24 November 2008 – The Aleph Blog

Book Review: A History of Interest Rates

Posted on 24 November 200828 November 2008 by David Merkel

This book is big, very big at ~700 pages. It is a testimony to the idea that history doesn’t repeat itself, but it often rhymes.

The book is arranged chronologically, and geographically within each time period.? Time is spent on each are roughly in proportion to the amount of unique data that we have from each era.? Thus, the recent past gets more pages per year.? Roughly one-quarter of the book goes from ancient times to 1800, and one quarter to the 19th century.? Half of the book is 1900-2005.

There are several things that the book points out, common to each time and area investigated.

1) It is very difficult to eliminate interest.? Even when governments or religions try to restrict interest, either in rate charged or in entire, systems arise to create promises to pay more in the future that than full payment today.

2) The more technologically advanced economies get, the lower interest rates tend to get.

3) Boom/bust cycles are impossible to avoid.

4) Governments introduce currencies and often cheat on them (debasement, or inflation of a fiat currency).

5) Governments do sometimes fail, whether due to a lost war, civil war, or default, taking their currencies and debt promises with them.

6) The economic cycle across the world is usually more correlated than most people believe at any given point in time, even in ancient times.? (How much more today… decoupling indeed…)

7) Cultures that allowed for a moderate amount of debt financing prospered the most, in general.

Those are my summary points after reading the book.? Homer and Sylla drew some but not all of those conclusions.? It’s an ambitious book and and ambitious read.? Sidney Homer did a lot of significant work researching from the past to the middle of the 20th century, and Richard Sylla did an admirable job giving the grand sweep of the increasing complexity of the bond markets as the 20th century progressed until 2005, which was an interesting point at which to end the fourth edition.? The fifth edition, should there be one, will prove even more interesting as it surveys the end of the housing and credit bubbles, and the shape of the financial system in their aftermath.

This book is a must for those that like economic history.? I really enjoyed it.? For those without such an interest, it’s a big, somewhat-expensive, show-off book that will be occasionally useful as a reference.

If you want, you can find it here: A History of Interest Rates, Fourth Edition (Wiley Finance)

PS ? Remember, I don?t have a tip jar, but I do do book reviews.? If you enter Amazon through a link on my site and buy things from them, I get a small commission, and you don?t pay anything extra.? I’m not out to sell things to you, so much as provide a service.? Not all books are good, and not every book is right for everyone, and I try to make that clear, rather than only giving positive book reviews on new books.? I review old books that have dropped of the radar as well, like this one, because they are often more valuable than what you can find on the shelves at your local bookstore.

The Citi was Asleep, is Asleep, and I Hope They Don’t Cause Us to Sleep

Posted on 24 November 2008 by David Merkel

Time moves fast in a crisis.? It surprises me that it was only seven weeks ago that I wrote, What A Fine Mess You Have Gotten Us Into, where I commented:

What the FDIC did with WaMu affects other banks like Wachovia.? Bidders will let the holding company fail, and bid for the operating bank subsidiary assets.? Holders of holding company securities get hit, as their likelihood of getting reasonable recoveries disappears.
We are putting a lot of faith in the health of Citigroup, Bank of America, and JP Morgan.? If one of them fails, the game is over.? Given their complexity, and the recent takeovers, the odds of there being a significant mistake are high.? Consider further that they are counterparties for more than 50% of all derivative transactions, so the synthetic leverage is high as well.

What I meant by “the game is over” is that the idea that you can keep laying off risk on increasingly large and complex banks would be over as a strategy.? Also, the ability of the US Government to continue to bail out every decrepit entity would be tested, and possibly found wanting.

Or, as I noted on Friday, in my piece Broken?:

There are still more oddities to the current bond market, most of which involve parties that can?t take certain risks any more.? We can expand that to banks, and toss in Citi.? Citi is trading like it is going out of business.? Now, Citi is one of the ?too big to fail? [TBTF] banks, along with JP Morgan, Bank of America, and Wells Fargo.? If they are in trouble, I?m not sure who can buy them; they would probably be too much for even a coalition of the other TBTF banks to handle.? Is there a foreign bank that wants them?? I doubt it.? This would be another area where a new TBTF chapter of the bankruptcy code would be useful.

So now we have a bailout of Citi by the US Treasury and FDIC.? At present the rescue of Citi is a plus to the markets, because it takes a short-term problem off the table, leaving behind a more ill-defined long-term problem: how much can the US Government borrow/guarantee?? Also, what of their derivative exposures, and the state of the other TBTF banks?? It’s difficult to get that big in a credit boom without absorbing the seeds of the credit bust.

So, I am selling a little into the euphoria.? We will see where all of this leads, but my guess is that it is just one more step on the road to credit failure for the US Government.