Worth Reading Part II

[ghariton]

I liked Ben Stein's article. He emphasizes that we're all humasn and make mistakes, even the smartest among us. I think that's right. We get into a lot of messes through overconfidence.

George

[bubbalouie]

I liked Ben Stein's article.

I guess it just shows he's more human than the rest of us.

[ghariton]

I liked Ben Stein's article.

I guess it just shows he's more human than the rest of us.

George

[Mike Schimek]

Ben Stein, signature thing at the bottom

"Ben Stein is a lawyer, write, actor, economist"

Taking anything he says in any field must be taken with a 25% credibility multiple, since that's how much of his time and brainpower he must be spending on each individual one of his areas of practice/learning/knowledge/expertise

Would you get an operation from a "doctor/mechanic/garbage man/plumber", or from a "doctor"...

I know, I have a weird way of looking at things.

[WishingWealth]

RE: Niall Ferguson "The Ascent of Money"

For those who prefer the spoken word vs. the written word there will be a 2 hour special on PBS tomorrow night.

http://www.pbs.org/wnet/ascentofmoney/

WW

[Bylo Selhi]

2 hour special on PBS tomorrow night

You're getting short-changed

Channel 4 in the UK devoted 6x 48min episodes to the good professor.

[worthy]

Would you get an operation from a "doctor/mechanic/garbage man/plumber

LOL

(But my surgeon neighbour was quite proud the other week to have r&r'd a wc that was beyond repair. Reminded me of my father who put the same care into cutting my hair as he would into operating on a patient.)

[Bylo Selhi]

2 hour special on PBS tomorrow night

You're getting short-changed

Channel 4 in the UK devoted 6x 48min episodes to the good professor.

It seems you're not going to get short-changed after all. PBS will air all 6 episodes.

In the same vein but somewhat dumbed-down, The City Uncovered. I just saw the first episode, The rocket scientists of finance

...it is just one example of the way our natural human instinct to be innovative has served us very badly in finance.

It is too easy to allow optimism and self-interest to cloud the judgement and to foster confusion between the very occasional genuine advance with the more common illusions that apparently allow profits to be conjured up from nowhere by disguising the risks that are being taken.

The answer is not to ban innovation, but to be wary of it...

The real lesson is not that we need to find even cleverer people to take over the world of banking. It is that we would be more likely to avoid mistakes if we could breed them a little stupider.

[bubbalouie]

Strong words.

"Our" president was a puppet for a cabal led by Dick Cheney and a handful of Jewish neoconservatives, who took control of the Pentagon, the State Department, the National Security Council, the CIA, and "Homeland Security." From these power positions, the neocon cabal used lies and deception to invade Afghanistan and Iraq, pointless wars that have cost Americans $3 trillion, while millions of Americans lose their jobs, their pensions, and their access to health care

.

http://www.vdare.com/roberts/090113_humiliation.htm

[Peculiar_Investor]

The End of the Financial World as We Know It a Op-Ed piece By MICHAEL LEWIS and DAVID EINHORN. and the follow-on, How to Repair a Broken Financial World

I've read most of Michael Lewis' books (Liar's Poker, Moneyball are good examples of his work) and am currently starting to read his book Panic, the Story of Modern Financial Insanity. IMHO he writes well thought out material that provokes the reader to think about their understanding of the topic.

Book Review: Panic, The Story of Modern Financial Insanity, Michael Lewis.

It is an OK read. In actual fact it is "A collection of the best writing on recent market crashes, showing how the misunderstanding and underpricing of risk leads to catastrophe.", quoting in the inside liner notes. Nothing in the book that someone couldn't find using Google, Lewis has just collected articles and arranged them for you. For example, the last three articles in the book are:

After the Money's Gone: Paul Krugman, Hedge Funds Come Unstuck on Truth-Twisting, Lies: Matthew Lynn, and Trader Made Billions on Subprime: Gregory Zuckerman

Reading it was a lot like reading FWF and the many articles linked and referenced here. It was interesting to re-read the history of the 1987 crash and the internet bust of 2000, particularly seeing some of the dot.com names that are long gone.

I'm glad that I got the book from a library rather than paying for it. I would recommend others to do the same. While I generally like Michael Lewis' books, I think he took the easy way out here and just collected articles, without adding much extra commentary. In this day and age, a blog with all the references like above would have provided the same material, although I guess that Lewis and the publisher would not have gotten paid the same amount.

