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Economics Bookshelf


"One of the greatest pieces of economic wisdom is to know what you do not know.
—John Kenneth Galbraith ".

"And once there was no more Soviet Union, those that run the US no longer had to pretend that they were on the side of the common man, that they offered a better alternative than communism."

A Note on the Return of Depression Economics

 While triumph of financial masturbation over productive economic activities is funny and tragic at the same time, we can do nothing about it. Financial crisis became a part of the landscape and repeat with certain periodicity. The last one started in 2008 did not yet ended despite huge borrowing by government to bail out banks and stimulate the economy. Situation with external debt became complex, to say the least...

A good fairy of economic growth has expired and financial perversions (aka casino capitalism) replaced the real thing. There is an amazing gullibility and ineptitude of both buy side “money managers” in mutual funds and 401K investors who were burned twice in a decade and still are desperately reaching for yield. Like the hero of the story The Roads We Take banker Shark Dodson aptly said "Bolivar cannot carry double." You should fight for the preservation of capital not for return on capital because in a coming shoot-out between financial gangsters it is 401K investors who will be shot.

Collapse of 2008 was not the first, nor it will be the last. Not nobody can stop another collapse: there was ideological capture of the society by neo-classical economy which directly serves the interests of financial oligarchy. The financial industry has money. And they use them to buy the politicians, all the politicians. The fact the Congress is owned by Wall Street is no longer secret even for rednecks. And not just them but the judges, independent judicial system is gone too. That's why there has been no genuine and effective financial reform, and no real recovery. And that's why there is clear and present danger of another financial market collapse.

Labor is too small and too weak to stop finance. As a result the American Dream for the average man doesn't exist any more. The national borders which in "good old times" would have limited the size a financial bubble are now replaced by the "global village", which makes the limits of finance expansion way larger. Another important factor is the ruling elite willingness (president Bush administration to be exact) to fork over the borrowed money to save banks ( the trillions that were given to the banks in 2008-2009).

At the same time industrial products lost importance. Finance, as a gambling machine, doesn’t need industry, health care or agriculture. They operate the global casino and the money are chips in the games that are played, a new deus ex machina. New type of perpetuum mobile. They forgot that according to laws of physics none exists. But there way too many willing accomplices of this scam including in the highest levels of government.

In many ways the economic die have been cast by the USA elite and resulting political risks are coming to the front door. Mark Twain said that history is rhyming with the past rather than repeating it. It might well be that current events rhymes with the 1930s with its political upheavals. Top 1% is confident that they are safe this time with huge police apparatus on their side. That does not always work. The war is always a solution as it redirect attention from the domestic elite to external enemy. That might also be used.

Situation with information during economic crisis reminds me situation in Soviet Union. People were trying to find alternative sources (including Samizdat, BBC and Voice of America) because they generally distrusted any and all information from official media.

Similarly only most naive and unsophisticated 401K investors trust  CNBC, WSJ or other official media channels. Foreign source like Financial Times, Telegraph, etc and domestic financial blogs are better, although far from perfect. Still it's hard for a regular 401K investor to understand what's happening because CNBC divas, corrupt academics/politicians/regulators (aka financial industry shills) each day are shouting that they knew what was going on.

The author is a computer specialist, not an economist  but still like in computer science reading right books is what distinguish good specialist from a bad one.   Programmers are used to learn all their life, so it is not hard d=for them to learn a couple of economics books. That might help to prevent doing stupid things in their 401K plans. So it is about your hard earned money.

First of all you cannot understand complex system without some framework and the worst thing to do is adopt some pseudo theory like Chicago school market theocracy or, worse,  supply side voodoo. In any case if you do not make an effort to find a realistic framework you probably will use the worst available among actively marketed.

One possibility here might be institutionalists.   This analytical framework retains the fundamental assumption of scarcity and hence provides competition to neo-classical junk. It modifies the rationality assumption and adds  historicism, the dimension of time. It also views institutions as the constraints that structure human economic behavior. Such constraints can be formal (rules, laws, constitutions), or informal (norms of behavior, conventions, codes of conduct). Each also has its enforcement characteristics. Together they define the incentive structure of societies and economies. See for example Douglass C. North - Nobel Prize Lecture

It is culture that provides the key to path dependence - a term used to describe the powerful influence of the past on the present and future. The current learning of any generation takes place within the context of the perceptions derived from collective learning. Learning then is an incremental process filtered by the culture of a society which determines the perceived pay-offs, but there is no guarantee that the cumulative past experience of a society will necessarily fit them to solve new problems. Societies that get "stuck" embody belief systems and institutions that fail to confront and solve new problems of societal complexity.

I would like to stress that neoclassic economists are too servile (fifth column of financial oligarchy) and detached from reality with their oversimplified models, which demonstrate both misunderstanding of the economy and misunderstanding of mathematics (why they cannot switch to Excel or some standard simulation language, after all and still use liner equations of dubious relevance ? ) All voodoo economists (aka "market fundamentalists" and, especially, supply side economists) are just snake-oil peddlers which service rich and powerful.

The authors views were greatly influenced by  John Kenneth Galbraith.  He coined the ironic term "Affluent society"  to describe the United States after World War II: society is rich in private resources but poor in public ones because of a misplaced priority on increasing production in the private sector (BMW's and Mercedeses riding filthy roads with potholes and beggars on the sidelines).  His work  ‘The New Industrial State’  is still relevant. Also interesting is his son's book The Predator State.

Galbraith argued that industrial production was channeled into satisfying non-essential or artificially created needs, in part to maintain employment, and that the United States should shift resources to improve schools, the infrastructure, recreational resources, and social services. The key idea here is to provide a better quality of life instead of an ever greater quantity of imported goods and wasting huge amount of resources. The term has lost its original ironic meaning and is now used simply to indicate the USA-style prosperity with individual autos, McDonalds, etc.

I think many IT professionals including myself are still living in a fool's paradise and have yet to understand the gravity of the economic crisis and its possible affect on out 401K savings. With financial sharks dominating markets it's not return on capital, it is return of capital that we should be concerted in out retirement accounts. As B9K9  noted in his comment to March Non Farm Payrolls , if you walk in a CS department at Columbia, CalTech, MIT or any other leading university and ask a random group of people (students, professors & visitors) a couple of very basic questions about our financial system.

How many would know anything at all about the Fed? About SEC? About gold vs fiat currencies? How about the exponential function as it relates to the inevitable divergence between compounding principal+interest & an underlying asset's carrying/servicing capacity?

They wouldn't know a damn thing, not because they aren't smart, but rather because they aren't (and were never) taught. On the contrary, the underlying principles of our current money-credit-banking system are so straightforward, in fact rather mundane & boring, that they are kept a secret for a reason.

My dad is of the type I mentioned above: a top flight MIC a few levels below POTUS - he knew nothing. Add him to the list of engineers that includes Denninger, Mish and countless others. Once it's explained, it's blindingly obvious. My dad had a 'duh?' look on his face when he put it all together. And he thought the Cold War was a big con; this takes the cake by far.

So how is that our system has been so thoroughly infiltrated & corrupted? Why have all age-old strictures against usury been discontinued? Why does the controlled media incessantly extol the virtues of debt? How is that we find ourselves in a situation where the ancient wisdom's have not only been abolished, but reversed?

