Anatole Kaletsky (2010) Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis; Public Affairs, New York

In their song Lola, Ray Davies and the Kinks sang: “Girls will be boys and boys will be girls/It's a mixed up muddled up, shook up world/ Except for Lola, L-L-Lola”. A similar cross dressing phase is evident in modern political economy.

While the Chinese have adopted Capitalism Chinese style, the West now flirts with Socialism Western style. Political positions are increasingly fluid, as evident from the fact that many public intellectuals, darling Libertarians and Conservatives, seem enthusiastic about the rise of China and its systems. The flux has been marked by the return of old fashioned political pamphlets, calls to arms for particular ideologies. Most are delivered via Internet blogs, T.V. chat shows and the occasional tome, the soapbox and Hyde Park’s Speaker’s Corner now being otiose.

In Capitalism 4.0, Anatole Kaletsky, an editor at the Times, former journalist at The Economist, and an economic consultant, argues that the global financial crisis is transforming capitalism. Capitalism 1.0 (the classical era of laissez-faire), Capitalism 2.0 (the Depression and the rise of government intervention) and Capitalism 3.0 (the stagflation of the 1970s and the rise of free-markets) will evolve into Capitalism 4.0. There are a few “X.1” and “X.2” interspersed in between. The new release entails a redefined relationship between markets and governments. Mr. Kaletsky argues, perhaps blandly, that this is due to capitalism’s innate ability to adapt and evolve.

According to the Kaletsky code, Capitalism 4.0 will require competent and active governments to create the framework for a viable market. It will require governments to manage demand and recognise the imperfections and errors of markets. There is a lengthy list of things that will need to be changed at the political and economic levels to bring the new Xanadu into being. The new order will be characterised by “experimentation”, where government intervention increases in some parts of the economy, financial markets, but decreases in others, such as education and health. Mr. Kaletsky preaches that if governments use their tools properly a rapid and robust recovery will occur.

The arguments and proposals are not novel or original. Many are in active discussion, having been put forward earlier by other authors. The most surprising thing about Capitalism 4.0 is the optimism about policy makers having the ability to make decisions that will improve the system. The policy makers are the same ones that the author vivisects as having failed in the lead up to the current crisis.

Capitalism 4.0 is founded on the bedrock of Joseph Schumpeter’s idea of “creative destruction”. It also sounds ominously like the mixed economy nostrums that all political persuasions have embraced with slight and minor variations in the post World War 2 era. Unfortunately, most people like the creative part of Schumpeter’s formulation, rather than the second less joyful part of the aphorism. Everyone also agrees on a mixed economy, provided that in the mix they are left to make money without interference in good times and bailed out in others.

The written form chosen or the size of the work (just over 300 pages) seems insufficient for the breadth of Mr. Kaletsky’s ambitions and unbounded enthusiasms. Capitalism 4.0 lurches uneasily at times from superficiality to excessive detail. The readers will find potions and remedies for everything from correcting deficits, trade imbalances to running the Chinese economy.

The author embraces futurism, unafraid to make predictions where others dare not predict. There are forecasts on currencies (the dollar), finance, energy (oil), healthcare, housing, tax and the environment. There is even career advice – business and financial institutions will stop employing economists, trained in traditional rational and efficient markets.

The potted history is standard. The author’s interpretation of it will undoubtedly have supporters and detractors depending on the political colour of the critic.

The tone lurches from earnest econo-speak to polemic, branching off occasionally into vituperative attack. Mr. Kaletsky believes that the magnitude of the crisis is largely attributable to George Bush’s Treasury Secretary - Henry “Hank’ Paulson. An entire chapter “The Economic Consequences of Mr Paulson” (around 8% of the book) consists of an ad hominem attack of Paulson, in particular his decision to allow Lehman Brothers to file for bankruptcy.

Despite hyperbole, Mr. Kaletsky claims that Paulson came “closer to destroying capitalism than Marx, Lenin, Stalin and Mao Zedong combined”, the chapter does not match Keynes’ 1925 “The Economic Consequences of Mr Churchill”, a critique of Sir Winston’s defence of the gold standard. The chapter is self consciously titled after Keynes’ piece, a note drawing this to reader’s attention.

Mr. Kaletsky sees no inherent contradiction in espousing capitalism’s self renewal process and avoiding periodically violent and destructive failures to impose necessary market discipline. Puzzlingly, he chooses to believe that voters realise that banks are always government supported and will merely now demand that all banks should pay in advance for government insurance.

Crises are generally useful in forcing decisions. Crises can be also extremely useful in creating a market, whether needed or superfluous, for big ideas about resolving the “crisis”, whether real or manufactured. Capitalism 4.0 is one of a glut of these crisis solution works, searching for the next “big idea”, that will make it onto the best seller list even if it doesn’t change the world or make a difference.

The truth of political economy may be simpler. Capitalism simply survives not on its merits but because it avoids the failure of command economies such as Russia, described once as “Upper Volta with rockets and nuclear weapons”. It also plays to the base instincts of the biological drivers of competition between human animals. It might also be as George Soros observed that at a certain point in cycle “people continue to play the game although they no longer believe in it.”

Politicians are rarely ideological. The process dictates pragmatism and spin in equal measures. The aim is to attain and retain power for as long as possible. In Rome, this meant ensuring the people had food, drink, employment and games. Surprisingly, little has changed in those political dynamics. The chattering classes and commentators may believe that political economy matters. Unfortunately, the only use that politicians have for theory is to either elucidate decisions already made or discredit opponents.

Other than North Korea, no country has adopted a pure form of political economy in recent history and that fact is unlikely to change soon. Keynes wanted economics to become a better respected profession on a par with dentistry. We remain some way short of that objective.

© 2010 Satyajit Das All Rights reserved. Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Carmen M. Reinhart & Kenneth Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly; Princeton University Press, London

Raghuram G. Rajan (2010) Fault Lines: How Hidden Fractures Still Threaten the World Economy Princeton University Press, London

Simon Johnson and James Kwak (2010) 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown; Pantheon Books, New York

Nouriel Roubini and Stephen Mihm (2010) Crisis Economics: A Crash Course in the Future of Finance; Penguin

Joseph Stiglitz (2010) Freefall: Free Markets and the Sinking of the Global Economy; Allen Lane, London

Robert Pozen (2010) Too Big To Save: How to Fix the U.S. Financial System; John Wiley, New Jersey

Yves Smith (2010) ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism; MacMillan

Thomas Carlyle, the Victorian historian, christened economics the "dismal science". In Eat The Rich, P.J.O’Rourke described economics as "an entire scientific discipline of not knowing what you’re talking about." One can only quibble with the word "scientific".

The publisher led recovery – "crunch porn" or, more kindly, "crash lit" - in the global economy has entered a new and more dangerous stage. Economists have begun to hold forth on the problems. Keynesians, Monetarists, Cavaliers, Roundheads and Vegetarians are stirring to give their own views of reality and putative solutions. Worryingly, at least two of the books are now in the Best Seller lists for Business Books.

