This is a short book that in some ways is a summary of Reinhart and Rogoff’s greater work This Time Is Different: Eight Centuries of Financial Folly. Think of it as an executive summary in book form.? How short is it?? Less than 160 pages, but in terms of text there’s less than 40 pages of text in this 6″ x 9″ book, so it’s a fast read.
Graphs occupy the remainder of the book, with the latter two-thirds of the book going nation-by-nation, allocating 1-3 pages to each, showing Debt/GDP, and the various sorts of financial crises they have faced.
Main Findings
1) When debt to GDP ratios get above 90%, growth rates fall by 1%.
2) Emerging markets fare worse than developed market on point #1.
3) There’s no relation in the short run regarding public debt and inflation in developed nations.
Other Findings
1) Many nations default continually… I allege cultural problems, but I am willing to be corrected.
2) Banking crises were normal in developed nations prior to WWII.
3) Private debts surge prior to banking crises. This is normal, when banks lend aggressively, they lend badly.
4) When there are banking crises, other crises tend to occur.? No surprise, because restrictions in bank lending leads to difficulties in those seeking financing.
5) Banking crises are associated with sovereign debt crises.
6) Public borrowing follows a repeated boom/bust cycle, particularly in developing markets.
8 ) Public credit ends to absorb private debts after the crisis erupts.
This is a good book,? it summarizes the dangers that come from high national debt levels.? The graphs in the back are a handy reference to the debt histories and crises of most major nations.
Quibbles
None
Who would benefit from this book: I think every serious investor and thinker on economics should be familiar with the findings of Reinhart and Rogoff.?If you want to, you can buy it here: A Decade of Debt (Policy Analyses in International Economics).
Full disclosure:I bought this book with my own money.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
I’m here this evening to review another excellent book on risk control by David X Martin.
This is a difficult book to review, because if I describe what happens, I end up spoiling the book.? This is a small book, and I read it in less than an hour.
This book came into existence because the author had a hard time explaining risk to the family of a friend who had died, and then his own family.? He wanted to come up with a simple way to describe risk to those who don’t know markets.? His tool was using common animals in a forest to explain risk, because their behaviors mimic those of different sorts of people as they face risks, or decide to ignore risks.
One thing I appreciate about the book is that it takes an ecological approach to risk.? My view is that markets are not like physical systems, they are like ecological systems.
Risk can never be eliminated, but it can be prepared for and managed.? I think that is the main message of the book.
For most of you reading me at Aleph Blog, this book would be fun for you but not necessary for you.? But consider some of your friends and family members that are not as sharp as you.? Personally, I am planning on having my wife and kids read this book.? Living with me, they pick up a lot, but this book is a clever way to teach risk management without making it seem like it is being taught.
To me the real use of this book is to teach less market oriented friends, family, and children about risk.? This is a small, simple but powerful book.
For those that are advanced, and want something more meaty, please read my review of the author’s book, Risk and the Smart Investor.
Quibbles
It’s a little book, and it is a very good book, but 15 clams for such a small book?? I would have priced it at $10 or so.
Who would benefit from this book: This book is designed for beginners and intermediate investors.? Get it as a gift for friends who you think are taking too much risk, and don’t get that.? Or, use it to educate young people about risk.? If you want to, you can buy it here: The Nature of Risk.
Full disclosure:The author asked me if I would like the book and I assented.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
I am going to say something that I rarely say: I am grateful that this book was written.? Why am I grateful?
It highlights the idea that people, even really bright people, do not behave rationally, but imitatively — they follow recent price action — they mimic.
It validates the concept of a “crowded trade,” one that offered high returns in the past, may presently offer low returns to a “buy and hold” investor, but will deliver negative returns in the near future, because the holders of the trade are relying on the trade to deliver positive returns in the short run, and will bail if it doesn’t happen.
It points up the nonlinearity of markets, and invalidates the efficient markets hypothesis; it validates the concept of the boom-bust cycle both in micro and macro.
It teaches us to not take on too much debt, even if we are really, really smart.? We aren’t as smart as we think we are.
In short, it sums up a lot of my philosophy at The Aleph Blog.? Real risk control thinks long term, and considers what will happen if liquidity dries up.? Real risk control knows that large positions in any asset relative to the market must be regarded to be “Buy-and-hold” regardless of what your trading intentions are.? False risk control assumes that markets always function, and that your relative size versus the market does not matter.