That suggests a deep flaw in 401K plans in general (they are not tax free, they are actually highly taxed accounts with the only difference that the tax is paid to Wall Street not the government): most people do not act in their best interests and due to Wall Street brainwashing take too much risk. While TIPs do not provide much return they at least save principal, which is unachievable goal for most 401K accounts. Not only most 401K investors fail to understand how deeply fraudulent the stock market. We have problem recognizing that the institutions hyping stocks  have a vested interest in keeping people invested: they get paid by taxing the value of funds under management. And their interests are well represented in subservient to Wall Street  media.  From this point of view CNBC is just  a circus that is run by Wall Street "too big to fail" giants … When you  hear a phase like “slow learners are coming to the party trying to play catch-up” you think about the next rip-off prepared for 401K crowd and Johnny Retail. You got to wonder how many times they have to get fried before they realize they’re playing a game on Wall Street terms and like in any casino are bound to lose. To lose large part of their 401K savings...  Especially with firms with completely crooked 401K plans like Wall Mart and some other big companies (for example Wall Mart 401K accounts are managed by Merrill Lynch, probably the most greedy and unscrupulous of TBTF).

Stocks casino gambling losses in retirement accounts are not compensated by the state for a good reason: if you are so stupid to play this crooked game, you need to pay the bill yourself.  But this rotten to the core giant casino aside,  there is only one measure of the health of an economy: how many fulfilling, living-wage jobs are created or destroyed (most other economic factors can be distilled to this.).  Here we recently hit another constrain -- peak oil.

Drastic costs cutting can be successful for a couple of years, but not a decade:  at some point a feedback loop comes into play: cost-cutting eventually diminishes the number of consumers of many types of produced goods. It works with substantial lag and is less pronounced in consumer and luxury goods: the consumption of those is the rich game anyway due to the level of inequality surpassing gild age. But it eventually comes into play.  

All those considerations (and there are more, see ) suggest that boomer crowd might have negative returns on thier 401K contributions (after inflation) and thus should expect pretty frugal future, retirement in which funds are far less plentiful then was anticipated. Forget about 8% annual returns. That's was fraudulent estimate from the very beginning. What about achieving positive return after inflation? That's is "new normal".  Those who are now are unemployed or underemployed, situation is even worse and they will have little more income that Social security.  Many IT specialists, especially those over 55 might not be able to find full time jobs. And it's very hard to adjust your lifestyle down.

The word "Recovery" is seldom defined. If it means a return to the recent past, it will never happen. There can be no remedies that can allow IT professionals as a group to keep living exactly the way we're accustomed to with all the trappings of comfort and convenience we are so used to.  Structural changes including structurally high unemployment in IT are inevitable. Companies will be keeping fewer employees for any particular level of sales revenue and try to fill more jobs as part time. Outsourcing might also continue, albeit at slower pace.  Potyomkin village façade of recovery that the administration presents is a fake.  It looks like they have nether courage, nor real intention to make any structural changes and want just to kick the can down the road.  As David Einhorn  observed in his October, 2009 speech:

Presently, Ben Bernanke and Tim Geithner have become the quintessential short-term decision makers. They explicitly “do whatever it takes” to “solve one problem at a time” and deal with the unintended consequences later. It is too soon for history to evaluate their work, because there hasn’t been time for the unintended consequences of the “do whatever it takes” decision-making to materialize.

Bernard Stiegler argues in his book, Acting Out, that consumer capitalism is in fact destructive of what he calls primordial narcissism. That description is pretty apt for the description of Wall Street.

As one reader of Big Picture blog aptly noted this is a kind of civil war:

  1.  CNBC Sucks Says:
    March 10th, 2009 at 11:22 am

    I don’t know how you do it, Barry. I cannot do what you do. You fight day after day for the virtues of objectivity, critical thinking, and reality under your own real name. Economically, we are not at a war, but a civil war, in which armies of the opposite side are conscripted against us by their own ignorance, gullibility, belief-system-impaired perceptions of reality, and self-destroying sociopolitical dogma.

    I don’t know how we Americans compete against Europe and Asia when we are so divided within our own borders.

    My hat is off to you and anyone else who has the stomach to keep fighting intellectually for what is right for our country against all odds.

And the other side of barricades is very well organized. Here is another apt comment about the state of mainstream media from Paul Craig Roberts ( Former Wall St. Journal editor savages the mainstream media)

Today reporters write the stories that their masters want to hear, or they are out. The function of editors is to make certain that no uncomfortable information reaches the public.

The public is slowly catching on, and the print media is slowly dying. The New York Times, Chicago Tribune, and Los Angeles Times are all on the ropes to one extent or the other.

Americans are still subjected to Fox "News" and CNN propaganda piped into airport waiting rooms, doctors’ offices, and exercise centers. It is very much the situation that George Orwell describes in 1984.

Here is how John Walsh expressed similar reservations in a footnote to his article The Root Cause of the Crisis of 2008:

John Walsh is a professor at U Mass. He is not an a practitioner of the Dismal Science, and he frankly doubts that “economics” as taught in the universities now, as distinguished from political economy, is a valid discipline. He has some knowledge of the physicists and mathematicians who put together the Wall Street “instruments” that have triggered the present crisis.  Many of these people knew that they were simply providing their bosses with simulations that proved what the bosses wanted proven.  And many of these former academics openly referred to themselves as “whores.”  It may be dangerous to let too many physicists go unemployed.

 For the latter category I personally prefer books by Prof. Robert Shiller  and Prof. John Kenneth Gailbraith. 

We've had 25 years of what I call financial mercantilism, which is the government aiding and pushing and bailing out the financial sector. It's not going to change. But I do think finance is going to lose its control over the economy in the sense that the public is going to be so angry they're going to insist on more regulation.

It would be nice if the Wall Street executives which aided and abetted this financial storm be sent to renovated Alcatraz, not saved by the government. But the hope that they will be held accountable are extremely slim. At most a couple of scapegoats will be prosecuted for their lack of due diligence or excessive corruption, the same scam that was rehearsed on Enron's executives. While the Nietzsche superman stereotype of  "chosen people" of global finance (hedge fund managers, buy-out gurus, etc)  are now a "damaged good", they are probably safe from joining population of prisons for white collar criminals. 

As Peter Norberg noted  technology dissociates the decision making from the final consequence of decisions promoting irresponsibility: anonymity of computer terminal shields individuals from ethical concerns, freeing people to act antisocially, the behavior to which they had been less inclined to if their identities were known.  Criminality generally is reversely correlated with the depth of social contacts. A low degree of human interaction seems to promote criminality. Trading became a game similar to poker. Brokers spend little effort to consider how their actions to affect larger society. This virtual world of computer screen, that programmers know all too well,  makes the broker to be morally numb, and likely to behave in asocial and irresponsible ways. As a result ”F**k the small guys!” attitude is simply pervasive. This amoral mentality includes contempt towards uninformed and minor customers and first of all  "401K suckers". Like many people who earn a high income brokers think that they have the right to surpass rules and the morality of common man. They also perceive it as advantageous to give good, large customers particular favors, not only invitations to fancy dinners, but at times also bypassing laws on behalf of the customers.

At present general public has less confidence in money managers and brokers than in people from virtually any other profession. But the fact that matter most is that financial losses of  Wall Street buccaneers are now transferred to the public and we were about to be asked to pay for it but do not ask any questions. Would this be a more blatant case of  taxation without representation?

Baby boomers retirement is really in jeopardy. Simpler more frugal life is in the card. As one reader of the article Failure to save East Europe will lead to worldwide meltdown - Telegraph noted

... Do we really need all the junk we've been persuaded to buy over the past couple of decades?
People can live perfectly happily on remarkably little if they try.

The market for many products will significantly diminish over the years to come.

Ready-made foods (e.g. a handful of prawns on a bed of flavored pasta, total cost 50p, selling for �3.95 a portion), bottled water, organic foods, gourmet items and countless other "non-essentials" can all be expected to shrink in size.

Restaurants and pubs will be visited far less often. Holidays will be in Britain. Clothes and footwear will be chosen for their durability rather than their fashion. Entertainment will be home-based.
The future is simple.