A key characteristic of the emerging tidal wave of books is the fact that almost everyone saw the writing on the wall, predicted the crisis and now moreover have solutions that can ensure that this was the crisis to end all crises. Unfortunately in the prediction stakes no economist can claim the prescience of Pope Benedict XVI. According to Italian Finance Minister Giulio Tremonti (as reported on Bloomberg News (20 November 2008)), the Pope, then merely Cardinal Joseph Ratzinger, in an article written in 1985 predicted that "an undisciplined economy would collapse by its own rules". It is unclear which crisis the Holy Father was predicting, but given papal infallibility, probably all of them.

In the wonderfully titled "This Time is Different", Carmen Reinhart and Kenneth Rogoff expand on their recent academic papers and empirical work on "eight hundred years" of financial crises. Marshalling a mind numbing array of statistics and data, the authors find similarities between financial crises. Their conclusion is that the cause is excessive debt accumulation by government, banks, corporations or consumers. The combination of excessive leverage and short-term debt lies at the heart of the problem.

If you are unsurprised at the predictable conclusions, "This Time is Different" provides solid empirical support for the intuitions. The book misses an essential point "This Time is Different" depends on identifying the correct base precedent that is being used for the economic state being studied.

The interesting part of the book is the evidence of what happens after a financial crisis. The authors show that severe financial crises share the following characteristics:

Declines in real housing prices averaging 35% over six years. Equity prices fall an average 56% over 3.5 years. Unemployment rises an average of 7% during the down phase with average length of four years. Output falls more than 9% over a two-year period. Government debt increases an average 86% in real terms, as a result of the collapse in tax revenues, counter-cyclical fiscal policy efforts and spiking interest rates. So much for a ‘V’ shaped recovery! But "this time is different".

To prevent future crisis, Mrs Reinhart and Mr Rogoff propose a new global financial regulator and improving the IMF (Mr Rogoff’s former alma mater where he was once chief economist). Puzzlingly, they are not optimistic about their reforms: "The persistent and recurrent nature of the ‘this-time-is-different’ syndrome is itself suggestive that we are not dealing with a challenge that can be overcome in a straightforward way."

Raghuram Rajan, Professor of Finance at the University of Chicago Booth School of Business and former chief economist at the IMF (there seem to be a lot of those going around!), did warn about the risk of the global financial crisis. His early warnings led to the economist’s version of a duel at dawn (only with irony and sarcastic epigrams) at a conference held at Jackson Hole.

In "Fault Lines" Professor Rajan’s focus is on deep-seated problems in the global economy, including the absence of income growth, employment, health care and the problems of global capital and trade imbalances. Bravely, he argues that the over borrowing that caused the problems was an entirely ‘rational’ response to a deeply flawed economic and financial system. He also identifies growing inequality as a theme in the problems. He argues that these "fault lines" are the real problems rather than a group of greedy bankers taking irrational risks.

The "Fault Lines" position on bankers is at odds with "13 Bankers", co-written by Professor Simon Johnson and James Kwak, a former McKinsey consultant. Expanding on their earlier Atlantic Monthly piece "The Quiet Coup", the authors outline the thesis that big banks, especially in America, have used their economic power to gain political power.

The economic power of the banks derives from their growing importance in the broader economy as measured by share of corporate earnings and stock market capitalisation. This economic strength is then leveraged using lobbying, campaign contributions and the transition of staff between Washington and Wall Street.

"13 Bankers" sees a conspiracy in this arrangement and also considerable danger. Like all good conspiracy theories there is some validity in the argument.

Suggestions of political influence and a palpable lack of transparency in recent government actions to bail out banks have emerged. There are allegations that the Henry Paulson, the previous U.S. Treasury Secretary, may have "pushed" Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. The "closeness" between banks and government officials and regulators that has been exposed is increasingly part of the problem in dealing with the real issues.

The thesis in "13 Bankers" is similar to the work of Mancur Olson, the American economist. In his books ("The Logic of Collective Action" and "The Rise and Decline of Nations"), Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population.

Over time, the incentive structure means that more distributional coalitions accumulate burdening and ultimately paralysing the economic system causing inevitable and irretrievable economic decline. Government attempts to deal with the problems of the financial system, especially in the U.S.A., Great Britain and other countries, may illustrate Olson’s thesis. Active well funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system.

"13 Bankers" is grounded in a traditional American fear of a financial oligarchy, dating back to the fights between Thomas Jefferson and Alexander Hamilton over the "Bank of the United States" and Franklin Roosevelt’s Depression-era regulation of finance. While American banks may certainly be powerful and highly influential, the case for a conspiracy is not entirely convincing.

Bankers are keen to pick the pockets of anybody including each other. The highly nuanced differences in the positions of individual banks are unlikely to be consistent. Bankers agree and disagree with each other on about the same number of issues. One online commentator noted the intersection between Wall Street, Constitution Avenue and Main Street was best named: "Confusion Corner".

In addition, the potential risks of such a powerful clique are not fully explained. Large banking and other industrial complex dominate many nations and economies with not always negative consequences.

The authors’ remedy is to cap the size of banks as a percentage of the economy. This may not be effective without reform of campaign finance rules, restrictions on political appointees to many positions, reform of the central banking system and other measures.

Nouriel Roubini (who had inherited the mantle of "Dr Doom" from Henry Kaufman) also predicted the global financial crisis. In case you didn’t know this, statements like the following ensure you are left in no doubt: "Roubini’s prescience was as singular as it was remarkable: no other economist in the world foresaw the recent crisis with nearly the same level of clarity and specificity." The problems of joint authorship and reference to only one of them presents challenges within the English language.

In "Crisis Economics", Professor Roubini with co-author Stephen Mihm take a distinctly Minsky line in analysing the global financial crisis. They argue that financial crises are the result of a confluence of historical and economic factors. Building on Hyman Minsky’s "stability is itself destabilising" hypotheses, "Crisis Economics" blends economy theory, behavioural economics and agency theory to try to explain the present crisis. The authors conclude that financial systems are inherently fragile and prone to collapse. Interestingly, while it is wary about the value of theories, statistics and mathematical economics and finance, "Crisis Economics" argues that crises are not only predictable, preventable and, with the Roubini/ Mihm brand medicine, curable.

Professor Joseph Stiglitz’s "Freefall: Free Markets and the Sinking of the Global Economy" and Robert Pozen’s "Too Big To Save: How to Fix the U.S. Financial System" focus less on the cause of the crisis than on solutions.

Professor Stiglitz believes that the origins of the present crisis lie in neo-liberalism and its fascination with free markets and de-regulation. Correcting these problems, Professor Stiglitz produces an extensive list of policy reforms. On the way, the author launches into often abrasive attacks of the government actions to date.