The author of the book has led a storied life.? He was a quantitative analyst hired to work in risk control for Long Term Capital Management [LTCM] near its inception, and continued with them through the failure.? After that, he worked for Rydex, built FOLIOfn, and worked for the Bank of International Settlements, and Schroders.? He now works as a professor of finance at the University of San Francisco, after having gotten a PhD from MIT.? He knows the markets both practically and experientially, like me, though he is better than me.
LTCM is a great example of what happens when some really smart guys find clever ways to make money in the markets, and then overplay them.? The trade that has a buy-and-hold yield of 10% is genius.? When it is 8% it is bright.? At 6% it is average, why are you playing?? At 4% it is dopey.? But what happens when your trade gets big relative to the market?? The rules change, much like JP Morgan recently.? When you are big enough that you are moving the market as a normal practice, that indicates danger.? You have become the market, and are distorting it.? It will eventually come back to bite you, as JP Morgan recently learned.
The failure of LTCM may have been the template, but the author goes on to explain other disequilibrium situations such as:
The quantitative equity panic of August 2007
The failure of Bear Stearns.
The failures of Fannie and Freddie (free money brings out the worst in all of us)
The failure of Lehman Brothers.
The failure of the banking system both in the US & Europe
The failure of LTCM progeny in 2008 (no, we don’t learn)
The Flash Crash
The failure of the Eurozone, so far. (It is performance art.? How can we create the biggest failure ever?? We will eclipse the Great Depression! Oui! Ya!)
I’ve written about most of these, and I can tell you the author does a good good job.? Aside from that, he took time to interview primary sources as to their own view of the events that happened, particularly at LTCM and its progeny, and it adds to what we know about the crises that he wrote about.
People need to understand that crises are a normal aspect of markets.? Until you understand that crises are normal, you will always take too much risk.
This is an excellent book; buy it and avoid losses.
Quibbles
In the beginning he got the name of Cramer’s firm wrong.
I would have eliminated the appendices if I were the editor, the audience that can benefit from the math is too narrow to be worth printing it in the book.? Better you should put a PDF out on the web, and put out a slimmer book.
Full disclosure:The PR flack asked me if I would like the book and I assented.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
What does Washington, DC care about more — people or corporations?? Do you have to ask? DC favors corporations, and all three branches of the government support this.? Both parties favor this.? Why is this so?
The corporations, and those that own them are a more effective means of raising funds to maintain their hold on the offices that the occupy.? Beyond that, there is an attitude that economic policy needs to be carried out through laws that address corporations.
So whether you come from the t-party, Occupy, or someplace else, you might harbor resentment against the status quo: big government in league with big corporations, and wealthy people.
I wish it weren’t so, but the Constitution takes a back seat to “pragmatic” concerns, especially when a “crisis” happens. It should not be that way, but that’s the way it is.
So, what if you drop an idealistic guy, the author, Neil Barofsky, into the job of watchdog for the TARP?? [SIGTARP: Special Inspector General of the Troubled Asset Relief Program] He objects to the uncontrolled nature of how money is being handed out to banks, with few checks as to how the money will be used.
Now, the author could have made a stronger argument.? The FDIC, where does it pump in cash to failed institutions? They protect depositors — that’s the lowest level of the capital structure.? But where did the TARP add capital?? At the highest level of the capital structure; they bought stock and warrants.
Constitutionally, the government has no authority to own corporations.? Further, even if the government had that authority, if it was trying to preserve the soundness of the banking system, the proper way to do it would be to make senior secured loans.? That would guarantee the banking system, but let the common and preferred stockholders, and bondholders go broke before the taxpayer coughs up the first dime.
As it was, the author found himself adrift in DC, cleverly fighting to bring some rules to what was a giveaway to the banks, many of which did not need the bailout, and certainly did not want the limits on executive pay.? He found that DC was a place where the bureaucratic government fights itself.? No one wants to look lazy or foolish, so when someone alleges a crime against a party that another branch of the bureaucracy is supposedly investigating, they fight back.? Applying the principles of Peter Drucker, our government could be smaller, and more effective — there would be fewer turf wars.
Were the Bailouts Wrong?? Did they Fail??
