critical of the role played by Goldman Sachs in their failure to honor a small “novation” request from Bear Stearns, which brought that firm down. However, at other times his writing is dull and staid

Bookstaber has written an important book and it should be read by risk managers and policy officials. The old models failed in 2008, now almost ten years later it is time for new ones.

The full Amazon URL appears at:
https://www.amazon.com/review/R14VHKPZ87FCAC/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Henry Kaufman's "Tectonic Shifts in Financial Markets: People, Policies and Institutions"

Too Big to Fail is Still with Us

Henry Kaufman, my former boss at Salomon Brothers, has written an easy to read and an important book about our nation’s financial structure. Simply put, Dodd-Frank did not solve the “too big to fail problem” and in fact made it worse by ratifying the undo concentration of the giant “financial conglomerates” that rule finance today. He further argues that this financial concentration impedes Federal Reserve policy. In a crisis that might be true, but it is not clear whether that is true in more normal times. After all Canada has run monetary policy for decades with a highly concentrated financial system with few issues than what occurred in the United States.

His book is part autobiographical as well in that he discusses his years at Salomon Brothers where in the late 1970s and early 1980s the financial world waited with baited breath for his comments. He notes his great friendship with Paul Volcker where he is very kind; he is not so kind to Alan Greenspan where the he believes the Fed became more political. This is not to say it wasn’t political in earlier times.

He makes an acute observation about Margaret Thatcher who impressed him with her sophisticated knowledge of macroeconomics.

What troubled me about his book is his discussion of Lehman Brothers where he was a board member before and at the time of its high profile bankruptcy. He argues that the Fed had more options than letting the firm go bankrupt and suggested that Treasury Secretary Henry Paulson was driving the bus, not the Fed. That could very well be true, but I wish he discussed what happened in the Lehman boardroom when the firm ran up its debt/equity ratio to 33-1 and loaded up their books with highly illiquid real estate, including the giant Archstone transaction. Further in late 2007 Lehman had a chance to walk from that transaction, but didn’t. Were it not for their real estate heavy transactions in both physical real estate and what was to become highly illiquid positions in commercial mortgage backed securities, the firm could very well have survived. In the interests of full disclosure I left Lehman in 2005.

Thus having opened the discussion about Lehman, I wish he would have given us more details. Otherwise this is a fine book for those interested in how our financial system evolved over the past 60 years.

The full Amazon URL is:

https://www.amazon.com/review/R2M7PQ7FJGMFC0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Adam Tooze's "The Deluge: The Great War, America and the Remaking of the Global Order, 1916-1931

America as Economic Super Power

Unlike most histories of World War I and the early inter-war years which have a European focus, Yale professor Adam Tooze trains his keen eye on the growing ability of America’s economic power to reshape the world in its own image. To him Wilson’s liberal internationalism is a cloak to extend the power of the United States. He views America’s role in the world as that of “privileged detachment” that began in with Wilson’s formulation of “peace without victory” in early 1917 and ends with Hoover’s reparations moratorium which was designed to bailout Wall Street’s loans to Germany.

He believes that it was Wilson’s goal to make America the arbiter of the world which Wilson and his Republican successors largely succeed at. The only difference between the Wilsonians and their Republican critics was that Wilson wanted to do that from within the League of Nations and the critics from without. Nevertheless the goal was the same.

Tooze chooses 1916 as the start date because it was in that year the Entente power were being bled dry in France in both a physical and economic sense. It was also in that year where the economic output of the United States for the first time exceeded that of the British Empire. The Entente had nowhere else to turn and from then on America became the banker to the world. And it was this financial power that forced all of the major powers to take into account the role of the United States. After the war German statesman Gustav Stresemann realized that the road to German recovery ran through Wall Street and it was Wall Street credits that triggered Germany’s rebound in the mid-1920s.

Tooze also notes that the U.S. was far from being isolationist in the 1920s; isolationism was more a creature of the 1930s. There was the Washington naval arms limitation conference in 1921-22, the Dawes Plan in 1924 and the Kellogg-Briand Pact of 1928.

Tooze’s book covers far more that Europe as he pans the world to include the Russian Revolution and its aftermath, upheaval in China, Britain’s struggle to hold on to India and the shifting coalitions of Japanese politics. My one criticism of the book is that it promises too much. There is far more discussion of the 1916-21 time period than that of the balance of the 1920s. It is far different from, say, Zara Steiner’s “The Lights that Failed” which is very Eurocentric, but that work covers far better the roles of the Locarno Treaty and the League of Nations in Geneva. Nevertheless, “The Deluge…” is a very worthy history of the time when America interposed itself on to the world scene. 

The full Amazon url is:

 http://www.amazon.com/review/R1YUL2VZXIVZBB

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

My Amazon Review of Mark Spitznagel's, "The Dao of Capital: Austrian Investing in a Distorted World"

Money manager Mark Spitznagel has written a very wordy paean to Austrian Economics. If ever a book needed a tight fisted editor this one is it. However, once you get beyond reading every thing Spitznagel knows about Austrian Economics the reader will get a better understanding of economics and the investment process. The key takeaways from the book are the core notions of Austrian Economics which value roundabout(indirect) production over direct production and the role of monetary policy to distort investment decisions. For example, in the case of the former, the direct route to catching a fish would be to try to grab one in a pond while the roundabout and far more profitable route would be to make a net first and then use it to catch fish. In case of the latter, the low interest policy of the Federal Reserve induces investment that will be proved unprofitable once interest rates normalize leading to a bust. This knowledge leads investors to hedge tail risks when the stock market trades at high price/replacement cost ratios and to buy individual stocks that with high returns on capital that won't be affected by increases in interest rates. Nothing really new here, but puts some real foundation underneath it. That is the value of the book.

Spitznagel uses the biographies of the three great Austrian economists, Carl Menger Eugen von Bohm-Bawerk and Ludvig von Mises to explain Austrian economic theory. All of that is to the good, but he leaves out perhaps the greatest Austrian economists of all time, Joseph Schumpeter and Friedrich von Hayek. I guess Schumpeter's and Hayek's work don't quite fit into his theories. He also ignores the work of three American economists who built on the work of the Austrians: Irving Fisher, Frank Knight and Jack Hirshleifer, a former professor of mine. For example Hirshleifer, in his "Investment, Interest and Capital" outlines a general equilibrium approach to interest rate determination with a society's rate of time preference and an intertemporal production possibilities function, pure Austrian economics.

The full Amazon URL is:http://www.amazon.com/The-Dao-Capital-Investing-Distorted-ebook/product-reviews/B00D7P2K1W/ref=cm_cr_pr_hist_3?ie=UTF8&filterBy=addThreeStar&showViewpoints=0&sortBy=bySubmissionDateDescending