Charles Lee on February 15, 2009 at 10:22 AM

What is interesting that 401K investors, especially baby-boomers,  are not only victims, but also a willing participants of this "financial excesses" saga...  I think 401 investors should be more properly called 401K donors. As Washington Post reported in No Longer Ready to Retire  (unfortunately they did ask the key question: will there be any jobs for those who cannot afford to retire ?)

After last week -- which saw volatile market swings, major bankruptcies of once-stable and venerated Wall Street firms and the largest government intervention in the market since the Depression -- people across the Washington area reported not only heightened anxiety about money, but uncertainty, if not outright fear.

People such as Tim Kenney or Thomas Williams said the summer's stress over rising gas, food and energy prices now feels like nothing. Now they are watching hard-earned savings shrink or simply disappear. Kenney began to wonder if the very foundation of the economy, and with it people's dreams and plans, was crumbling.

Jean Celine, 64, was already so worried about rising health-care costs that she'd been forcing herself to go to the gym every day to stay healthy. After last week, her nerves are shot. Like many her age, she has only a small pot of money to live on for the rest of her life. Any loss is a big loss. And the average 65-year-old retiree can expect to live 17 more years, the AARP says. So this weekend, Celine started a $15-an-hour job. "I'll probably be working for the rest of my life," she said. "Some golden years."

After last week, psychologists took to the airwaves to tell people not to become sick over losing money, advising that pausing was better than panicking. But by then, enough people had sufficiently panicked to make a run on the $3.5 trillion in money market funds, similar to the bank runs that led to the Great Depression.

"It's just amazing in the last four or five days how many times I've heard the words 'The Depression' brought up," said Kevin Flannery, general manager of the Leisure World retirement community. "It's all people are talking about here."

By Friday, after word of the federal intervention, people seemed to breathe a sigh of relief. But the wild week left many with changed visions of what might lie ahead.

* * *

Kenney, 58, had a gauzy vision of what his retirement would look like. A creative type, he didn't want to decamp to Florida or play golf all day. He wanted freedom. That meant having enough money to do only the work that he loved, to compose music, finally get to those two books he's been meaning to write, perhaps buy a farm in Iceland.

But after last week, Kenney, like tens of thousands of people reaching retirement age, is being forced to reconsider his future. Glued to his chair in front of two Mac computer screens, chain-smoking Camel Lights, Kenney watched, wide-eyed, as over the course five business days one-third of the value of his retirement savings simply vanished.

He hasn't slept well since.

Reading this selection of outdated financial news please remember that its your hard earned money and  you better be careful with them. Programmers and system administrators work is a hard one so it reckless to invest something without creating a ticket for the transaction and analyzing consequences of it in a small spreadsheet (Excel is a really great program for economic models) or using Perl.

One often forgotten lesson is that higher returns entail disproportionately high risk. The key word here is "disproportionately": often slightly higher returns entail dramatically higher risk. So please don't be greedy: 401K investors are pray for financial services companies and should properly be called 401K donors...

One often forgotten lesson is that higher returns entail disproportionately high risk. The key word here is "disproportionately": often slightly higher returns entail dramatically higher risk. So please don't be greedy: 401K investors are pray for financial services companies and should properly be called 401K donors...

We all want to blame someone. It's pretty human to crave for scapegoats. There were certainly a lot of people who saw this crisis coming, while there were certainly even more people (like myself) who did not. Unfortunately, the ones who did not controlled both the finances and the politics of the country. I am less concerned with prosecuting the CEOs (who pushed the limits of risk-taking to produce quarterly results) but with the failure of the checks in the system, namely the outside auditors, regulators, rating agencies and CFOs and controllers of the banks who knew or should have known that valuations were unrealistic, or even fraudulent. It is their collective failure that allowed the problem to metastasize. Once one player in the marketplace is allowed to post results based on unrealistic valuation , competitive pressures will incentivize or even force the other players to follow suit.

A key skill for investors is to verify the accuracy of sources and their evidence.  Economically, we are not at a war, but a civil war, in which armies of the opposite side are conscripted against us (401K investors) by exploiting our own ignorance, gullibility, belief-system-impaired perceptions of reality, and self-destroying sociopolitical dogma.

"My estimate is that the financial sector takes $560 billion a year out of society," Bogle explains to Bill Moyers. "Banks, money managers, insurance companies, certainly annuity providers. They're all subtracting value from the economy." (Bill Moyers talks with John Bogle)

We will pay dearly for the collapse of regulation. Here are a couple of apt comments on this subject:

The proximate causes of the crisis are usually said to be easy credit, bankers' cavalier attitudes toward risk, "securitization"..., the extraordinary leverage built into the financial system by complex derivatives, and the failure of our regulators to do their job.

But the larger cause was our failure to recognize the sea change in the nature of capitalism that was occurring right before our eyes. That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the "ownership society" of yore, but by agents of the owners, which created an "agency society."

The managers of our public corporations came to place their interests ahead of the interests of their company's owners. ... The malfeasance and misjudgments by our corporate, financial and government leaders, declining ethical standards, and the failure of our new agency society reflect a failure of capitalism. ...

What's to be done? We must work to establish a "fiduciary society," where manager/agents entrusted with managing other people's money are required -- by federal statute -- to place front and center the interests of the owners they are duty-bound to serve. The focus needs to be on long-term investment (rather than short-term speculation), appropriate due diligence in security selection, and ensuring that corporations are run in the interest of their owners. ... Making that happen will be no easy task.

Please note that this "That change was the growth of giant business corporations and giant financial institutions controlled not by their owners in the "ownership society" of yore, but by agents of the owners, which created an "agency society." is the same problem that doomed the USSR.

In another comment DownSouth said...

Here's a quote from Reinhold Niehbur's Moral Man & Immoral Society . Remember this was published in 1932, and it appears almost nothing has changed since then:
Thus, for instance, a laissez faire economic theory is maintained in an industrial era through the ignorant belief that the general welfare is best served by placing the least possible political restraints upon economic activity. The history of the past hundred years is a refutation of the theory; but it is still maintained, or is dying a too lingering death, particularly in nations as politically incompetent as our own. Its survival is due to the ignorance of those who suffer injustice from the application of this theory to modern industrial life but fail to attribute their difficulties to the social anarchy and political irresponsibility which the theory sanctions. Their ignorance permits the beneficiaries of the present anarchic industrial system to make dishonest use of the waning prestige of laissez faire economics. The men of power in modern industry would not, of course, capitulate simply because the social philosophy by which they justify their policies had been discredited. When power is robbed of the shining armor of political, moral and philosophical theories, by which it defends itself, it will fight on without armor; but it will be more vulnerable, and the strength of its enemies is increased.

When economic power desires to be left alone it uses the philosophy of laissez faire to discourage political restraint upon economic freedom. When it wants to make use of the police power of the state to subdue rebellions and discontent in the ranks of its helots, it justifies the use of political coercion and the resulting suppression of liberties by insisting that peace is more precious than freedom and that its only desire is social peace. A rational analysis of social facts easily punctures this pretension also. It proves that the police power of the state is usually used prematurely; before an effort has been made to eliminate the cause of discontent, and that it therefore tends to perpetuate injustice and the consequent social disaffections. Social intelligence may, in short, eliminate many abortive means to socially approved ends, whether they have been proposed honestly or dishonestly, and may therefore contribute to a higher measure of social morality. If psychological and social scientists overestimate the possibilities of improving social relations by the development of intelligence, that may be regarded as an understandable naïveté of rationalists, who naturally incline to attribute too much power to reason and to recognize its limits too grudgingly. Men will not cease to be dishonest, merely because they have discovered their own deceptions. Whenever men hold unequal power in society, they will strive to maintain it. They will use whatever means are most convenient to that end and will seek to justify them by the most plausible arguments they are able to devise.