The author makes the case that the bailout has failed. When he says that he is not saying that the bailout as a whole lost money. (I would note that the bailouts have lost money on the home if you include Fannie and Freddie, the auto companies, along with all of the financial institutions including AIG.) He is saying that the problem of too big to fail banks has not only not been solved, is actually gotten worse since the crisis. The big five banks now have around 50% of the deposit base in US. “Too big to fail” is a problem unsolved that still threatens our financial system. This problem is solvable; the US government broke up AT&T (then allowed it to recombine again). Interstate branching could be limited, or ended.
The second problem with bailout is that engenders moral hazard. Because you have done it once, it would be expected next time, which when the financial system once again enters a bull cycle, the bankers will know that the federal government has its back and will not be inclined to limit risk to the same degree that they otherwise might.
The third problem with the bailout is that it was uneven. A logical question for any person harmed by the crisis is, “Where’s my bailout?” Even if bailing out the banks in order to preserve financial systemic integrity was needed, there were other ways to do it, such as being lender of last resort at a penalty rate, or giving vouchers good to reduce debts to every household in America. Particularly that last option would have been viewed as fair by the American people. That could have saved some of the pain felt by those with mortgages, and help the creditworthiness of loans at the banks. Instead, the Obama administration created programs like HAMP, which did little good for most, and actually harmed some.
The fourth problem with bailout and monetary policy that accompanied it was that it was a large transfer of wealth savers to banks. It doesn’t do much for the economy, if the banks have zero cost on their deposits, and all they do is invest in ultrasafe securities, clipping a small, but safe profit.
What was it Like to be There?
More often than not, the Treasury Department did not want to have the Special Inspector General interfering with their plans.? There was a lot of stonewalling, and nondisclosure of pertinent data.? It got fairly contentious at times, and often required members of Congress to intervene on behalf of SIGTARP.? The relationship probably got worse over time, because those working at SIGTARP knew that they would have no influence, no changes would be made, unless they convinced the media that something was wrong, and thus prodded Congress to push for change at Treasury.? The worst that that could happen would be that the President would fire the Special Inspector General, and appoint a new one.
Another part of challenge was realizing the need to build a talented team of lawyers, analysts, PR professionals, etc., to do the work analyzing how TARP funds were being spent, and write reports that would grab attention, and change the terms of the political debate.
That challenge was made more difficult by a lack of adequate facilities.? The initial staff was relegated to some pretty poor accommodations at the Treasury building.? I met with the SIGTARP staff over the AIG bailout in June of 2010 over a paper that I wrote that exposed aspects of the weakness at the domestic insurance subsidiaries.? (For Amazon readers, there is a link to my report at my blog.)? The accommodations that they had were some of the poorest I ran into in DC.
I know from personal experience that the US Treasury was sensitive to any criticism of the TARP.? At the first blogger summit at the Treasury, the officials were prickly over any questioning on the topic.? It did not help that GMAC got another dollop of cash that morning.? (links here, and here)
There were some ugly controversies.? One of the SIGTARP reports noted that if every potential program had been fully tapped the US would have expended $23.7 Trillion.? The report caveated that figure heavily, but it was seized upon by Republicans for partisan advantage.? They took a lot of flak for totaling figures that were in some sense apples and oranges.
On page 190, the question from Democrat Stephen Lynch to Tim Geithner, ?Why didn?t he try harder to cut a better bargain for the American people?? was never answered by Geithner.? Truth, Treasury was making it up as they went, with counsel from money managers and banks, which left the US Treasury vulnerable to those more technically proficient at finance who had at least some degree of conflicts of interest.
One more limitation of SIGTARP, they had no ability to bring cases ? they had to convince the Department of Justice or another prosecutor to take action.? That brought another level of negotiation and bureaucratic infighting.
The end came for the author after he realized that the TARP was winding down, and he was tiring of the Washington scene, and the corrosive effect it was having on his own character.
That leaves me with one closing question: What good did the author and his team do?? In one sense, not a lot.? The current financial regulatory environment post-Dodd-Frank continues business as usual with a more complex bureaucracy, with likely more infighting between competing regulators.? My view is when many are responsible, no one is responsible? that is certainly not the fault of SIGTARP, but we are probably in a worse regulatory environment than prior to the crisis.
That said, SIGTARP gathered data on the TARP, which led to a decent number of small and medium-sized fraud cases, and constrained the open-handed nature of the US Treasury toward financial companies, which could have result in a lot more fraud, and/or higher costs to the taxpayer.
Quibbles
Small mistake on page 173, where the author mentions PNC acquiring City National Bank instead of National City Bank.
