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How Markets Fail, John Cassidy, 2009

This book is a devastating indictment of Fed Chairman Alan Greenspan and of economics and economists generally. When academic economics should have been focused on Cassidy’s title question: How do Markets Fail? Instead in a blog entitled “The Unfortunate Uselessness of Most State of the Art Academic Monetary Economics“, Willem Buiter, Professor at prestigious London School of Economics charges:

The typical graduate macroeconomics and monetary economics training received at Anglo-American universities during the past 30 years or so may have set back by decades serious investigations of aggregate economic behavior and economic policy-relevant understanding. It was a privately and publicly waste of time and resources.

Despite this conclusion, Cassidy feels a need to take us through 200 ponderous pages of the history of economic theory. Probably most readers give up far before reaching the heart of the book and the author’s central arguments.

John Von Neumann at Los Alamos

His history starts picking up when, in 1937, polyglot John Von Neumann (computers, Manhattan project, encryption, etc.) decided to write a paper on economics using the new game theory. Von Neumann teased economists of the day that if their articles using mathematics could be thought to have been written in the age of Newton so primitive were their methods. Von Neumann’s article resulted in two changes; better qualified economists left the field to study game theory; and an extensive discussion of the Prisoner’s Dilemma entered economics discussions. Prisoner’s Dilemma asks why multiple independent actors do not cooperate to achieve optimal outcomes. Instead, in study after study, actors assume the worst of others and act accordingly with the result that inferior outcomes result. Classic examples explain why Microsoft’s operating system becomes dominant when Unix and Apple have vastly superior operating systems and why Intel’s microprocessors become dominant when Motorola microprocessors used by Apple and early engineering workstations were clearly superior.

His history is primarily a battle of ideas or ideology between the free marketeers and the Keynesians. The free marketers take control during stable good economic times and go into eclipse during times of economic turmoil lying low and waiting to reemerge when memories of an economic collapse fade. The great depression, its lessons and the dominant period of Keynesian thought held until the 70’s when a combination of high inflation coupled with high unemployment and tagged “stagflation” led to the end of Keynesian dominance and emergence of the Chicago free market school of Hayek and Milton Friedman. The change was complete with the election of Ronald Regan who appointed Alan Greenspan to head the Federal Reserve. Deregulation, started by Carter in Telecommunications and the airlines was extended to banking and finance. The immediate collapse of the savings and loan industry did nothing to slow the resurgence and power of the free marketeers.

Hyman Minsky

One of the strange things about the history of economics has been the lack of study or interest in banking and the financial economy which is inexplicable given that banks are virtually always at the heart of every economic collapse. Cassidy can find only one economist, Hyman Minsky, working in obscurity at Washington University, who focused on banks and the financial industry and who was an avowed Keynesian who came to the conclusion that the financial market is inherently and violently unstable. Minsky’s books are mostly out of print and Cassidy notes that the recent collapse and freezing of the credit market caused people to bid hundreds of dollars (Cassidy included?) for copies of Minsky’s books on Ebay. The financial market has grown until it now represents a majority of the GDP in the US and if the financial market impact adjusted for inflation is removed from GDP, the US economy has been almost stagnant for the last thirty years. So why did economists not study the key growth portion of the economy? Good question.

Boston Schemer Charles Ponzi

Minsky’s main insight is that the financial markets most innovative changes are actually Ponzi schemes and he coined the term Ponzi Finance to describe these activities. for Ponzi finance, expected income flows will not cover interest cost, so the firm must borrow more or sell off assets simply to service its debt. The hope is that either the market value of assets or income will rise enough to pay off interest and principal. Hence the need to promote successive asset bubbles to sustain the illusion of profits.

Cassidy turns to the question of why banking and wall street executives continued to put all their resources and investments into the Ponzi finance Sub Prime mortgage market even though many of the executives were shown to be aware that the Sub Prime mortgage market was guaranteed to blow up in their faces and that the housing bubble would burst at some time. He dismisses that short term incentives were at fault since several of the top executives held stock worth more than a billion and the poorest held at least 150 million in stock. So why would these aware and intelligence executives drive their companies off the cliff by continuing to load up on sub prime mortgages? Clearly these executives are unable manage their own behavior and need significant regulatory constraints. Yet Cassidy doubts that regulatory reform is forthcoming.

To illustrate the pressures to support bubbles, Cassidy gives the example of the funds manager who sold his fund’s internet dot com holdings a few months before the bubble burst and was fired while another manager held on to his internet holdings, costing the fund 2.5 billion in losses in the burst but who still managed the same fund five years later. This phenomenon has been labeled rational irrationality. Another way to say investors resemble lemmings.