Since Niebuhr wrote his book prior to Postmodernism becoming an important cultural force, he did no critique of overly pessimistic rationalists. He did, however, do a critique of overly pessimistic religionists, and it is most intriguing to see how similar they are in their beliefs to their secular first cousins--the equally pessimistic modern day libertarians--who also worship at the altar of the imperial self:

Nevertheless the tendency of religion to obscure the shades and shadows of moral life, by painting only the contrast between the white radiance of divine holiness and the darkness of the world, remains a permanent characteristic of religious life.

This tendency has more than one dubious effect. It certainly tends very readily to a moral, social and political indifferentism. The individual, and more particularly society, are regarded as too involved in the sins of the earth to be capable of salvation in any moral sense. Usually the individual is saved by the grace of God, while society is consigned to the devil; that is, the social problem is declared to be insoluble on any ethical basis. Thus Augustine concludes that the city of this world is "compact of injustice," that its ruler is the devil, that it was built by Cain and that its peace is secured by strife. That is a very realistic interpretation of the realities of social life. It would stand in wholesome contrast to the sentimentalities and superficial analyses, current in modern religion, were it not marred by a note of defeatism. That note creeps easily into all rigorous religion, with its drift toward dualism. The injustices of society are placed into such sharp contrast with the absolute moral ideal, conceived by the individual conscience, that the religiously sensitized soul is tempted to despair of society.

Religion thus degenerates into an asocial quest for the absolute. The soul seeks the perfection of God in either quietistic absorption or ascetic withdrawal from the world; and in each case perfection is defined and experienced in purely individualistic terms.

The last paragraph of  famous "The Quiet Coup" article by Simon Johnson suggests the old elite (banksters) is in danger :

"The conventional wisdom among the elite is still that the current slump 'cannot be as bad as the Great Depression.' This view is wrong. What we face now could, in fact, be worse than the Great Depression -- because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late."

As Roubini put it: "The U.S. financial system is effectively insolvent."  Or as Financial Times' American blog aptly put it: On housing: "Myopia, opportunistic behavior and insider protection: welcome to U.S. home financing policy." The Congress is indulging in a populist frenzy with Republican fascinated by "Tea parties" (after squandering all the nation wealth and dismantling all the New Deal regulation (with substantial help from Clinton and his economic hit men); and Obama administration is hoping for the best."

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Long run is a misleading guide to current affairs. In the long run we are all dead.

John Maynard Keynes, A Tract on Monetary Reform, ch. 3, 1923

 "When a fire's burning in the global financial markets, it has to be put out, even if it's a case of arson. But then the arsonists have to be held responsible, and spreading flames must be outlawed.''

German Finance Minister Peer Steinbrück

"In the long run, Americans will always do the right thing-after exploring all other alternatives”

Winston Churchill

"Confidence grows at the rate that a coconut tree grows, and it falls at the rate a coconut falls."

-- Montek Ahluwalia, deputy chairman of India's planning commission, Davos 2009

The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralization, and gives this class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner— and this gang knows nothing about production and has nothing to do with it.”

Steve Keen

2012 Year In Review - Free Markets, Rule of Law, And Other Urban Legends


Every year I summarize books that I read. I am a slow reader so I try to chose them carefully. I’ve overdosed on crisis books for over a decade (beginning with crisis foreshadowing books) but succumbed to the temptation a few more times. I also slipped back into pop psychology mode.

The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years by Lawrence H. White

White describes the debates that took place throughout the 20th century, pitting the free market advocates against the central planners. Although White shows his colors as a free marketeer, he does a beautiful job of letting the reader ponder the debate rather than force-feeding the conclusion. The book might not be wonky enough for the pros, but I found it to be very scholarly—a great book for a wide swath of macroeconomic enthusiasts. This is the stuff economists-in-training seem to miss in modern curricula. I took the plunge prompted by an Econtalk interview of the author.308

Broken Markets: How High Frequency Trading and Predatory Practices on Wall Street are Destroying Investor Confidence and Your Portfolio by Sal L. Arnuk and Joseph C. Saluzzi

I don’t really know Sal Arnuk but am a big fan of Joe Saluzzi, occasionally swapping barbs about the horrendous price discovery process in modern markets. Joe and Sal describe in detail how high frequency traders are eroding the foundations of the markets—not just equity markets—through their relentless game of high-frequency Whac-A-Mole. Although Sal’s and Joe’s knowledge of the markets and passion for change is uncontestable, their frustration at times overwhelms the prose. I recommend the book, but some enthusiasm for trading may be required to nudge this book into the five-star group.

Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself by Sheila Bair

I wasn’t going to touch this book if it were not for a personal endorsement from Chris Whalen. Bair, Chair of the FDIC (Federal Deposit Insurance Corporation), describes the incredible turf wars and petty battles below the surface of the bailouts. I previously had sensed Sheila was one of the good guys; the book reinforced it. She describes Bernanke as generally well-meaning, Geithner as a relentlessly pro-Citigroup promoter and Rubin pawn (to the point of racketeering), and a host of others who clearly need severe beatings. It is an antidote to the highly lopsided Sorkin treatise, Too Big to Fail. Here is a Bair interview.309

Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street by Neil Barofsky

Neil entered the crisis plotline as the young, feisty special investigator general to oversee the TARP bailout (SIG-TARP). From his presentation, he was green and naïve, unready for the thugs he would be dealing with. By example, he figured out relatively late in the game that the gaping holes in the bailouts used by the banks to siphon trillions from the Fed were left there by design, not by mistake. The big loser is Geithner, who comes across yet again as a despicable human being. I was disappointed not to get more insight into Elizabeth Warren’s role as Chair of the TARP oversight committee. Barofsky has done many interviews; an Econtalk variant is particularly thorough.310

Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner

This is an excellent and detailed analysis of the financial crisis, deeply probing the mortgage industry’s role (more than simply explaining the basics found in all of the crisis books.) Some may find this old news that they would like to put behind them. My only caveat is that one should read this book or Nocera and McLean’s All the Devils Are Here, but not both.

The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order by Benn Steil

Benn is a fellow at the Council on Foreign Relations (CFR) with what I would call an Austrian economic slant. The book will be released in March. In it, Steil describes a fascinating battle between Harry Dexter White and John Maynard Keynes before, at, and after the 1944 Bretton Woods Conference in which the future world currency regime was hammered out. We get deeply insider views of the events in a prose and presentation that I found gripping. Keynes’s role as a diplomat, unknown to many, may have been his most important single contribution. Heads up: Steve Hanke of the Cato Institute and Johns Hopkins University also has a book on the Bretton Woods Conference coming.

Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of us to Prison by Peter Schweizer

Many may know Schweizer from a 60 Minutes episode that revealed broadly based, scandalous insider trading by Congress that is legal for them. This is the book upon which the 60 Minutes episode was based. Schweizer tells horror story after horror story of graft that would get normal citizens sent to prison. What is appalling is how often they sell the taxpayer out by billions of dollars so that they can make a few hundred thousand dollars. Obama comes out looking particularly bad as the author describes how shovel-ready projects were really about massive kickbacks for campaign donors. It was not, however, a partisan hatchet job.

Thinking About Capitalism by Jerry Z. Muller and Modern Economic Issues by Robert Whaples

These two trimester-length audio books from The Teaching Company focus on basic principles of economics from a decidedly descriptive slant (as mandated by audio).311 It’s easy listening stuff that is appropriate for those trying to become comfortable with foundational principles. I liked them because they provide these principles in particularly clear and cogent prose. Never pay retail; they go on sale at 80% discount many times during the year.