The book reads a little disjointedly.? It is mostly chronological, but topical by chapter, so sometimes it feels like two steps forward, one step back as far as the time flow goes.
Who would benefit from this book:??This book will benefit anyone who wants a first person account of what it was like to be the Special Inspector General of the TARP.? It is also for those who want to see how dysfunctional politics can be in DC, and how resistant the Treasury Department was to any limits on their autonomy.? Finally, it shows how difficult it is for anyone to change the system in DC.? The author survived in DC for 2+ years as a change agent; that?s difficult enough, but he is gone now, though SIGTARP soldiers on.?? If you want to, you can buy it here: Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.
Full disclosure:?I asked the author to send me data on his PR flack, who I asked to send the book to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
To my readers: this is the second time I have written this review. When I pushed the “publish” button earlier this evening, WordPress ate the document. That’s never happened before, so I did not have a backup. As a result, this review is entirely different than the prior one, and I did it using DragonDictate, so it may sound a little more colloquial than other reviews of mine. Let me know what you think, and if you like my reviews please vote them up at Amazon. As always, whether you agree or not, thanks for being a reader of mine.
This book is about the questions every investor wants answers to:
Why do I tend to get into and out of the market at the wrong times?
Why are professionals prone to the exact same problems?
Why do financial crises happen?
Is there a way to approximately measure where we are in the overall market cycle?
The author has a theory that he calls “Horizon Preference.” Think of it this way: when the market is near bottom, market players have very short time horizons for investment. They hide in cash. More than that, they choose very generic investments; they stay close to home and keep things simple. Fear drives them back to what they know always works in the very short run, which means any opportunity for gain is lost.
At such a time, only the most risk tolerant and experienced remain holding risky assets. Valuations are low. The party is over, the young have left, and the old guys are cleaning up the room. If you look in a financial newspaper, or out on the web, the headlines you read are pervasively negative. But at a true bottom, you’ll see that things have stopped getting worse.
Then optimism begins. It’s a fitful at first. It is two steps forward and one step back, before it becomes three steps forward and one step back, before it becomes an unrelentingly good trend. But as this happens, moods, headlines, move from disbelief, to doubt, to wonder, to optimism, and to greed. As this happens, market players expand their horizons. They are willing to take on new risks, with new instruments, and in new places. They are willing to pay remarkably higher prices for risky assets. This happens with individual investors, professional investors, bankers make loans, regulators, accountants who have to make the numbers for management, etc.
At the top everything is wondrous. Nothing can go wrong. At the top, the attitude is “We are going to make a lot of money.??It?s as if money is free, and anyone can make it in the markets now. Everyone can be rich, just invest in the market. All of the neophytes are playing in the market. The experienced professionals who have seen a few market cycles have begun to edge out of the market, if not raise significant cash. Risk control is derided as a way of losing money. Real heavy hitters don’t need risk control.
All of the discretionary cash is applied to the markets. Various forms of leverage are applied to personal investments, real estate, and business investments. Because everyone knows things are going to go well, they figure they may as well play it to the hilt.
But at the top, things stop getting better. Then pessimism begins.? It’s a fitful at first. It is two steps back and one step forward, before it becomes three steps back and one step forward, before it becomes an unrelentingly bad trend.? Sadly, during the phase of pessimism, things move down about twice as fast as they went up. It’s frightening, and it should be. Bear markets tend to persist until the bad ideas and investments of the up cycle are liquidated, unless the government steps in to arrest the fall.
The planning horizons of businessmen and investors shrink, as do valuations, until we hit the bottom, and the cycle starts again.
What I have described to you is the basic framework of the book. The author then applies that framework to the housing bubble, the possible higher education bubble, changes to accounting frameworks as rising preferences change, and where we are today in the markets. He gives a tour of the various phenomena inside corporations that take place at different points in the cycle. Optimism breeds complexity, lack of risk management, concept stocks, big projects, and a lot of credit. Pessimism breeds simplicity, renewed risk management, and bankruptcies.
This book will give you a feel for what part of the market cycle we’re in, and how you can profit from it. It is not math intensive; the book has no equations. There are a lot of graphs, but they are simple to understand.
Quibbles
In one sense, this book is about the credit cycle, and how it affects all risky assets. But it is couched in the language of how moods change of market participants, which then drives the market. My view of the matter is slightly different. I see market players making estimates of their future well-being, and as that estimate changes, so do their moods change, and the prices of risky assets. I don’t think this is a big difference from what the author is saying, so I heartily endorse this book.