The analysis of the causes of the crisis is not original. His criticisms of policy actions range from insightful to assertions that need supporting facts. "Freefall’s" call to action disappointingly ends rather tamely in a serious of well-worn prescriptions for stronger regulation (by the same apparatus that caused the problems) to correct market failures. Somewhere, Professor Stiglitz finds the time to argue for a less materialistic society and adoption of something akin to Bhutan’s measure of Gross Domestic Happiness ("GDH").

"Too Big To Save" is light on causes (thankfully) and long on lengthy lists of proposals. The proposals themselves focus on analysing alternative models for government stakes in banks, new board structure for large financial institutions, jurisdictional issues over systemic risks and the securitisation of loans. None of the proposals are startling or differ much from that offered by others. Some are in the process of being implemented.

Both "Freefall" and "Too Big To Save" tend to telesis ascribing events to innate, inexorable facts. Reality is far more nuanced than such a simple view of history. Perhaps this why economists generally tell you tomorrow why what they forecast yesterday didn’t happen today.

Both books also embrace regulation and regulators freely whilst being critical of regulators as lacking in skills and beholden to special interests. The faith in government activism is perverse. It fails to consider why a new set of rules will necessarily be more effective and existing regulators will be able to deal with complex issues well above their pay grades. This is particularly the case when the same regulators failed in the very same tasks in the lead up to this crisis. This dissonance is striking.

In "ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism" Yves Smith, the creator of the Naked Capitalism website, provides an edgy and interesting antidote to the other books on offer. It is an anti-economics economics book that explores the failures of the discipline itself as revealed by the global financial crisis.

Ms Smith argues, consistent with Professor Rajan, that the proximate causes (excessive leverage, global imbalances and model failures) are symptomatic of deeper financial problems. "ECONned" focuses on a central issue - the role of economists as policy-makers and the weaknesses of economic thought. The thesis is that economists, some in key policy making roles, relied on dogma ignoring the dangers that eventually led to the financial crisis. The book’s coverage of the sequence of errors, misrepresentations and rationalisations of poor outcomes and instability is revealing.

"ECONned" is strongest in its coverage of the role played by economists in the crisis and the flaws in the widely used financial models and concepts that created the conditions for the crisis.

The books, with the exception of "This Time is Different" which lurches around a space time continuum that would have made Dr. Who giddy, are primarily American in focus. For the main part, the world ends appears to end at the Atlantic and Pacific Oceans (Mexico and Canada are American off-shoots in any case). American exceptionalism extends to financial crises or it must seem to the reader.

The style of these books varies. The tone is mostly the desiccated drone (reminiscent of John Cage’s experimental work from the 1960s). Some are deliberately academic in tone to achieve the correct type of unreadability. One assumes that they are weapons deployed in the dawn duels between economic scholars.

"This Time is Different" is not wholly successful in condensing its stupefying density of data and facts into an accessible tract. The book favours the repetition of minimalist music. Aaron Brown (who authored a less than complimentary review in the Wilmott Magazine) noted that the book uses the word "inflation" 154 times, "default" 220 times and "crisis" 253 times. It also repeats the title phrase "This Time is Different" from time to time in a form of economic incantation.

"Freefall" reads like a 19th century pamphlet with equal measures of vitriol, self-righteousness and broad prescriptions. "13 Bankers" and "ECONned" are written intelligently with the non-technical layman, rather than the "econo-wonk", in mind.

It seems that the global financial crisis is the economist’s moment in the sun. They are busily "solving" the problem, sometime with pet theories or, more often, rehashing old ones. Unsurprisingly, there have been spats between economists with allegiances to different camps. Most notable fights include Paul Krugman versus Stephen Roach, Martin Wolf versus Niall Ferguson etc. If Friedman had been alive, then it would have been Milton versus all comers. If Keynes had been alive, then the jousts would have at least been witty and cultured. No modern economist can touch Keynes and John Kenneth Galbraith for pungent wit.

Most economists, it seems, believe strongly in their own superior intelligence and take themselves far too seriously. In his open letter of 22 July 2001 to Joseph Stiglitz, Kenneth Rogoff identified this problem: "One of my favourite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, "Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?" I responded something to the effect of "Well, he was arguably the greatest Federal Reserve Chairman of the twentieth century" To which you replied, "But is he smart like us?" Economists have delusions of adequacy and a related assured self-confidence that they bring to any problem.

Rogoff went on note that in one of Stiglitz’s books – "Globalisation and its Discontents": "… I failed to detect a single instance where you, Joe Stiglitz, admit to having been even slightly wrong about a major real world problem. When the U.S. economy booms in the 1990s, you take some credit. But when anything goes wrong, it is because lesser mortals like Federal Reserve Chairman Greenspan or then-Treasury Secretary Rubin did not listen to your advice." Rogoff concluded that Stiglitz was "… a towering genius. Like your fellow Nobel Prize winner, John Nash, you have a "beautiful mind." As a policymaker, however, you were just a bit less impressive."

Writing in his preface to Benjamin Graham’s "Intelligent Investor", Warren Buffet observed that: "…not only does a sky-high IQ not guarantee success but it could also pose a danger…I therefore urge the relevant regulatory bodies of the United Studies and Canada to incorporate an IQ test into their securities licensing exams. … nobody would be allowed to work in the financial markets in any capacity with a score of 115 or higher. Finance is too important to be left to smart people." One could add economics should definitely never be left to economists.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Michael Lewis (2010) The Big Short: Inside the Doomsday Machine; Allen Lane

John Lanchester (2010) Whoops! Why Everyone Owes Everyone and No One Can Pay; Allen Lane

Roger Lowenstein (2010) The End of Wall Street; Allen Lane

Vicky Ward (2010) The Devil’s Casino: Friendship, Betrayal, and the High-Stakes Games Played Inside Lehman Brothers; Wiley

Harry Markopoulos (2010) No One Would Listen: A True Financial Thriller; John Wiley

Modern finance is generally incomprehensible to ordinary men and women. The level of comprehension of many bankers and regulators is not significantly higher. It was probably designed that way. Like the wolf in the fairy tale: “All the better to fleece you with.”

In a thoroughly post-modern contradiction, this incomprehensibility creates a market for a literature that pretends to explain the inner workings of arcane finance. The average reader is not only happy to be stripped of his or her saving in every which way but is also willing to fork out further money to read how it was all done. The latest books on the global financial crisis inhabit this strange no man’s land between fiction and non-fiction writing.

Like all things, the writing is formulaic. Central to these works is the idea of the “human touch”, entailing the humanisation of money. It involves characters that the readers can identify with or hate and an overly Manichean perspective of the world where preferably good triumphs over evil.

In “The Big Short”, Michael Lewis returns to the world of finance. In fact, Lewis self-consciously uses a lunch with John Guttenfreud, the head of Salomon Brothers during his time in banking in the 1980s featured in his earlier work, as a framing device in his story. The inevitable question is how does it compare to “Liar’s Poker” (the gold standard for the genre). The answer is complicated.

Unlike “Liar’s Poker” which was based on his direct experiences, “The Big Short” is a highly contrived narrative focused on a group of individuals who prospered from the collapse of the sub-prime mortgage market. Lewis uses their experiences to explore and explain the world of mortgage lending and the excesses of banks.