The Clash of Generations: Saving Ourselves, Our Kids, and Our Economy by Laurence J. Kotlikoff and Scott Burns

This is a follow up to Kotlikoff’s The Coming Generational Storm describing the impending problems from off-balance sheet obligations. The authors, in conjunction with Kent Smetters, did the seminal studies on unfunded liabilities—promises that are unfunded even when projected tax revenues are subtracted. The authors now estimate them at over $200 trillion. I found the The Coming Generational Storm more appropriate for my needs. The clash of generations is part warning and part investment book for those who are not familiar with this issue. I think the authors manifest ‘doomsayer’s fatigue’—the need to be optimistic after years of seeing a dismal future. I am, nonetheless, a huge Kotlikoff fan.

Thinking, Fast and Slow by Daniel Kahnemann

Kahnemann is probably the most prominent contributor to behavioral economics, garnering him the Nobel Memorial Prize in Economics. He works with Nassim Taleb and appears to be Taleb’s mentor. Thinking Fast and Slow presents the constant battle between the instinctive thoughts and more decidedly cognitive reasoning, explaining how we make decisions and how they can go astray. It is more thoughtful than Gladwell’s Blink, sometimes demanding deeper thought.

How We Decide by Jonah Lehrer

Lehrer’s book came recommended via an Econtalk interview.312 It is yet another Blink-genre book looking into how humans make decisions. I love these books but this treatise is presented at a much lower level than Kahnemann’s and is remarkably similar to a book entitled Sway by Ori and Rom Brafman. Consumers of pop psychology should probably check out Ed Yong’s interview on Econtalk discussing the underlying flaws in this type of social science.313

The Wisdom of Crowds by James Surowiecki

Surowiecki discusses how collections of people with limited individual insights, if acting truly independently, display collective "wisdom" and how that wisdom is lost when they start acting in a correlated fashion. There are many cute snippets describing the results that, at times, become a little too loosely connected. Aficionados of this genre will find it both fun but partially redundant to other works (Taleb; Kahnemann; Gladwell).

My Stroke of Insight: A Brain Scientist's Personal Journey by Jill Bolte Taylor

Jill, a Harvard neurophysiologist, wakes up one morning and finds herself having a stroke in the highly rational left brain. Her deductive reasoning goes on- and off-line, throttling her back and forth between euphoria and panic. The story describes the stroke and the long recovery in hysterically funny prose from an especially insightful perspective of a neurophysiologist. I found the audio book to be an excellent medium.

Steve Jobs by Walter Isaacson

In case you’ve been living under a rock, this fully sanctioned biography that was in no way edited by Steve or his family is simply the best biography I’ve ever read. You get a bird’s-eye view of the computer revolution from soup to nuts through the detailed stories and words of all of the key players. Steve was a unique personality with a unique ability to translate unimaginable compulsive behavior into profound success rather than total failure. My conclusion: Sell any shares of Apple Computer because it ain’t the same company without Steve.

Secrets: A Memoir of Vietnam and the Pentagon Papers by Daniel Ellsberg

Ellsberg describes the events leading up to, during, and following the release of the Pentagon Papers, the media-driven exposé of nefarious activities by a string of administrations. It is not really about the content of the papers. Presidents who lie to the American populace seem rather pedestrian in this era. It was interesting but only in the four-star category.

Human Prehistory and the First Civilizations by Professor Brian M. Fagan

I have listened to dozens of trimester-length courses provided by The Teaching Company as audio books.314 With only one exception, they have been great. In this course, Fagan does a great job of following the lineage from the origins of humans starting about 8 million years ago through to the ancient (pre-historic) civilizations across all continents. It’s both informative and very easy listening. Reminder: Never pay retail for these books: they go on 80% sale routinely, bringing the price down to about $70.

Bonhoeffer: Pastor, Martyr, Prophet, Spy by Eric Metaxas

Bonhoeffer was a cleric and a spy in Nazi Germany who eventually gets executed for his role in a conspiracy to kill Hitler. (That is not a plot spoiler; the author tells you he died right up front.) The biography describes the church-state battle, which was very new to me. In my opinion, however, there was way too much church and not enough state. Despite over 500 bonkers reviews at Amazon I found it to be boring.


OK. This ain’t a book; it’s just a friggin’ blog. I’ve got to take this opportunity, however, to thank some folks who have generously shared their time and insights so as to make thinking about capitalism a special experience. You guys have made a difference. Chris Martenson brings gravitas to the debate on resource depletion and, in conjunction with Adam Taggart, graciously publishes my Reviews and invited me for my favorite interview.315 Rick Sherlund of Goldman Sachs/Nomura and friend of 40 years inadvertently and unknowingly triggered a discontinuity in my perception of markets with the most innocuous of statements. Bloomberg reporters are especially accessible. I have exchanged hundreds of emails with Mark Gilbert, head of Bloomberg’s London Office, Caroline Baum, and many other colleagues. Dave Lewis, a former Louis Bacon protégé and scholar of a higher order I call a friend although we meet up only sporadically. I have had dozens of exchanges with an eclectic mix of characters ranging from Elizabeth Warren on the left and Lew Rockwell on the way right. Within that enormous chasm includes multiple and meaningful exchanges with Stephen Roach (Morgan Stanley), James Howard Kunstler, Art Cutten (Jesse’s Café Americain), Byron King (Agora), John Rubino, Bill Fleckenstein, Benn Steil (CFR), Gerard Minack (Morgan Stanley), Doug Noland (Federated Investors), Richard Daughty, Jack Crooks, Grant Williams, and Jim Rickards. I thank Richard Uhlig, former CEO of Morgan Stanley’s banking subsidiary, for giving a two-hour guest lecture on mortgage-backed securities in my honors chemistry class. (The kids loved it!) Meetings and conversations with economists Larry Kotlikoff and Steve Hanke are enormously appreciated. I have especially cherished numerous exchanges with David Einhorn, a truly unique individual and intellect, culminating in a meeting with David and subsequent breakfast with his parents. (Mom is quite the bear.) I was profoundly honored when David Weidner included me in a WSJ article on the flash crash and Demetri Kofinas and Lauren Lyster invited me to do an amazing interview on Capital Account.7 These experiences are special and wholly orthogonal to my exposure in chemistry. Lastly, Bruce Ganem rekindled my interest in markets, politics, and economics. Our colleagues will never forgive you.

***** Shiller, R. The Subprime Solution How Today's Global Financial Crisis Happened, and What to Do about It.

Corruption of the society by "free marketers" has profound consequences. Second round of enthusiasm after dot-com bubble -- now in real estate corresponded to the desire of power to be to inflate the bubble to support Bush administration. He draw an important distinction between Versailles Treaty and Marshall plan.  Keynes resigned from British delegation in protest against treating Germany by victors and wrote the economic consequences of peace. It was excessively harsh of German and generated tremendous resentment. After World War II the brilliant move was to establish Marshall plan. There are strong parallels with this recently and they speak volume about pettiness and incompetence of Clinton.

Shiller argues that we should deal in the style of Marshall plan with the subprime crisis.  A bigger New Deal... He carefully aviod the charge of "ginancization:" that was key of Reiganism. Now when Reiganism is dead

Compare with Bad Money- Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism

[Jan 16, 2011] NPR’s “Must Read”, As in Orthodoxy-Promoting, Economics Books

naked capitalism

Reader Gary specifically asked for a recommendation on modern monetary theory. The classic there is Randall Wray’s Understanding Modern Money. His query led me to ponder what books belong on a list of economics “must reads”.

I’ve deliberately excluded crisis books from my quick and dirty list (except for one sleeper that discusses general crisis dynamics) and have focused on good heterodox books as well as instructive historical accounts:

Needless to say, reader input encouraged.