Who would benefit from this book:?? Inexperienced investors would definitely benefit from this book. Experienced investors who are having a hard time with the unpredictability of the market of late would also benefit.? If you want to, you can buy it here: Moods and Markets: A New Way to Invest in Good Times and in Bad (Minyanville Media).
Full disclosure:?I got this book in a weird way. I don’t know the author, but we have a mutual friend, and he suggested to the publisher that he send me a copy of the book. That’s how I got it.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
This is a good book and I recommend it to certain people.? Thus when you see the number of stars I give it at Amazon, know that for those whom the book is good, it is really good.? But there are some who will get less out of the book.
The author, David Wilson, is an excellent explainer of markets to those who are just learning.? He frequently does “The Chart of the Day” at Bloomberg, giving considerable insight to neophytes and professionals as he boils down complex topics into one graph.
As I began to read the book, I noted to myself, “Oh, in a number of places, they are using Bloomberg Terminal formats without mentioning it.? At the end of the book, they give a list of Bloomberg Terminal codes that would be useful to those who subscribe to the ~$2,000/month service. (Yeh, it costs that much, and it is worth it if you can afford/use it.)
I say this partly because I was a rare Bloomberg user that had expertise with all of the “yellow keys” of Bloomberg.? I’m intellectually curious, so when I first used a Bloomberg terminal back in late 1992, I played around with it to see what it could deliver.? It could deliver a lot, and it has expanded exponentially since then.? It is one amazing system.
But what if you could cobble together the most important 50% of what you get on a Bloomberg terminal, ad pay nothing?? That’s me.? It takes extra work, but you can do it.? I miss my Bloomberg terminal, because I can’t afford it now, but for those that can afford it, it is a wealth of information.
Thus, back to the book.? The book reads like one who imbibes both Bloomberg’s editorial ideals: “keep it simple. explain, give them the facts,” and teaching beginner users of a Bloomberg terminal on how to think about the markets.? Note that the terminal never gets mentioned until an appendix at the end.? But those that use a Bloomberg terminal to a high degree understand how the market is segmented.? We don’t ask the same questions with municipal bonds as we do with stocks.
This book is a very good book for beginners in the markets.? It explains a lot of things well, with reasonable detail.? It is not a good book for experts — you know all this, but if you want to get an introduction to some tangential areas you might not know, this could still help you.? This book brings you up to an intelligent beginner level in a wide number of areas.
What areas does it cover:
Stocks
Bonds (of many sorts — corporate, government, municipal, mortgage, etc.)
Money markets
Indexes
Commodities
Derivatives (options, swaps, futures, forwards)
Mutual Funds (open-end and ETFs)
The book highlights at the edges of its pages the main ideas, processes for using the information described, and definitions of financial terms.
Quibbles
When the book gives definitions, it is white on a vivid green background, and is hard to read.? The text should have been black against the vivid green.
The book implicitly assumes that people get quotes from a Bloomberg terminal.? Aside from professionals, few people do.? Until Bloomberg markets a retail service for individuals, offering the basics for 5% of the cost, there is little utility from explaining the nuances of a Bloomberg quote.
The title is slightly misleading, because the the book is no more “visual” than most.? There are a decent amount of graphs, but for a book that calls itself visual, I would have expected more.
Who would benefit from this book:?? This book is best for those that have access to a Bloomberg terminal, but are not expert in using it. Second best, it could help those without a Bloomberg terminal, but want to learn the basics of investing.? Dave is a good teacher.? Finally, for those with experience, this book is redundant.? If you want to, you can buy it here: Visual Guide to Financial Markets (Bloomberg Financial).
Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
This book is very different than most I review.? First, it should not have existed.? While the author was under house arrest, he found time to dictate the book, recording over music tapes of his children & grandchildren.? He then? handed out the tapes few-by-few to friends who then somehow gathered them together into one place to create this book which is available in English and Chinese.? (Again, to those reading this at Amazon, there are links at my blog.)
Zhao Ziyang was a member of the Chinese Communist Party from his youth, joining the party at age 19.? He proved to be an able administrator, and the provinces that he served/led tended to prosper.
Why did they prosper?? He gave them more freedom economically.? Control was only at the highest levels, whereas low level control in other provinces of China tended to produce bad results.? Freeing up agriculture aided the Chinese economy in a large way: the people no longer starved.