Lewis’ highly polished writing style makes “The Big Short” an easy and compelling read. As in “Liar’s Poker”, the book succeeds in providing a feeling for the times and some of its dynamics.

His choice of characters to portray varies. Perhaps the most interesting is Dr. Michael Burry, a neurologist who becomes a fund manager. Burry is also a self diagnosed Asperger Syndrome sufferer. It seems that all the fashionable people suffer from this condition – witness Lisbeth Salander, the heroine of Steigg Larsson’s Millennium trilogy. The coverage of Burry’s personal travails and especially his relationship with his own investors as well as banks is interesting.

“The Big Short” lacks the raw vibrancy of “Liar’s Poker”. It also lacks the immediacy of the first person narrative and the first-hand knowledge that made the earlier book interesting. The technical details of the instruments and markets described are superficial. Lewis uses the book to espouse his theory that the woes of Wall Street derive largely from the shift from partnerships to publicly owned investment banks. This view of the issues is simplistic.

Parts of the book derive from a series of pieces that Lewis wrote for various magazines giving it, at times, the feel of a magazine article that has been extended or a series of shorter pieces that have been amalgamated.

In the final analysis, “The Big Short” is a wonderful piece of ‘Faction” – neither history nor fiction, neither accurate nor seeking the real truth. Lewis constructs a conventional tale of fear, greed and stupidity and the triumph of good over evil without ever attempting to get to the heart of the problem. In doing this, Lewis caters, one suspects, to the audience that he now serves. As Guttenfreud correctly states that “Liar’s Poker” made Lewis’ career while destroying his. Lewis is now referred to routinely as a “master story teller” – therein may lie a problem.

A journalist and novelist, John Lanchester started studying financial markets as research for a potential novel. “I.O.U.: Why Everyone Owes Everyone and No One Can Pay” (the American title) or “Whoops: Why Everyone Owes Everyone and No One Can Pay” (the non-American title) is his take on the unfolding global financial crisis, which was in the author’s view “the most interesting story I’ve ever found.” Perhaps Mr. Lanchester should get out more often.

In what also sometimes reads like an extended magazine article (Mr. Lanchester contributes to The New Yorker and The New York Review of Books), “Whoops” presents a personalised perspective on the author’s journey of discovery. There is little new here but an understated, humorous, jokey writing style and a gift for the telling phrase enlivens the book.

For example, Mr. Lanchester describes the fall of the Berlin Wall and the integration of socialist economies as: “The jet engine of capitalism was harnessed to the oxcart of social justice, to much bleating from the advocates of pure capitalism….” The rise of credit default swaps attracts the following comment: “It's as if people had used the invention of seat belts as an opportunity to take up drunk driving.” In ignoring the tell tale signs of the risk of Madoff’s promises, officials failed to recognise “a critically important category of funny smells.”

The book is at its best when it is personal. Mr. Lanchester’s father was a banker with the then Hong Kong and Shanghai Banking Corporation. The recollection of his father and his childhood fear of ATM sometimes creates vivid imagery for the abstract world of money. Mr. Lanchester’s writing about the obligatory fieldwork visiting Baltimore, where thousands of borrowers have had their homes repossessed, is, at times, moving.

Like Lewis, the book is skimpy on details and is superficial in its understanding of the financial horror stories that underlie the current problems. Mr. Lanchester finds the mystical belief in Alan Greenspan, the former Federal Reserve chairman, and the self-regulating power of the markets fascinating. Unfortunately, the Greenspan legacy and Rand-ian belief system is more nuanced than “Whoops” describes and has been more effectively covered elsewhere.

“Whoops” reaches the conclusion that the current problems are “climatic” where a confluence of weather systems (free market capitalism, regulatory failures, belief in mathematical finance and global imbalances) are the primary culprits. Mr. Lanchester finds the world of finance and financiers odd: “One of the peculiar things about the world of finance is that it freely offers the sensation of being proved right to its participants ... One of our culture's deepest beliefs is expressed in the question 'If you're so smart, why ain't you rich?' But people in finance are rich – so it logically follows that everything they choose to do must be smart.”

In “End of Wall Street”, Roger Lowenstein, author of “When Genius Failed”, the history of the collapse of uber hedge fund LTCM, undertakes a more conventional narrative about the financial crisis. The “human touch” in “End of Wall Street” comes from behind the scenes episodes - Jim Cramer, Ben Bernanke’s meanderings and, predictably, Alan Greenspan.

Lowenstein draws a chronological arc focusing on the excesses of the mortgage market (built around discussion of the rapid growth of Fannie Mae and banks), the Bear Stearns problems, the Lehman collapse and the government’s rescue actions. In its historical analysis, “End of Wall Street” follows and is similar to other preceding books that record the same history.

Lowenstein writes well and his access to the luminaries who play key parts illuminates the tale. As in “When Genuis Fails”, Lowenstein attempts to draw significant deep conclusions from the immediate events.

In his book about LTCM, it was about the failure of models and quantitative models and, to a lesser degree, of hedge funds. But hedge funds and quantitative finance grew and prospered post LTCM. Even John Meriwether went on to form JWM Partners that duly had problems in 2008. In “End of Wall Street”, Lowenstein tries to extrapolate from current events to predict the changes in investment banking and financial business models.

Events over the last twelve months perhaps detract somewhat from that thesis as the “Street” has rediscovered old ways. As Andy Serwer, Managing Editor of Fortune put it: “The party is over until it comes back again…I’ve been around long enough to see that we have these cycles. These guys get their cigars and champagne. They have a great time. The whole thing blows up. But then they re-emerge years later. This one is a really bad one. But I don’t think Wall Street is dead.” [Abbie Bordeau, David Fitzpatrick and Scott Zamost “Wall Street: Fall of the Fat Cats” (17 October 2008) cnn.com]

Perhaps, the only truism about bankers and traders is that along with cockroaches and rates they would be the survivors of a nuclear explosion.

In “The Devil’s Casino”, Vicky Ward, a contributor to Vanity Fair magazine (a noted publication with ordinary people as its target), explores the human side of Lehman Brothers and its culture over the last quarter of a century. The conclusions are unsurprising and the picture of a macho, self delusional culture is consistent with that at any investment bank. Ward does not uncover any secrets, details of illegality or new information about the principal players in her book.

Ward paints a picture a tight cabal of “lifers” whose views shape and determine the business and strategy of Lehman brothers. Ms. Ward’s sometimes entertaining account is at its best in the chapter titled appropriately “Lehman’s Desperate Housewives”. The portrait of a rigid, highly controlled and manipulative culture of “Stepford Wives” is engaging. But the portrait would be the same for any spouses of any large corporate organisation.

As a first person narrative based on the author’s own experiences, “No Open Would Listen” is different from the other books. It also benefits from its focus on a single subject – Bernard Madoff’s Ponzi inspired ‘hedge fund’ and Harry Markopoulos’ quest to expose the fraud.