Jay :

1:41 am I recommend The Volatility Machine by Michael Pettis. It reviews all major emerging market financial crises dating back to the 1800s (including the U.S. in 1870s) and explains how a country’s capital structure and liability management can exacerbate financial meltdowns. Really interesting for people who want to understand mechanically the process that leads to crisis and the after effects.
Tao Jonesing :
1:43 am “the books that are hard core economics books are decidedly neoclassical in their bent”

No. Neoclassical economics died a LONG time ago. The books you complain about are NEOLIBERAL. I love Steve Keen, but his naming of the problem is wrong. Chicago School Ponzinomics is a neoliberal phenomenon, not a neoclassical one.

Deus-DJ :
2:09 am it is simply neoclassical economics taken to the extreme… given that neoclassical economics(except for a few of the rogue neoclassical economists) generally validates and supports it’s more extreme versions does not support your assertion
Yves Smith :
2:58 am Sorry, but the label used IS neoclassical economics. For instance, Bill Black attacks it by calling it “theoclassical”.

Neoclassical economics goes back to the work of Jevons, Walras, and Menger. There is some fuzziness in the literature as to where “classical” economics ends and “neoclassical” economics begins, but the nomenclature is “neoclassical”, not “neoliberal”.

Dave :
1:52 am One of my favorites is Money and Man a survey of monetary experience by elgin groseclose. not sure where it fits on the scale of the above though.
Deus-DJ :
2:07 am The predator state was by far the most important book I have ever read…it’s impact on me was beyond measure…and that’s even disregarding the fact that I heavily disagreed with certain parts of the book(regarding inflation and the FED, and setting up Veblen as an alternative ideology in predation, which I thought was misleading until I read Niebuhr). As heterodox as I was attending an orthodox school at the time, it never occurred to me just how much the ideology of price dictating events was controlling my thought(even though I was opposed to it on some grounds). Now I operate from the opposite spectrum, assuming the opposite unless I can see the merit of price dictating events. Yeah I had to say that.

Though I generally dislike most of Joseph Stiglitz’s books, it was his book “globalization and it’s discontents” that ultimately got me into economics, and given his utter contempt for neoliberal economics at a time when it was at it’s peak gives it enough weight to be included in the top 10.

Deus-DJ :
2:20 am BTW, I disagree with you going after The Big Short in your original post. You can say that it’s unfortunate that he didn’t mention the irony of the heroes in his book actually being the villains, but to say that his book was misleading doesn’t take into account his ultimate message of how certain people made their money…which is a topic the majority of people are fascinated in (hence why business is so interesting to many…including yourself)… and given his penchant for storytelling I think you were overreaching a bit.

It should however be opposed on grounds that it’s not really an economics book.

Yves Smith :
3:01 am Greg Zuckerberg’s The Greatest Trade Ever does a vastly better job (in terms of reporting, who did what to whom, much bigger net in terms of how the subprime short trade started and who the prime movers were, how the economics of the trades worked) than Lewis did. But he didn’t tell a crowd pleasing Manichean tale. So Lewis falls short by the standards you prefer to apply.
Trent Rock :
2:38 am Tim Harford’s The Undercover Economist is a great book. I recommend it to all my non economist friends……….
GaryD :
2:46 am I’d consider the following books :

Extraordinary Popular Delusions and the Madness of Crowds by Charles Mackay

Manias, Panics and Crashes by Charles Kindleberger


The Financial Instability Hypothesis by Hyman Minsky. Minsky is cited repeatedly by Keen.


Gentlemutt :
9:39 am Agreed with Gary. Minsky on Keynes or his Financial Instability piece.
Crocodile Chuck :
2:53 am “How Rich Countries Get Rich, Why Poor Countries Stay Poor”, Eric Reinert. The best book I’ve read on how countries develop. Exhaustively footnoted, with a grand sweep of history. Like Michael Hudson – who also studies the history of economics – an enemy of the Academy. Worth checking out NB punch line: How rich countries get rich: the exact opposite of the IMF recommendations/conditions to ‘client nations’
mannfm11 :
2:53 am Yves, you have listed a lot of authors I have been trying to learn something from over the past couple of years. You would find stuff around the net I have written over the last 10 years that has been right on, but I have learned a lot through the years reading Doug Noland, amongst others. I am going to read some of Michael Hudson’s books like Super Imperialism and Global Fracture, which appear to deal with the methods in which the US banking system has over-extended credit, run massive trade deficits and at the same time strangled who they loaned to around the world and at the same time the US has avoided the same fate. These were books written years ago that apply today and would bare the establishment in the US to be what they really are, evil. NPR isn’t liberal or conservative, but establishment.

The Best Way to Rob a Bank is To Own One might should be on the list, by William Black, though not a real economics book. It might dispel the Chicago neo-classical nonsense the bankers have crammed down the throats of college students for the last half century.

mannfm11 :
2:57 am I might add another book I bought due to the author, Louis Brandeis, the former Supreme Court Justice called Other People’s Money and How the Bankers Use it.

Having never read it, I recently bought The Wealth of Nations, as I see it brought up by the free thinkers in the economics world today. Seems the ideas about freemen and free economies were developed in the 18th century and no much of use has been added since.

attempter :
3:20 am I’ll add:

Monopoly Capital by Paul Baran and Paul Sweezy

Specifically on more current events:

The Great Financial Crisis by John Bellamy Foster and Fred Magdoff.

These best describe the terminal plight of capitalism entering the 70s, and why it had to embark upon the neoliberal onslaught.

Also Shock Doctrine – everything about the Bailout and “austerity” is simply the most monumental of all disaster capitalist gambits.

Ian :
5:24 am Wow, FIASCO rates as one my all time least favourite Econ/Fin books. I got literally nothing from it that wasn’t better written, and more insightfully discussed in ‘Liars’ Poker’, which for me rates alongside Wall Street as still _the_ expositions of the modern wall street/city phenomenon (I don’t get the love for Bonfire of the Vanities at all…)

For textbook theory, the best book i’ve read was called ‘Financial Economics’ by Brian Kettell, but that’s the boring stuff for the more interesting:

Philip Augar’s ‘Death of gentlemanly capitalism’ is a great account of the 80s in the UK, and his followup ‘Greed Merchants’ is very interesting, too.

I’m a huge fan of Aaron Brown, and ‘The poker face of wall street’ is a fun read and, i think, insightful, too.

I’ve not read ‘The ascent of money’, but really enjoyed ‘The rise and fall of the great powers’, by Paul Kennedy, which is a historian arguing that the ability to finance itself is the key behind the success of an imperial power.

Jesse Frederik :
7:05 am How Rich Countries got Rich and Why Poor Countries Stay Poor by Erik S. Reinert Kicking Away the Ladder by Ha-Joon Chang Technological Revolutions and Financial Capital by Carlota Perez The Best Way to Rob a Bank is to Own One by William K. Black

And of course:

ECONNED by Yves Smith

Kurt :
7:25 am Reader input encouraged? Good. I have spent the past year reading the works of Alexander del Mar, a 19th century monetary historian. Del Mar didn’t have much use for economics, per se, but he explained the money mechanism quite well in such works as “The Science of Money”, “The History of Precious Metals”, “Money & Civilization”, “The History of Monetary Systems”, “The History of Money in America”, “A History of Monetary Crimes”, and “Middle Ages Revisited”. Del Mar makes Niall Ferguson look like a boy scout, by comparison.

Also, I enjoyed Econned very much.

Superduperdave :
8:05 am John K. Galbraith’s “The Great Crash.” Probably the most lucid writer in the history of economics on what went wrong back then, with obvious relevance today. The dry wit makes it a joy to read, too.

Also, Robert Heilbroner’s “The Worldly Philosophers,” tracing the evolution of the discipline that has come to be dominated by theoclassical economics.

Christian :
9:18 am I think that your list shows your own biases. Not insofar as quality, but too much on finance and a little light on macroeconomics and international dimensions. I think that it is important to understand how foreign economies function to provide perspective on our own.