Zhao kept his head low during “The Great Leap Forward,” and also during “The Cultural Revolution.”? Until he became Premier in 1980, he kept his head low.? He was the sort of guy who got things done quietly, and did not trumpet his achievements.
As Premier, he was entrusted with oversight over the Chinese economy.? Because of his prior successes he was inclined to offer more an more freedom to the economy, and did so until his ouster in 1989.? This resulted in considerable economic growth, but also resentment from hardliners, who felt that they were losing control of China.
In 1985, the hardliners started to go after Hu Yaobang, General Secretary of the Party, who was relatively liberal on freeing up the economy.? By 1987, they oust him, and against his wishes, Zhao Ziyang becomes the General Secretary of the Party.
In April of 1989, Hu Yaobang dies.? Students protest in the streets because he had offered some hope of political reform.? Zhao urges lenience to the protestors, and urges them to go back to their studies.? They continue the protest.? The hardliners prevail upon Deng Xiaoping to use the military against the students, who may have wanted to preserve Zhao’s decision, but not against unified opposition from hardliners in the Party.
Zhao chose to step down, rather than enforce Deng’s decision, which came with no vote in favor on the Standing Committee.? The Tienanmen massacre occurred, and Zhao Ziyang was confined to his home for the next 15+ years.
That’s the history, and very brief.? Here are a few things to make the matters more clear:
To those in the upper levels of the Party, the Cultural Revolution was a horror.? The ideological rigidity of the far left of the Party was stifling, and being killed or re-educated for slight variations from the party line was not something that most wanted to repeat after the death of Mao.? We can all be grateful that Mao recalled Deng from re-education shortly before his death.
Zhao Ziyang worked as a “fitter” at the Xiangzhong mechanics factory in Lianyuan County, in the Province of Hunan during part of the Cultural Revolution.? He was purged in 1967, and restored relatively quickly in 1971.
But there were some in the Party who did not like any type of reform.? They liked the control from the Marxist/Leninist policies, whether they grew the economy or not.? Even if rejecting the excesses of the Cultural Revolution, they still wanted as much control as possible.? Those “Party Elders” made life tough for Hu and Zhao.
Deng Xiaoping was a man who wanted the benefits of free markets, but would not free politics.? He saw how the experiments of Hu and Zhao were leading to a stronger economy, but did not want to countenance the idea of Democracy.? He wanted the Communist Party to have singular control over the economy, because it enabled the government to act quickly as it needed, with all the resources of China at its disposal.? Deng wanted economic reform, but when it was convenient for him to placate hardliners, he threw Hu, then Zhao, under the bus.? He eventually in 1992 took a tour through the special economic zones of Southern China, showing his alliance with economic reform.
Deng wanted political reform, but that has various meanings.? To Hu and Zhao, it meant more democracy and economic freedom.? To Deng, it meant cleaning up the corruption that inevitably occurs in a mixed system — socialism typically has a lot of corruption.? Deng was not realistic; you can’t change the nature of man.? Hu and Zhao knew that freeing things up would eliminate incentives to cheat.
At the end of the book, Zhao talks about the need to move China, or at least the Party, to some form of Democracy, with checks and balances, which is something that Deng does not want, because it slows the government’s power to act.
Zhao and Hu were two men born ahead of their time.? Every citizen of China should be grateful for all they did and suffered, because they tried to promote your liberty.
Quibbles
In general, I think Zhao was naive, and Hu was tone-deaf.? Hu did not respond to the requests of Deng to act on bourgeois liberalism.? Zhao let the student demonstrations after Hu’s death? frame him.
After he was confined to his house, he appealed to many senior party members as to what the Chinese Constitution said was illegal about his imprisonment.? He was naive.? After going through the Great Leap Forward and the Cultural Revolution, why should anyone believe that the Chinese Government would honor its own constitution?? After all, there is no division of powers, as Zhao sought, and Deng did not.
Full disclosure: I bought this book with my own money.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
When I first saw the book, and read the introduction, my heart sank and I said to myself, “I doubt I will like this one.”
I was wrong, very wrong, and liked the book more and more as I read it.? The author is a professor of Psychology, Biology and Neurobiology, and is writing about economics.? Those who have read me for some time know that I favor ecological analogies to explain economics, rather than the pseudo-physics that most neoclassical economists employ.? I am beginning to think that non-economists have a better chance of understanding economics than most economists do, because they are free from the indoctrination that comes in the early economics classes where they teach you to assume away all reality, and assume that all men are maximizers of utility or profits, and that the world is radically simple, when it is really very messy.