Shown the exemplary returns of a fund run by Bernard Madoff, Mr, Markapoulos, an analyst at a small Boston firm, detected what John Lanchester would term a telltale “funny smell”. Attempting to unravel the secrets of Madoff’s money machine, Mr. Markopooulos found the world’s largest Ponzi scheme.

The most interesting part of “No Open Would Listen” is his attempt to bring the fraud to the attention of the Securities and Exchange Commission (“SEC”). Despite no less than five separate efforts, the SEC failed to follow up and take any enforcement action. Mr. Markapoulos sees the failure as driven by ignorance, incompetence, arrogance and lack of willingness to take on a former chairman of NASDAQ and an industry grandee. Given Madoff’s scheme took in more than $40 billion between Mr. Markapoulos’ first letters to the SEC and Madoff’s eventual arrest in December 2008, this would have to be one of the greatest regulatory failure in history by a considerable margin.

Despite a writing style that owes more to Gestalt sessions or accounting (his profession) than Shakespeare, Mr. Markopoulos’ tale provides considerable insights to the factors that created the conditions for the global financial crisis.

The burgeoning literature about the global financial crisis targeted at the mass-market audiences is increasingly focused on tales of excess, greed, brilliance and stupidity. They are based on narratives about good and evil and success against the odds. They are also simplistic, frequently factually incorrect and can be misleading. Readability combined with a celebrity, “brand name” author (and the critical media access it provides) is now the accepted formula for fitting a narrative to important events.

The vast majority of people of limited financial literacy, it seems, prefer to be entertained by well-told familiar stories from well-known authors rather than strain their synapses for the truth. As growing public apathy to the financial and environmental problems of the world shows, the public is content with an anodyne and airbrushed version of reality. The literature of the age accepts rather than challenges this view.

As Frederick Neitzche wrote: “To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown -- the first instinct is to eliminate these distressing states. First principle: any explanation is better than none…”

It is perhaps not the end of Wall Street but it surely getting close to the end of the road for books about the financial crisis.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Jennifer Burns (2010) “Goddess of the Market: Ayn Rand and the American Right” Oxford University Press

One of the strange by-products of the publishing boom around the global financial crisis is the revival of the Ayn Rand’s reputation. The sales of her books, such as “The Fountainhead” and especially “Atlas Shrugged”, the 1957 novel that for libertarians is the marker for the rise and failure of collectivism, has risen sharply outperforming most living writers and most recent contributions.

The spike is neither unexpected nor surprising. The rise in fortune coincides directly with massive state intervention in the economy following market failures in the fallout from the financial crisis. As one recently formed group on the social networking site, Facebook, expressed it: “Read the news today? It’s like ‘Atlas Shrugged’ is happening in real life”. The writer just forgot to add the “Oh boy!” at the end of “Read the news today?” to complete the nostalgia.

For some, the future predicted and feared by Rand is coming true. Alan Greenspan’s downcast admission in Congress about the failure in his view of the world echoed similar admissions by the character, Robert Stadler, the gifted physicist in “Atlas Shrugged”, who had betrayed his faith cravenly in exchange for political favour. The fact that Alan Greenspan was once a member Rand’s circle merely added to the parallels.

Ayn Rand was a trenchant critic of the popular collectivism movements of the twentieth century. Her view was always resolutely pro-individual and anti-government. Rand helped shape the libertarian self image – the gifted individual restricted, brought down and in permanent conflict with power hungry bureaucrats, officials and the untalented ‘second handers’ who populate life.

Born Alisa Rosenbaum, Rand, a Russian Jew, had first hand experience of the Communist revolution and it effects on her native land. It shaped a philosophy that was fervently anti-communist and devoted to the rights and liberty of the individual.

An experienced scriptwriter, Rand shaped her two major novels less as literary works and more as vehicles for her polemic. In her time, the academic establishment found her views to be shallow and limited. Perhaps one reason was her strident criticism of everybody including people whose views were not dissimilar to her own, such as Hayek. She, it seemed, found it impossible to agree with anybody even if they agreed with her.

Her writing never rose to high standards. The stereotyped characters in her novels were poor caricatures. These weaknesses did not detract from a unique popular appeal.

In “Goddess of the Market”, Jennifer Burns identifies the source of her appeal. The very shallowness of her thinking that intellectuals dismissed was inherently attractive to a certain sensibility, especially adolescents. Her absolute values and intolerance are attractive to those who prefer a Manichean worldview. Rand’s popularity also derives from her correct insight that thriving societies are not possible without freedom, entrepreneurial abilities and innovation. This fact is most evident in China’s embrace of market economics to some degree.

Rand’s popularity is also in no small part driven by her greatest talent - creating mystique and self-promotion. Rand anticipated the cult of “celebrity thought leadership” (practised by Richard Gere, Madonna, Bono, Bob Geldorf and others) even before the terms existed.

Her power came from her greatest creation – Ayn Rand herself. Highly deliberate, Rand cultivated a distinctive image. She had a glare according to a magazine profile that “could wilt a cactus”. She wore a broach in the shape of a dollar sign.

As Ms Burns writes, her personal life completed the imagery. Her long-suffering husband had to wear a bell on his shoe to ensure that Rand could hear him approach. She informed both her husband and Mrs Branden of the arrangement whereby she met and had sex with her leading acolyte, Nathaniel Branden, twice a week.

Ms Burns identifies the internal contradictions of Rand. Within her inner circle (known ironically as “the collective”), the promoter of individual liberty could not tolerate dissent of any kind. Her stifling worldview encompassed everything from politics to interior design and dancing. Despite her following, Rand never succeeded in creating a lasting legacy or political movement. The collective fell apart when she fell out with Branden.

In “Goddess of the Market”, Jennifer Burns, Assistant Professor of History at the University of Virginia, provides an insightful and, at times, entertaining perspective of Ayn Rand and her thinking. Ms. Burns has fashioned an interesting portrait of one of the twentieth century’s most fascinating and yet Quixotic figures. Rand’s influence lives on in her book and also in the watered down elements of her libertarian philosophy that has penetrated liberal political thinking.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Zygmunt Bauman (2007) Liquid Times: Living in an Age of Uncertainty; Polity Press, Cambridge

Zygmunt Bauman (2010) Living on Borrowed Times; Polity Press, Cambridge

Alex Preda (2009) Framing Finance: The Boundaries of Markets and Modern Capitalism; University of Chicago Press, Illinois

Karen Ho (2009) Liquidated: An Ethnography of Wall Street; Duke University Press, Durham and London

Money is deeply embedded in and inseparable from the cultural and psychological environment within which it is used. The debate about ‘efficient markets’ and ‘rational actors’ is really about the deeper belief systems that underlie modern economies. In recent years, an increasing literature in the sociology of finance has developed. While sometimes not easily accessible, this body of work is often far more insightful about the global financial crisis than the work of economist and financiers.