Almost as an aside, but a subject dear to the heart of Nassim Nicholas Taleb author of The Black Swan; the prdilection of economist to assume that various economic phenomena such as stock prices conform to the Gaussian Bell Curve.
Mandelbrot, creator of chaos theory, took the daily DOW Jones Industrial averages from 1916 to 2003 and calculate the mean and standard deviations. If the data actually fit the Bell Curve, one would expect a daily swing of 7% or more only once every 1,000 years. In fact, such swings occurred 48 times in the period under study. In Taleb’s terms there were a remarkable 48 Black Swans during this period. Yet economists continue to model things like risk in terms of conformity to the Bell Curve. Bell Curves were at the heart of the risk models of LTCM (Long Term Capital Management), the hedge fund that collapsed in 1998 due to the emergence of Black Swans. Similarly, and learning nothing from LTCM, the VAR (Value at Risk) models at the heart of the sub prime mortgage market with its derivatives and insurance and AAA ratings had erroneous Bell Curves at their heart. It was obvious, even to many of the key players, that this market would crash so its hard to call the events of the bubble bursting a Black Swan event.

He finds a choice quote in January 2004 from Alan Greenspan for which Cassidy names the entire period the “Greenspan Bubble Era“;

Recent Regulatory reform coupled with innovative technologies has spawned rapidly growing markets for, among many other products, asset backed securities, collateral loan obligations, and credit default swaps…These increasingly complex financial instruments have contributed, especially over the recent stressful period, to the development of a far more flexible, efficient, and hence resilient financial system than existed just a quarter of a century ago.

Cassidy politely calls Greenspan a Naif.

In spite of his promise to write a book of ideas, Cassidy delves into the actual banking meltdown of 2007 – 2008 in some detail. His purpose is primarily to decry the “moral hazard” of the sequence of events that caused the government to ride to the rescue of irresponsible executives who seem to have learned only that they largely insulated from the repercussions of their risky behavior and who today are engaging in the same risky behavior, this time with Federally borrowed money. Cassidy is pretty depressed that things will never change in this one sided socialism.

This book takes discipline to fight through but there are some rewards.

Wolf Hall, Hilary Mantel, 2009
This novel, winner of the Man Booker Prize, is set in the era of Henry VIII from 1527 to 1535 and is told from the perspective of Thomas Cromwell. For the English, the story and cast of characters is probably familiar from childhood, but for this reader it was helpful to have recently viewed the first two seasons of The Tudors TV Series. Unfortunately in the series Henry (Jonathan Rhys Meyers) is not fat and Cromwell (James Frain) is not ugly and physically imposing. The novel has the huge advantage that we can share not only Cromwell’s words (“the most cunning man in England, but who looks like a killer”) but his innermost thoughts as well.

Cromwell in 1527 <> <> <> <> Frain as Cromwell

The novel actually opens in 1500 with Thomas’ blacksmith father Walter delivering a severe beating almost killing 15 year old Thomas. Thomas runs away to the continent where he fights alongside the French briefly before continuing on to Italy (Venice and Florence) where he receives a first class education (bookkeeping, trade, banking and finance, and the law). He returns to England an experienced trader, lawyer, and commited Machiavellian. Cromwell finds work with Cardinal Wolsey, Archbishop of York the most powerful, richest, and vainest man in England. Wolsey surrounds himself with cleaver aids and Cromwell is the ablest and cleaver ist.

We pick up the story in 1527 when Cromwell is 42 and Henry has decided that Katherine of Aragon will not be able to give him a male heir and wants to divorce her to marry Anne Boleyn. Wolsey is unable to help with Henry’s divorce and Henry slowly confiscates Wolsey’s property as punishment. Cromwell carries messages between Henry and Wolsey and Henry comes to respect Cromwell for his loyalty and straight talking intelligence. When Wolsey falls from power, Henry brings Cromwell to advice him and Cromwell slowly gains power and influence in England.

Henry VIII Painting <> <> <> <> Meyers as Henry

Much of Cromwell’s advice has to do with empowering Parliament and making Henry head of the Church in England. The Church holds a third of all land in England and Cromwell realizes that selectively confiscating this land and imprisoning treasonous churchmen will assure Henry’s power and finances. Cromwell becomes the most feared man in England.
The novel is subtly written and assumes the reader is generally familiar with the story and cast of characters. Because it is told from Cromwell’s point of view it is a very Machiavellian view of the times and events. One example: a lord in the north is mismanaging his estates and is heavily in debt. It is Cromwell’s job to talk some sense into him.