To the Book
Sorry to be verbose, but I found the author’s approach to be refreshing.? Men are economically rational, but what do we mean by rational?? To some, being rational means imitating what seems good.? “My neighbor is making lots of money speculating in real estate, I will do this also.”? Or rationality can mean something higher, “Real Estate prices are getting far beyond the prices that rentals could justify, I think I will sell my house and rent.”? The difference is the degree of analysis, and the willingness to think about the system as a whole.
The book also highlights why free markets and democracy do not necessarily go together.? There is pressure from the moneyed to affect the democratic process, and there is pressure from the less-well-off to vote money to themselves from the public purse.
The book takes on the concept of economic efficiency, and shows that it leads to instability, as I have argued.? Stable economic systems have slack.? Stable systems do not optimize to the hilt.
He describes the process where more and more loans were provided to the housing market, leading to a bubble.? The bubble involved some sideshows, like CDOs, where Collateralized Debt Obligation buyers provided cheap capital that purchased risky pieces of residential mortgage loans.
Economists like to talk about equilibrium, because that allows them to publish their complex math papers, but economies are big on variation, things are far more volatile than theory can admit.
He takes a dim view of central banking but does not see how we can get rid of it.? The politics are too strong, and the aversion to gold too great.? He lays most of the blame for the bubble and bust at the feet of the Fed, which is right.
He finds Keynes to be a bright guy but with many unrealistic assumptions, and too much aggregation.? The simplification of the economy is too great, and the models don’t work.
Unlike many other books, he offers solutions, and I think they are reasonable.? He inveighs against insurance where the risk is voluntarily takes on.? We should not backstop voluntary risks, nor should we allow people to speculate on the losses of others, as I have argued elsewhere.
He also argues that the Dodd-Frank bill will largely be ineffective because it does not set rules. You can have rules or scrutiny.? We have used scrutiny in the past for financial regulation and it has not worked, because the regulators were wimps.? Over the last 30 years, they have mostly been wimps.
Rules have value, and insurance regulation has been more rules-based, which helps to account for its success.? Principles-based approaches allow a minority to bend the principles, leading to financial failure.
Particularly the Fed has been lax in financial oversight, as they are the overall regulator, and they have not been tough on the regulators that they oversee.
Naive faith in economic efficiency leads many to neglect the need to regulate banks tightly.? It is far better to set rules that provide negative feedback to banks that are taking too much risk, and negative feedback to those who borrow from or lend to other banks, which increases systemic risk.
At the end, he offers four rules that I will summarize:
Limit the monetary policy discretion of the Fed. (Yes!)
No bailouts.
Insurance products that have the possibility of positive feedback should be banned.
Investment Banks should be partnerships, and commercial banks should be limited from investment banking business.
I am in hearty agreement with all of this.? He adds one further proposal that suggests taxing investment banks on the riskiness of their books; if that can be properly achieved that is a worthy idea.
Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
I have worked for a hedge fund, and I have many friends that work for hedge funds.? I understand hedge funds well.
The “Little Book” people at Wiley should indeed have done this book, but with a different author.? Why?? When there are significant areas of controversy around a topic, and you write a book as if there is no controversy, it means you haven’t done your homework.
But, some of the problems with hedge funds, as a opposed to open-end mutual funds, is that:
1) Many hedge funds go out of business, and as they do, their bad performance is not recorded, and sometimes lost.
2) Hedge funds with good performance give the databases their early performance.? Bad early performance does not get reported.
3) The activity of investors chasing trends is more pronounced in hedge funds than in mutual funds, with a loss of returns of 5% in hedge funds, versus 3% in mutual funds.? This is all due to greater volatility.
4) Double alpha is generally not achievable, because most managers good at longs are not good at shorts, and vice-versa.? Going long and short are different skill sets.
These are issues that the author of the “Little Book” does not address in any significant way.? He mentions Simon Lack’s book once in passing, but doesn’t do anything substantive with it.? He also does not deal with the difference between dollar-weighted and time-weighted returns.? Because hedge funds are often quite volatile, investors buy at the wrong time (after a strong performance), and sell at the wrong time (after a weak performance).? What that implies is that the average investor in a hedge fund typically does worse than a buy-and-hold investor.