Resident in England after being driven out of Poland by an anti-Semitic campaign, Zygmunt Bauman is Professor of sociology at the University of Leeds. In his later works, such as “Liquid Times” and “Living on Borrowed Times”, Professor Bauman examines two different but interrelated issues – ‘post modernity’ and ‘consumerism’.

Professor Bauman’s central thesis is that in the latter half of the 20th century the world shifted from a society of producers to a society of consumers. Security was given up to enjoy increased freedom to purchase, to consume and to enjoy life. Professor Bauman uses the metaphors of 'liquid' and 'solid' modernity to capture this shift. Financial market’s obsession with liquidity and the word’s specific significance within finance is noteworthy.

In contrast with its ‘solid’ shape, ‘liquid’ modernity created new and unprecedented challenges. Social forms and institutions no longer had enough time to solidify into accepted frames of reference for human actions and long-term plans. Individuals now had to be flexible and adaptable, pursuing available opportunities. Liquid modernity required calculation of the likely gains and losses of acting (or failing to act) under conditions of endemic uncertainty.

The rise of financial markets and financialisation of everyday life is the irresistible result of liquid modernity. The rise of debt fuelled consumption and speculation derives directly from an uncertain world where risk taking is an essential survival strategy. The shift from the solidity of welfare statism to the liquid neo-liberalism is seen as a direct extension of this process.

Professor Bauman’s concerns are primarily social and cultural . He writes compellingly about the effect of declines in social safety nets and the increase in economic insecurity. Bauman describes a process in which individuals must desperately reinvent themselves through consumption. “What the denizens of the liquid-modern world quickly find out is that nothing in the world is bound to last, let alone last forever. Everything is born with a brand of imminent death and emerges from the production line with a use-by date printed or presumed.”

The readiness to discard extends to people who we do not recognise as fellow human beings - migrant workers, immigrants or terrorist suspects. “It seems all things, born or made, human or not, are until-further-notice and dispensable.” He concludes that consumerism and debt offers individuals a self-perpetuating illusion of utopia.

“Liquid Times” and “Living on Borrowed Times” offer deep insights into post-modern life. Specifically, it exposes the essential social and philosophical changes that lie at the heart of the conditions that led to the global financial crisis.

“Framing Finance” focuses on the history of markets. It tries to understand how the idea of the market that underpins modern economics developed from a social and cultural perspective. The author, a sociologist, provides rich insights into how speculation moved from a declasse activity into a central pillar of modern life.

The book is particularly interesting in showing how various devices or strategies were crucial in legitimising finance and trading. Professor Preda’s discussion of the employment of mathematics and market data to create a pseudo-scientific aura around money is enlightening. It also provides valuable insight into the origins and traps of quantitative finance. “Framing Finance” provides an interesting focus on how culture and imagination shaped and in turn were shaped by markets and their model.

“Liquidated: An Ethnography of Wall Street” uses the techniques of modern anthropological study to observe and comment on financiers, especially investment bankers and traders. Professor Karen Ho created this interesting study based on her personal experience of working on Wall Street and classical field study techniques. Observing the behaviours of bankers in Manhattan was perhaps no less enlightening but less glamorous and less exotic than studying rituals of remote Kazakh tribes (a field once favoured by Gillian Tett, now Assistant Editor of the Financial Times).

Professor Ho describes the banker’s worlds in a non-judgmental way and tries to provide a holistic view of how the culture works. As her fieldwork was undertaken before the global financial crisis, she does not have a chance to comment of the Chairman of Goldman Sach’s recent observation that bankers were “doing God’s work”. It would have surely added a religious dimension to banking, worthy of exploration.

Professor Ho’s central focus is to try to expose the system of beliefs, reinforced by education and experience that underpins finance. While bankers may not be aware of these, they are present and powerfully shape the world in which they operate.

“Liquidated” highlights certain factors that lie at the core of the global financial crisis. The best and brightest are hired by banks and then brutalised in a form of slave labour for 100 to 140 hours a week. Job security is non-existent and fear of failure is constant. The only part of the equation that makes sense is the pay grades that are obsequious.

This amalgamation of forces creates a culture where narrow, short-term self-interest dominates. Creating and selling products of no intrinsic value to people who do not understand them is a direct result of this culture.

The title and the underlying concepts evoke Bauman’s idea of ‘liquid’ modernity. Bankers seek to make assets liquid or tradeable. The inherent contradiction is that they too are highly ‘liquid’ assets and can be ‘liquidated’, living in fear of this eventuality constantly.

This brutal world is masked in the narrative of free-markets and capitalism. Bankers cannot reject these “truths” that are held up as core values even if they are riddled with contradictions. This is because it would essential lead to ostracism from the society and culture and, most important, its monetary and material rewards.

While the ideas in these books are fascinating, the writing style is not easy. For example, Professor Ho’s book is derived from her dissertation and it shows, unfortunately. The writing styles can be described, politely, as “academic”. The conjunction of prolix text and jargon would not be out-of-place on a structured product desk. But it does not increase the readability of these otherwise insightful and interesting works.

The culture and societal background of finance are key factors in the financial crisis. To understand and prevent future crisis and human tragedy, these factors need to be understood and managed. The issue of executive compensation and the environment in which they work needs to be changed to avoid perpetuating and reinforcing current problems. As Adair Turner, chairman of the U.K. Financial Services Authority, stated at a meeting of the Future of Banking Commission: “We simply don’t know whether we really have tools which can change culture.”

Unfortunately, bankers or economists generally see George Orwell’s “Animal Farm” as a tale about farm animals. They are unlikely to challenge themselves and venture into these uncharted worlds.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

Paul Maass (2009) Crude World: The Violent Twilight of Oil

The search and extraction of oil was and is the “great game”. Oil and its by products have been central to the development of the world. A large chunk of modern life is to quote the author “oil’s spawn” – heating, transportation, fertilisers that underpin production of food, plastics, PET etc.

The need for oil has been central to economics and geo-politics for centuries. In the film Three Days of the Condor (referred to in Crude World), an older more cynical CIA operative (Cliff Robertson) tells a younger researcher (Robert Redford) why American will support murder for petroleum: “Ask’em when they are running out. Ask’em when there’s no heat in their homes and they’re cold. Ask’em when their engines stop. Ask’em when people who have never known hunger start going hungry. You wanna know something? They won’t want us to ask’em. They’ll just want us to get it for ‘em.”

"Crude Oil" is not a book about oil per se but an interesting and sometimes insightful picture of what oil does to countries that have it. It also looks at the operations of oil companies actively involved in exploration and extraction of oil and their activities in these countries.

The book is organised loosely around the themes of oil scarcity, problems of oil wealth (plunder, rot), oil revenue driven political ambition (empire, mirage) and environmental cost (contamination). There is also coverage of the U.S. invasion of Iraq (fear, greed, desire). It relies on anecdote drawn from the author’s interview and travel. Well written and compassionate towards the individuals portrayed, Crude Oil is an interesting read although there are no original or unexpected revelations.