[bender]

Jeremy Grantham's latest quarterly letter

But let us look for a minute at the extent of the loss in perceived wealth that is the main shock to our economic system. If in real terms we assume write-downs of 50% in U.S. equities, 35% in U.S. housing, and 35% to 40% in commercial real estate, we will have had a total loss of about $20 trillion of perceived wealth from a peak total of about $50 trillion. This relates to a GDP of about $13 trillion

This time in the U.S., however, we must write down perceived wealth or capital by almost precisely one and a half times GDP, worse than the Depression but happily much less than Japan.

Current Recommendations
Slowly and carefully invest your cash reserves into global equities, preferring high quality U.S. blue chips and emerging market equities. Imputed 7-year returns are moderately above normal and much above the average of the last 15 years. But be prepared for a decline to new lows this year or next, for that would be the most likely historical pattern, as markets love to overcorrect on the downside after major bubbles. 600 or below on the S&P 500 would be a more typical low than the 750 we reached for one day.

[bubbalouie]

Hi Bender, just finished Grantham's article. Most of it makes sense to me but some of it seems plain wrong; perhaps I'm missing something.

The good news is that
with the market at half price, you now have much more
powerful dollars. For consumption purposes, a dollar
is always a dollar. Investment dollars, in contrast, are
weak dollars in badly over-priced markets but powerful
dollars in cheap markets. Today, investment dollars are a
whole lot more powerful than they used to be.

[bubbalouie]

Interesting video from itulip;

http://www.youtube.com/watch?v=pZsY1rFr_yw

[Icarus]

Markopolos-Madoff Complaint

A detailed letter to the SEC in 2005 explaining why Madoff's hedge fund was almost certainly fradulent. Ignored by the SEC, obviously.

Deregulation doesn't work, but regulation apparently isn't so hot, either.

[bender]

Hi Bender, just finished Grantham's article. Most of it makes sense to me but some of it seems plain wrong; perhaps I'm missing something.

The good news is that
with the market at half price, you now have much more
powerful dollars. For consumption purposes, a dollar
is always a dollar. Investment dollars, in contrast, are
weak dollars in badly over-priced markets but powerful
dollars in cheap markets. Today, investment dollars are a
whole lot more powerful than they used to be.

Howdy. I think he is just saying -- in a wordy way -- that stocks are a better buy now than before the crash.

[tidal]

Twenty-five people at the heart of the meltdown ... and, bonus, six who saw it coming...

[parvus]

Bruce Bartlett on stimulus plans (more on this in the Austrian thread):

Eighty years ago, the conventional view among economists was that government had nothing to do with business cycles--it neither caused them nor was there anything it could do about them. They were like the weather; you just coped the best you could.

Eventually, economists came to understand that vast numbers of individuals and businesses throughout the economy don't make exactly the same mistakes simultaneously unless something has changed the rules of the game. Government isn't always responsible--bubbles can occur on their own, as they have over the centuries--but systemic errors usually result from government policy.

The Federal Reserve, our nation's central bank, is the institution mainly responsible for altering the terms of trade. That is because it has the power to change the value of the currency, which is the intermediary in every single economic transaction, and also to alter the terms of every intertemporal transaction--those between the present and future, such as saving today to consume tomorrow--by raising or lowering the interest rate.

No one today believes that the Great Depression just happened or dragged on as long as it did because the private sector kept making mistake after mistake after mistake. It only made them and continued to do so because government interfered with the normal operations of the market and prevented readjustment from taking place.

The Great Depression resulted from a confluence of governmental errors--the Fed was too easy for too long in the 1920s, tightened too much in 1928-29 and then failed to fix its mistake, thus bringing on a general deflation that was very difficult to arrest once downward momentum had set in. Herbert Hoover compounded the problem by signing into law the Smoot-Hawley Tariff and sharply raising taxes in 1932.

Unfortunately, Franklin D. Roosevelt misunderstood the nature of the economy's problem and tried to fix prices to keep them from falling--thus preventing the very readjustment that would have brought about recovery. (See this paper by UCLA economists Harold Cole and Lee Ohanian.) He doesn't seem to have ever understood the critical role of Fed policy and mistakenly thought that arbitrarily raising the price of gold would make money easier.