Other Problems
Page 121 contains a math error in the first example on shorting.? Yo! This is only arithmetic.? Didn’t anyone proofread the work?
Page 136 attempts to describe deal arbitrage, and makes what should be an easy concept rather turgid.? It is so unclear, that I would have to assume the author does not understand what is a simple concept.
The book does not spend any significant time on how we live in a different world now than in the glory days of hedge fund outperformance.? Even some slight commentary on the limits to arbitrage would have been useful.
Some Strengths
Much of the advice that the author gives in selecting hedge fund managers is sound, especially the list of red flags.
The “due diligence questionnaire” was also interesting.
Most of the descriptive material in the book was accurate, but there are other books and blog posts that provide that information, minus the hype.
This book is not mathematical, sometimes to a fault, where a chart or graph could have proven useful.
Summary
To be truly educated about hedge funds, you would need a lot more than this book.? This book reads like you are being pitched on how great hedge funds are; it does not provide enough on the limitations of hedge funds, nor does it interact with the critiques of hedge funds.
Who would benefit from this book: Most investors would not benefit from this book.? Particularly those that advise institutional clients and high net worth individuals would not benefit. It is too optimistic about the performance of hedge funds.? If you want to, you can buy it here: The Little Book of Hedge Funds (Little Books. Big Profits).
Full disclosure: The publisher asked if I wanted the book.? I said ?yes? and he sent it to me.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
This book is written by a man who wants to see the European experiment succeed, but is not confident that it will succeed.? I think this is a fair book on the topic; it does not absorb all of my biases on why I think the Eurozone is hopeless: a) Currency unions have never worked; they must either become a nation, or break up.? b) I have a saying, “Governments are smaller than Economies, and Economies are smaller than Cultures.”
This saying puts things in their place.? Government can’t in the long run prevent things that are economically successful, those things fill human needs.? But cultures are bigger than economies; we don’t live to consume. We live for ideals.? Different cultures have different ideals, and it means that a purely individualistic or collectivist view of economics won’t be accepted in the Eurozone.? They muddle in the middle.
The Eurozone is a political and economic experiment, and was pretty successful and harmless until they began to seek a common currency.? Yes, there were other problems, bureaucrats in Brussels, seeking human perfection though regulation, helped to strangulate a previously more competitive Eurozone economy.? That said, the common currency offered some offsetting advantages of efficiency.
Other Troubles
But there are other troubles.? There are unaffordable pensions in many countries that lie behind that economic problems.? As one who is 51, and well off, why should anyone, aside from oil wildcatters, who endure a lot of physical stress retire at age 50 on the largess of the taxpayers, that is, if you have taxpayers.
Even retiring at age 60 is ridiculous, which France has recently reverted to from 62.? France will never be able to afford it as a nation.
But then there are cultural issues: do you care what your laws are?? Would you care if immigrants are ruled by Islamic Law?? Would you care if your grandchildren, a minority like the Maronites (Roman Catholics) in Lebanon, are ruled by Islamic Law?
The Main Economic Issue
After all of the strangu-regulation, what if economies can’t grow at levels sufficient to exceed the rates at which they borrow?? They slowly fail, as debts grow, and doubts about repayment grow.
In the Euro-zone this is particularly pertinent, because countries can’t depreciate; they must repay in Euros.? When the Euro was introduced it was heaven for many nations, because they could borrow cheaply.? Eventually, they had too much debt, and lenders rebelled.
This is the nature of an area that is not a natural currency area — the Eurozone.? This was an experiment doomed to fail.
Quibbles
None, but I would be a full Euro-sceptic.? This can’t work.? More effective human labor is always better than less.
Who would benefit from this book:?? If you want to learn about the problems in the Eurozone from someone that is fair, you will find it here.? If you want to, you can buy the book here: The Decline and Fall of Europe.
Full disclosure: The PR flack asked me if I wanted the book, and was kind enough to send me the book.
If you enter Amazon through my site, and you buy anything, I get a small commission.? This is my main source of blog revenue.? I prefer this to a ?tip jar? because I want you to get something you want, rather than merely giving me a tip.? Book reviews take time, particularly with the reading, which most book reviewers don?t do in full, and I typically do. (When I don?t, I mention that I scanned the book.? Also, I never use the data that the PR flacks send out.)
Most people buying at Amazon do not enter via a referring website.? Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.? Whether you buy at Amazon directly or enter via my site, your prices don?t change.