Instead of the Brenner that you suggest, who I like, I prefer BOOM AND THE BUBBLE. However, I would recommend the late Andrew Glyn’s CAPITALISM UNLEASHED. I would recommend political scientist Herman Schwartz’s SUBPRIME NATION, which is the best book about recent (and not just the crisis) political economy that has not drawn any notice. While I like Jamie Galbraith, I found THE PREDATOR STATE poorly written. I preferred Larry Bartels’ UNEQUAL DEMOCRACY for the same issues.

The Brooks, Partnoy, & Das offerings seem to cover similar ground and I would choose one and not all three. Similarly, the Greider and Cooper both cover the Federal Reserve and I think that Greider is now somewhat dated. I would keep Quiggin and cut Keen. I might even include one of Deidre McCloskey’s works (i.e., THE RHETORIC OF ECONOMICS) here.

For history, I would recommend and oldie, historian-political economist J.Rogers Hollingsworth’s THE WHIRLIGIG OF POLITICS about the politics and political economy of Cleveland and Bryan in the late 19th century or Thomas Ferguson’s THE GOLDEN RULE.

I think that something like Fred Block’s old THE ORIGINS OF THE INTERNATIONAL ECONOMIC DISORDER or Michael Hudson’s SUPER-IMPERIALISM, Charles Kindleberger’s MANIAS, PANICS, & CRASHES or THE WORLD IN DEPRESSION, 1929 – 1939 should be included.

Philip Pilkington :
9:19 am Erm… Let’s see; on finance and macroeconomics shtuff…

First one is a bit obscure, but its really stood out to me in the recent past:

Paul Sweezy and Harry Magdoff’s ‘Economic History As It Happened, Volume IV: Stagnation and the Financial Explosion’


Hyman Minsky ‘Stabalising an Unstable Economy’

Michal Kalecki ‘Theory of Economic Dynamics’ (and Keynes’ ‘General Theory’)

JK Galbraith ‘The New Industrial State’

And then onto more obscure topics…

For a history of neoclassical thought – and some novel theses about mathematical economics:

Philip Mirowski ‘More Light than Heat: Economics as Social Physics’

And then, to really give your brains a shaking:

Karl Polanyi ‘The Great Transformation’

Cheerleading Invasions :
9:19 am When did NPR degenerate into a loudspeaker for the owner ruler class? They’ve long since stopped “investigative” reporting, a non-profit FAUX noise complete with high paid anchors.
Christian :
9:22 am I would also endorse those that recommended Erik Reinert’s book.
Sufferin' Succotash :
9:25 am “The Unbound Prometheus”, by David Landes “The Rise of the Western World”, by Douglass North & Robert Paul Thomas “This Time is Different”, Carmen Reinhart & Kenneth Rogoff “The Passions & the Interests”, by Albert Hirschmann.



Freefall: America, Free Markets, and the Sinking of the World Economy (Hardcover)

The End of Influence: What Happens When Ot... by J. Bradford De Long

Omer Belsky(Haifa, Israel)

After finishing J. Bradford de Long and Stephen Cohen's book, I admit I'm still very much in the dark about the consequences of the redistribution of Wealth from the US to the rest of the world, particularly China. Although there's a lot that's interesting in the book, the failure to solve the main question is highly disappointing.

"The End of Influence" has two overlapping themes: The rise of Sovereign Wealth Funds and the Fall of the Neo Liberal Orders. The argument is that they are interlinked - the decline of Neo-Liberalism makes Sovereign Wealth Funds more dangerous, and the robustness of Sovereign Wealth Funds makes Neo-Liberalism seem less appealing.

Let's start with Neo-Liberalism: Since the Middle 1970s, the Post WW2 conception of a mixed economy came under increased attack by those whom de Long and Cohen call "Neo-Liberals". The failure of managed Capitalism in the UK, and its apparent failure in the US caused a backlash against government interference in markets. The roll back of government interventions in markets was not complete, but it was widespread. It effected not only the US and the UK, but also most of Northern Europe, much of East Asia (and Israel, although the authors don't mention that). Right wing Neo-Liberals loved inequalities and markets; Left wing Neo-Liberals considered them a necessary evil. And the dismantling, deregulation and privatization of market industries sped up, as governments went out of the business of business everywhere... or almost everywhere.

The big (but not the only) exception was China. After Mao's Death, China started to slowly embrace Capitalism. It started to manufacture on a large scale. And as it had low labor costs, it exported its products aboard, especially to the United States.

When you start selling your product to a certain country, you end up with a lot of its currency. But this currency is normally not very useful to you; you have to convert it to your local currency. By buying much of your local currency and selling the currency of the customer country, the exchange rate changes. The customer currency becomes less valuable, and yours more. Therefore, goods produced in the customer country become more attractive to consumers in your country, and goods produced in your country become less attractive to them. And the trade imbalance... gets balanced.

Or so it is supposed to happen. But China (and other countries before, but China is the biggest, and so the effect is the largest) did not want to stop its export-fueled growth. It wanted to ensure continuous export induced economic growth. The way it did that was by preventing the Chinese currency (the Renminbi) from appreciating against the dollar. Instead of converting the dollars gains from selling Chinese products in the US to Renminbis, the Chinese government kept the dollars.

What has it done with them? It has lent them back to the United States! Thus, ironically, the dirt poor China has been subsidizing US consumption. China's economic growth has been fueled by selling manufacturing products to the US, and then loaning the profits to the US so that the US can buy more products! This meant that the Chinese government held a huge amount of money in the form of US debt - creating the world's largest sovereign wealth fund.

Now that China has the money, and holds it in US Debt, what could it do with it? What are he consequences of China being America's creditor? This is where the story gets unclear. From De Long and Cohen, one gets two stories, partially contradictory, about what happened next.

According to both, the Sovereign Wealth Funds (SWFs - China's is the largest but not the only one) posed a threat to the Neo-Liberal order. But the Neo-Liberals tried to "domesticate" the SWFs, make them act like "regular", profit seeking wealth funds. Had they managed, SWFs would not have been very dangerous.

But they have failed, and according to one story de Long and Cohen are telling, SWFs are extremely dangerous. The economic crisis of 2008 (caused at least partially by the cheap credit created by the SWFs) has soiled the reputation of Neo-Liberalism. Industrial Policy is now back with a vengeance. And the SWFs would now start to use their power strategically, buying up technologies that could be used to enhance economic growth in the US, and using them to enhance growth in China. The frontier of economic growth would move east. With China now having the money, America would have to pay attention, economically and politically. It would not be a thrall to China, but it would be much weaker than it is today.

The other story De Long and Cohen tell is, from an American perspective, much more optimistic. It focuses on the insight, repeated in the book several times, that if you owe enough money to the bank, you own the bank. The huge debt America has to China offers its own kind of power on the Chinese. America could inflate away Chinese saving. China has a huge amount of US treasury bonds. It can't put the money anywhere else: there's nowhere else to dump so much money. China has subsidized US consumers for a decade, and it is likely to keep doing it in the foreseeable future. Having someone else working for you is not altogether an unpleasant experience.

Furthermore, US debt could not lead to a payment crisis, like the Asian credit crisis of the late 1990s (see Paul Krugman's excellent The Return of Depression Economics and the Crisis of 2008). Unlike Thailand and the other debt ridden Asian economies of the 1990s, the US debt is enumerated in its own currency. The US cannot run out of dollars, and so it cannot go bankrupt.

So what happens when other countries have the market? I'm not sure. I doubt de Long and Cohen are certain. They make a case for China posing a mercantilist threat to the US, as well as for China acting as a willing foreign worker, slaving away for the US benefit. No doubt there is truth in both cases, but Cohen and De Lung fail to synthesize them. "The End of Influence" is thought-provoking, but not conclusive.