The book is strongest when it deals with specific local problems, such as the problem of production and political and social costs of oil in the Niger Delta. It is weaker when it tries to extrapolate from the specific to the general and draw broader conclusions about the nature of the oil industry and its problems.

For a history of oil, Daniel Yergin "The Prize" is hard to go past. What Mr. Maass, a journalist, does is provide colour on the effects and difficulties that resource wealth and the world’s insatiable demand for energy imposes on countries and people from a human perspective. As the polish writer Ryszard Kapuscinski wrote” “[oil] anetsthetizes thought, blurs vision, corrupts”.

An Iraqi character tells the author: “The whole world is built around oil, so let’s talk about it honestly.” Unfortunately, dealing with oil and the related issues of non-renewable resources is neither easy nor high on anybody’s current agenda. "Crude Oil" illustrates this reluctance to confront the issues abundantly.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – Revised Edition (2010, FT-Prentice Hall).

False Economy: A Surprising Economic History of the World by Alan Beattie

Misadventures of the Most Favoured Nations: Clashing Egos, Inflated Ambitions, and the Great Shambles of the World Trade System by Paul Blustein

Adam Smith observed that man has an intrinsic “propensity to truck, barter, and exchange one thing for another.” False Economy and Most Favoured Nations provide different and interesting perspectives on economic growth and trade.

Alan Beattie, the world-trade editor for the Financial Times, explores the basis for economic success and failure.

The central simple conceit (every non-fiction book now requires one!) is the contrasting fortunes of Argentina and America. Mr. Beattie shows that in the nineteenth century, the two nations exhibited similar potential and enjoyed not dissimilar natural endowments. The thought leaders of the time favoured Argentina to succeed relative to America. History records that the result, like most predictions beyond the next ten minutes, were different. America, despite its current problems, is the world’s largest and most successful economy and Argentina remains a basket case and serial defaulter on its debt.

Mr.Beattie’s analysis highlights that the choices of rulers and the sequences of decisions may influence success powerfully. Perhaps disappointingly for nationalists and conspiracy theorists, he finds little evidence that natural resources, religion or the interference of colonial masters affect economic success.

For example, natural resources are considered especially troublesome – the “Dutch” disease. Richness in natural resources can create few local jobs and profits for locals. Profits accrue frequently to foreign multinationals and corrupt politicians’ Swiss bank accounts. But sensible management of these resources can assist development. Mr Beattie uses the contrast between Botswana’s successful management of its resource wealth and other African countries to illustrate this.

Well written, False Economy does not purport to be comprehensive. The breadth of geography and topics covered at time make the book feel slight and superficial. Flights from topic to topic and the author’s desire to be clever sometimes jar. These minor criticisms aside, False Economy is both an interesting and at times insightful read.

In Most Favoured Nations, Paul Blustein, former Washington Post reporter, critically analyses the World Trade Organisation (“WTO”) and the reality of free trade. The author is singularly unimpressed, like many others, with both the WTO and the successive futile trade negotiations. We are currently in the Doha round soon to be followed by the Homer Simpson “Doh” Round.

Mr. Blustein’s thesis is that the benefits of global trade have been overstated, probably egregiously so. He argues for the simpler framework of the Global Agreement on Trade and Tariffs which made progress in reducing and eliminating barriers to trade in preference to the utopian and ultimately unrealisable objectives of the WTO which would ultimately benefit mainly the wealthier nations.

Short on historical and economic analysis, Mr. Blustein’s book is at its most compelling in its portraits of individuals, both ordinary and the great, in the world of trade. His portrait of Mike Moore - a former New Zealand politician who became a WTO director, after a massive campaign to obtain the position expending a part of his personal fortune on the effort – is a good example.

The coverage of negotiations within the WTO itself is especially acute. Mr. Blustein describes Kamal Nath, the Indian commerce minister, pressing Peter Mandelson, the European trade commissioner, to specify the year by which Europe would phase out its export subsidies: “I want a date! I want a date! I want a date! But not with you!” Kamal Nath features again in another session, questioning the U.S. position: “Next time you can bring a picture of an American farmer? Because I have never actually seen one. I have only seen US conglomerates masquerading as farmers.”

Most Favoured Nation shows that the machinations of the WTO and world trade are always lively if ultimately unproductive.

Interestingly, the third law of publishing says that the relative importance of the topic declines at a speed that is directly proportional to the number of books written on the subject. False Economy and Most Favoured Nations appear at a time when models of economic growth are changing and growth in global trade is reversing for the first time in years in the wake of the global financial crisis.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives- Revised Edition (2010, FT-Prentice Hall).

John Cassidy (2009) How Markets Fail: The Logic of Economic Calamities

Like Mark Anthony with Julius Caesar, many have now come to bury the Efficient Market Hypothesis (“EMH”) rather than praise it. Amusingly, some of the critics who have recently found their voice are those who for years made their living from financial markets that were predicated in no small measure from the intellectual dogmas that EMH was central to.

In his previous book Dot.Con, John Cassidy, a writer for the New Yorker, provided a penetrating history of the Internet bubble and its bust. In How Markets Fail, Mr. Cassidy attempts a critique of modern economics. In this regard, he covers similar ground to Justin Fox’s The Myth of the Rational Market and Pablo Triana’s Lecturing Birds on Flying.

At its best, How Markets Fail provides a vivid history of recent economic thought and its influence on events that laid the foundations of the global financial crisis. Drawing on anecdotes and interviews, Mr. Cassidy provides an accurate outline of the developmental trajectory of modern economies.

His description of a noted confrontation between Raghuram G. Rajan and orthodox economists led by Larry Summers and members of the Fed, at a Jackson Hole meeting is revealing. Rajan, then the chief economist of the International Monetary Fund, warned about the risks embedded in the financial system. His detractors blithely denigrated the concerns on ideological grounds.

Mr.Cassidy also attempts to extend the text to encompass a critical review of what he calls “Utopian Economics”. The central focus of the criticism is that society is best served by individual self-interest and free markets. Mr. Cassidy’s argument is that individual self interest does not work, markets frequently fail, price mechanisms are flawed and markets are plagued by problems of information asymmetry – different levels of knowledge between participants.

In his criticisms, How Markets Fail is perhaps a little too eager to embrace behavioural economics and the work of Hyman Minsky. Useful as both alternatives are, they are also incomplete explanations of the complex economic and financial relationships.

In the final section of the book argues that it was these failures that led to the disastrous sequence of events that caused the global financial crisis.

Well written and researched, How Markets Fail is superior to the growing list of titles that cover similar ground. Mr. Cassidy largely succeeds in his objectives although the book does not extend the debate. The book undoubtedly will introduce a new generation of readers to the debate and encourage further debate.

There are some contentious and erroneous pieces of analysis of individual technical elements of the theory. In this regard, Donald Mackenzie’s brilliant An Engine Not A Camera provides a more technical and deeper analysis of aspects of the theory.