Cromwell: But my lord, they need supply, they need provision they need walls and forts in good repair. If you cannot ensure these things you are worse than useless. The king will take your title away and give them to someone who will do the job you cannot…
Lord Percy: He will not. He respects all ancient titles all ancient rights.
Cromwell: Then Let’s say I will. (to himself) Let’s say I will rip your life apart. Me and my banker friends. How can I explain to him? The world is not run from where he thinks. Not from his border fortresses, not even from Whitehall. The world is run from Antwerp, from Florence, from places he has never imagined; from Lisbon, from where the ships with sails of silk drift west and are burned up in the sun. Not from the castle walls, but from counting houses, not be the call of the bugle, but by the click of the abacus, not by the grate and click of the mechanism of the gun but by the scrape of the pen on the page of the promissory note that pays for the gun and the gunsmith and the powder and shot.

Other times Mantel brings an incredible conciseness to a complex tale:

But Christendom was overturned for the Boleyn marriage, to put the ginger pig (Elizabeth) in the cradle.

Not exactly Shakespeare, but that just about sums up the whole story. Well worth the effort.

Where Men Win Glory; The Odyssey of Pat Tillman, Jon Krakauer, 2009

Previously read books by Krakauer include Into Thin Air, the account of the 1996 climbing disaster on Everest; Into the Wild, which was adapted for a movie by Sean Penn; and Under the Banner of Heaven, a story of the Mormon’s violent history. Given this list, it is clear why Krakauer would be interested in the Tillman story.

Pat Tillman

Krakauer had some difficulty fleshing this one out. No one in Pat’s family beyond his wife Mary was willing to help or even be interviewed. The reluctance of the family in the aftermath of the Bush administration’s attempt to turn his tragic death into war propaganda and to hide his fratricide is understandable. As he points out, Pat’s mother Dannie’s insistence on learning the truth of his death and holding the responsible accountable led to the release of most of the material that made the book possible. But to this day, The Bush administration and defense department have refused to release emails and other documents relating to top level involvement in the cover up and propaganda campaign.

One of the big ironies of the book is the central role of Pat’s mother Dannie in raising her three sons to love sports and athletics and to give them a set of values which made it all but inevitable that Pat and Kevin would volunteer for the army rangers in the aftermath of the 9/11 attacks. Dannie was crushed when she organized an intervention to talk Pat out of his decision that failed.

The book is organized into the parallel stories of the recent history of Afghanistan from the Soviet invasion to today with the story of Pat Tillman as he grew to become a star football player whose small size and relatively slow speed belied his real talents that allowed him to star at Arizona State and to start for the Arizona Cardinals in the NFL. Krakauer gets much of his Afghan story from Steve Coll’s Ghost Wars.

Propagandist Jim Wilkinson with Rice

Pat was first sent to Iraq where his group played a backup role in the rescue of Jessica Lynch. This allows Krakauer to talk about the false information and propaganda campaign surrounding Lynch spur headed by a Bush campaign propagandist Jim Wilkinson who later played a similar role in glorifying Tillman. A few days after the uneventful Lynch rescue, a group of marines was ordered into the same city An Nasiriyah to capture the bridges. When the commander’s tank bogged itself into a sewer under a power line so he lost both mobility and communications, the operation turned into a disaster. The group separated into three sub groups, none of which knew where the others were due to the terrible radios. Making matters worse, communicating with air cover requires different radios entirely and the only person able to establish contact with the two circling warthogs mistakenly directed the planes to fire on his own group killing many marines. The cover up of this action included “losing” the warthog videos that recorded the entire action.

The cover up of Tillman’s death, which is described in great detail because of the many subsequent investigations included burning his uniform and vest as well as his personal diary. Finally, after about seven investigations (all by the military), the squad responsible for the actual shooting was kicked out of the rangers and the staff Sargent was demoted. No higher authority was ever even reprimanded. The only reason the military finally revealed the friendly fire was that Pat’s brother Kevin was still in the rangers and was the only member of his group not to know the truth. The army finally realized that someone in Kevin’s group was bound to reveal the truth at some point so they decided to tell him.

Krakauer ends with disturbing statistics; 21% of American deaths in WWII are believed to be caused by friendly fire. the number for Vietnam is believed to be 39%, in the first gulf war the number climbs to 52%.

FOB Tillman

The book indicates that army ranger Tillman may have fired his weapon only once, a warning shot in Baghdad. The only action he was involved in was to be shot by his own colleagues. Not exactly the heroism he expected. Oh, the canyon where he was killed and the nearby Forward Operating Base (FOB) were named after him.