Economic Gangsters Corruption, Violence, and the Poverty of Nations Raymond Fisman, Edward Miguel Books

Meet the economic gangster. He's the United Nations diplomat who double-parks his Mercedes on New York City streets at rush hour because the cops can't touch him -- he has diplomatic immunity. He's the Chinese smuggler who dodges tariffs by magically transforming frozen chickens into frozen turkeys. The dictator, the warlord, the unscrupulous bureaucrat who bilks the developing world of billions in aid. The calculating crook who views stealing and murder as just another part of his business strategy. And, in the wrong set of circumstances, he might just be you.

In Economic Gangsters, Raymond Fisman and Edward Miguel take readers into the secretive, chaotic, and brutal worlds inhabited by these lawless and violent thugs. Join these two sleuthing economists as they follow the foreign aid money trail into the grasping hands of corrupt governments and shady underworld characters. Spend time with ingenious black marketeers as they game the international system. Follow the steep rise and fall of stock prices of companies with unseemly connections to Indonesia's former dictator. See for yourself what rainfall has to do with witch killings in Tanzania--and more.

Fisman and Miguel use economics to get inside the heads of these "gangsters," and propose solutions that can make a difference to the world's poor -- including cash infusions to defuse violence in times of drought, and steering the World Bank away from aid programs most susceptible to corruption.

Take an entertaining walk on the dark side of global economic development with Economic Gangsters.

[May 7, 2008] Bad Money Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism Kevin Phillips Books

5.0 out of 5 stars Insightful, but Incomplete and Rapidly Becoming Dated!, April 22, 2008


By Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.)

...Phillips points out that over the last 30 years, financial services have nearly doubled to a record 20% of GDP (and an even greater share of corporate profits - 54% in '04), while manufacturing's share has halved to 13% (10% of profits), greatly imperiling the economy. En route, Washington has provided government bailouts and/or liquidity when financial institutions or methodologies got themselves into trouble (eg. S&L crisis; Citibank forced into technical failure, but allowed to stay open; bailing out junk bond investors by lowering federal funds rate; etc.), encouraging bigger problems down the road.

The positive impact of borrowing has declined about 60-70% from the 1970s-80s when such monies would mostly be used for factory and highway construction, compared to today's increasingly likely use for increasing leverage for LBOs, M&A, and hedge funds. Meanwhile, the negative likelihood of families experiencing a 50% drop in income has increased dramatically from 1970 - resulting in a greater probability of default.

Cognizance of our problems has been somewhat covered up with revisions to the CPI (understating costs of home ownership) and unemployment measures (not counting those who gave up and quit looking). Thus, the 2-4%/year CPI increase 2005-2007 would have been 5-7%/year, and unemployment would have been 8%.

Early millennium results include the housing sector (including its "ATM effect") providing 40% of the nation's growth in GDP and employment (an unsustainable rate achieved through financial gamesmanship that set the stage for the current financial and construction crash), while imported petroleum outlays rose from $100 billion in '02 to $302 in '06.

Observing from a distance, OPEC has reduced its foreign-currency reserves held in dollars from 75% to 62.5%, and Iraq and Venezuela began selling oil in euros and yen (admittedly for political purposes, at least at first). Meanwhile, the U.S. has antagonized major oil producers (Iran, Russia, Venezuela), and effectively dismantled Iraq - raising the risk of nations being unwilling or unable to supply the U.S. as supplies grow tighter.

Declining oil supplies, rising demand, global warming, our recession, and global loss of confidence in American financial markets are all converging and demand strong political leadership. Phillips, however, is not optimistic that this will emerge based on strong financial sector support for the Democratic Party and political failures in other nations needing dramatic change.

Phillips makes numerous comparisons between the U.S. today and the Great Depression (Eg. Total indebtedness was three times the size of GDP in 2007, higher than the prior record set in the years of the Great Depression), as well as the declines of Rome, Holland, Spain, and Great Britain. Regardless, no predictions are made about how long or deep our current downturn will be (though his writing hints the more severe possibilities), and he gives little or no attention to the steady amassing of dollars in Asia and associated growing unemployment of Americans. Finally, readers must also keep in mind that throughout the book he refers to $70 oil - obviously outdated vs. today's nearly $120.

Interesting Side Issue: Phillips states that food represents about 14% of the U.S. CPI, vs. 33% and 46% for China and India, respectively. Doesn't auger well for biofuels continuing to take 28% of the U.S. corn crop. American Theocracy The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury Kevin Phillips Books

4.0 out of 5 stars The pot calling the kettle black, March 21, 2006
By Eric J. Lyman (Roma, Lazio Italy) - See all my reviews
This review is from: American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury (Hardcover)

This is the kind of book that would have kept me up at night had I read it six or seven years ago. American Theocracy convincingly and chillingly compares the current situation in the U.S. to that during the beginning of the end of the Roman Empire, The British Empire, Hapsburg Spain, and the Dutch Republic. Scared yet?

Author Kevin Phillips comes up with a series of characteristics of what he called a "power already at its peak and starting to decline." The list includes a polarization of the society and widespread concern with cultural and economic decay; growing religious fervor and an increasingly close relationship between church and state; a rising commitment to faith over reason; growing government debt; and "hubris-driven national strategic and military overreach."

Jeez, open most days' newspaper and don't be surprised to find concrete examples of each of these points.

The point risks being lost amid all the white noise predicting doom and gloom of different sorts these days. No doubt most readers will find themselves a little more jaded to these sorts of prognostications than they would have been just a few years back.

But what separates Mr. Phillips from the pack (at least to some extent) is his curriculum vitae: he is the same Kevin Phillips who, as a Republican strategist in the 1960s, shattered the Democrat's "solid south" in his book The Emerging Republican Majority. Most political scientists credit the book with sowing the seeds that handed the Republicans the White House in every election since then that didn't feature a highly-intelligent southern governor on top of the Democratic ticket as a way to wrestle a few electoral votes away south of the Mason-Dixon line.

If Mr. Phillips can recognize the hubris in what he helped create, then maybe that's something we should take seriously.

The book comes a bit unraveled at the end, though, when Mr. Phillips unconvincingly argues that the disastrous war in Iraq was precipitated by the needs of several key Republican constituencies: energy producers looking for new oil and gas fields to develop, currency traders worried that OPEC might abandon the dollar and cause its collapse, and evangelical Christians who see events of the last generation in the Middle East as coming right from the Book of Revelation, hailing Armageddon. While he there some validity in his conclusions, Mr. Phillips is no doubt oversimplifying an astonishingly complex set of issues.

But his ultimate conclusion -- that Republican extremists currently pulling the strings of power in Washington are responsible for the country's energy vulnerability, over-stretched military, sky-high debt levels, and the indulgence of radical religion -- are a threat to the country as great as the one facing fifth-century Rome is rings true and is without a doubt bone chilling. Come to think of it, American Theocracy may yet keep me awake with worry tonight.

 New Economist Free economics books!

The Foundation for Economic Education offers an online edition of Henry Hazlitt's 1946 classic work, Economics in One Lesson.

Doug Henwood's Wall Street, first published by Verso in 1997, is now available for free download on the web under a Creative Commons Attribution-NonCommercial-NoDerivs license. Hat tip to Political Theory Daily Review.


13 Bankers: The Wall Street Takeover and the Nex... by Simon Johnson


Making Globalization Work by Joseph E. Stiglitz

4.2 out of 5 stars (35) $12.92

False Profits: Recovering from the Bubble Economy by Dean Baker

4.0 out of 5 stars (1) $10.85


Fooling Some of the People All of the Time Updated and Revised: A Long Short Story (Hardcover)

The General Theory of Employment, Interest and Money

John Maynard Keynes, CreateSpace, $19.95

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