Recent criticism of the EMH, Chicago economics and “free market idolatry” tends to gloss over some interesting anomalies. Markets are rarely entirely free and regulatory failures were a contributing factor to many of the problems that have emerged. That is not to make the case for unfettered ‘red tooth and claw’ capitalism but to point out that many proposed regulatory interventions will not necessarily have the intended effects.

All economics is deeply embedded in a political, cultural and sociological framework. In many ways, it is symptomatic of these underlying issues.

For example, the analysis of sub-prime mortgages misses several factors. Firstly, a lack of growth in real income, especially for middle and lower paid employees, made it difficult for them to achieve the material success that was daily sold to them by the media and advertising. Secondly, the rise of stated income and low or no documentation mortgage reflected the change in work practice where large parts of the work force were no longer employed full-time. Casual or part-time employment and contracting arrangements made the required proof of income difficult.

Interestingly, many problems arise from the lack of humility about the theories. They are, at best, incomplete and highly conditional models that compare unfavourably to middle-age medical and religious superstitions.

Robert Merton articulated this concept precisely. “At times we can lose sight of the ultimate purpose of the models when their mathematics become too interesting. The mathematics of models can be applied precisely, but the models are not at all precise in their application to the complex real world. Their accuracy as useful approximations to that world varies significantly across time and place. The models should be applied in practice only tentatively, with careful assessment of their limitations in each approximation.” Ironically, the speech was less than a year before the collapse of LTCM. Writing in 1995, Merton foreshadowed the events that were to unfold 3 years later at LTCM: “any virtue can become a vice if taken to extreme”.

As recent events in Copenhagen suggest, the only thing that history tells us is that mankind generally are poor learners. Mr. Cassidy quotes a recent column by Harvard’s Greg Mankiw: “despite the enormity of recent events, the principles of economics are largely unchanged.” Professor Mankiw suggested that student still needed to learn about “the efficiency properties of market outcomes.”

How Markets Fail is perhaps merely a sub-set of a wider phenomenon – How Mankind Fails.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

David Roche and Bob McKee (2008) New Monetarism – New Edition

David Roche and Bob McKee are President and Chief Economist of Independent Strategy, a global investment consultancy. Both experienced market economists with a wealth of practical investment and financial market knowledge, they self published New Monetarism in 2007 and issued a new edition in 2008.

The book is the most succinct and penetrating analysis of the changes in financial order that took place in the last 10-15 years that is available. Pithy (the text runs to around 100 pages), untrammelled by jargon and extraneous garbage (generally deployed by authors to obscure or rescue a failing argument) and mercifully free of interviews and anecdotes, New Monetarism sets out the key drivers of the build up of liquidity and its effect on the global economy.

Messrs Roche and McKee present a convincing argument of how much of global “growth” over the past 20 years was, in reality, driven disproportionately by borrowing that fuelled asset price bubbles that in turn have allowed further borrowing. The authors show how the growth in liquidity was driven by macro-economic factors (the decline of inflation and low oil prices) and changes in financial markets (the growth of derivatives, changes in intermediaries such as banks, investors, hedge funds and “innovative” new financial products).

The book covers the rise of emerging markets and the massive liquidity vortex created by the large foreign exchange reserves and its affect on capital flows, cost of capital and ultimately growth.

Importantly, New Monetarism succeeds in tying the disparate elements together in a coherent narrative.

Presciently, the first edition of New Monetarism appeared in September 2007 just prior to the calamitous collapse of financial markets. The new edition is updated and also includes a new chapter Parched World that looks at a post-GFC world. It provides a useful guide to possible developments in financial markets.

Paul Krugman, writing in the New York Times, called the U.S. economy the “Madoff Economy”. Messrs Roche and McKee show that the world for the last decade or two has been a gigantic Ponzi game.

The only lesson that central bankers and politicians have learned is that there is nothing wrong with a Ponzi scheme. It is just that you can’t allow the game to end. Present initiatives to arrest the problems are merely designed to prolong the game without addressing the root cause and imbalances.

© 2009 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).

Keynes: The Return of the Master By Robert Skidelsky (2009)

John Maynard Keynes is having an excellent crisis. Dead for over a half a century, the British economist is enjoying a comeback as desperate governments and even more desperate economists adopt massive and dramatic fiscal stimulus to prevent the current crisis developing into a depression.

Renewed interest in Keynes is evident in the rash of new books re-examining his work and legacy. There can be, of course, no suggestion that authors and publishers are merely cashing in on the opportunity.

Mr. Robert Skidelsky is recognised as an authority on Keynes, based on his peerless three-volume biography of the man. The Return of the Master tries to reposition the economist’s work and insights in the light of recent events. It is an interesting and eminently readable overview of some themes that can be found in Keynes’ work.

Drawing, at times heavily, on the biography (authors must be allowed the license to ‘self refer’), Mr. Skidelsky’s central theme appears to be that most post Keynesian economics is problematic and the great man’s insights are ‘misunderstood’. Specifically, Keynes’ thought on "radical" or "irreducible uncertainty" as a primary cause of economic instability is not given enough recognition or prominence. Mr Skidelsky argues that in ignoring uncertainty, modern economics makes a serious intellectual error. Some of the criticisms are entertaining and also valid.

The book probably overstates its case. It is a bit like Nostradamus’ prophecies – followers see in the elliptical words what they wish to see.

The modern world is fundamentally different to that which Keynes inhabited and analysed. The insights gleaned from Keynes are ambiguous when viewed from the viewpoint of the economies and markets of 2009. There is selective resort to specific dictum to justify any specific course of desired action. There is sometimes insufficient acknowledgement of the complexity and ambiguity of Keynes’s own views on economic theory and its practice.

In the run-up to the 1929 election, Keynes discovered a seminal political truth about deficit spending. Lloyd George, an economically challenged politician, was delighted when Keynes provided the rationale for spending taxpayers’ money on social programs to bribe voters. Keynes absorbed this lesson well and maintained a constructive ambiguity throughout his life allowing him to appeal to politicians who favoured government spending and those who favoured middle-class tax cuts.

Economics is, at best, an inexact, inadequate and evolving set of theories seeking to explain complex relationships in a constantly changing world. The major insight that Keynes offered was regarding the inability of theories to explain actual events and how any attempt to apply the theory had unintended consequences. In an essay titled "The Great Slump of 1930," published in December of that year, Keynes acknowledged: "We have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand."

Writing in the Financial Times (5 February 2009) Benn Steil, Director of International Economics at the Council on Foreign Relations, succinctly set out the background to the return of Keynes: "when the facts are on our side, we pound the facts; when theory is on our side, we pound theory; and when neither the facts nor theory are on our side, we pound Keynes." The Return of the Master and the many other titles appearing about Keynes are testament to this tendency rather than the validity or otherwise of his nostrums.

When an author or thinker’s own published total output is exceeded in a single year by that of writers writing about his ideas, it is a fair assumption that there is a ‘bubble’ in his or her stock.

© 2010 Satyajit Das All Rights reserved.

Satyajit Das is a risk consultant and author of Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives (2006, FT-Prentice Hall).