Then, in 1937, just as the economy was starting to build some upward momentum, Roosevelt decided to raise taxes and cut spending, and the Fed suddenly concluded that inflation, rather than deflation, was the main problem and tightened monetary policy. (Note: According to the National Bureau of Economic Research, the Great Depression was basically two severe recessions--one from August 1929 to March 1933, and another from May 1937 to June 1938--not a continuous downturn.)

The result was an economic setback that didn't really end until both monetary and fiscal policy became expansive with the onset of World War II. At that point, no one worried any more about budget deficits, and the Fed pegged interest rates to ensure that they stayed low, increasing the money supply as necessary to achieve this goal.

It was then and only then that the Great Depression truly ended. As a consequence, economists concluded that an expansive monetary and fiscal policy, which had been advocated by economist John Maynard Keynes throughout the 1930s, was the key to getting out of a depression.

Keynes was right, but many of his followers weren't. They thought that budget deficits would stimulate growth under all circumstances, not just those of a deflationary depression. When this medicine was applied inappropriately, as it was in the 1960s and 1970s, the result was inflation.

Economists then concluded that it was a mistake to pursue countercyclical fiscal policy, and the idea of "fine-tuning" became a derogatory term. Even those who continued to believe it was theoretically possible to counter recessions with public works or government jobs programs were eventually forced to concede that it was impossibly difficult to make them work in a timely manner.

In the 1980s and 1990s, economists came around to the view that only monetary policy could act quickly enough to reverse or moderate a recession. But they never really came to grips with the Fed's responsibility for causing recessions in the first place. It always tightened a little too much when inflation was the problem and eased too much when slow growth was the problem.

[WishingWealth]

I read a few reviews of:

Lords of Finance: The Bankers Who Broke the World
By Liaquat Ahamed
The great liquidity crisis – 94 years ago
Review by Niall Ferguson

http://www.ft.com/cms/s/2/d4a84d58-d6c7 ... 07658.html

When the history of the current financial crisis comes to be written, the battle of the index entries will surely be won by central bankers not politicians. The name Bernanke will appear on many more pages than Bush, King more often than Brown, and Trichet will trump even Sarkozy. Most of the time, central banks strive to be dull places; the people who run them relish their obscurity. But when crisis strikes, the limelight shines.

The last great liquidity crisis to hit the global financial system happened 94 years ago, at the end of July 1914. It paralysed the wholesale money market, closed the world’s stock markets for months and necessitated unprecedented government intervention in the banking system. Rightly, this is where Liaquat Ahamed begins.

A semi-retired investment manager, Ahamed set out to tell the story of the four dominant central bankers of the inter-war period. He cannot have foreseen how timely his book would be. Unlike most works on the origins of the Great Depression, Lords of Finance is highly readable – enlivened by vivid biographical detail but soundly based on the literature. That it should appear now, as history threatens to repeat itself, compounds its appeal.

Ahamed’s four central characters are Émile Moreau, governor of the Banque de France; Montagu Norman, governor of the Bank of England; Hjalmar Schacht, president of the German Reichsbank; and Benjamin Strong, governor of the Federal Reserve Bank of New York. By 1926 they constituted “the most exclusive club in the world” but in 1914 they were largely unheard of.

Norman was a partner at the British affiliate of US merchant bank Brown Brothers. Neurotic and prone to bouts of mental collapse, he lived in a large, gloomy house off Holland Park, surrounded by furnishings of his own design, listening to Brahms and dabbling in spiritualism. With his long ginger beard, he looked more like a boulevardier than a banker.

At the other extreme was Schacht, a Hamburger who affected the stiff gait of a Prussian reserve officer, complete with bristling moustache, high celluloid collar and fierce glare. In 1914 he was rising through the ranks of Dresdner Bank.

Of the four, Benjamin Strong was the furthest advanced: president of the powerful Bankers Trust Company, an offshoot of the financial empire of JPMorgan. His troubles were purely personal: a first wife who committed suicide and the onset of the tuberculosis that ultimately killed him. Moreau, meanwhile, was a happy, healthy civil servant whose career had taken a wrong turning. Having served as chef de cabinet to the scandal-prone finance minister Maurice Rouvier, Moreau was sidelined at the Algerian central bank.
...

http://www.economist.com/books/displays ... d=12884939

http://www.nytimes.com/2009/01/15/books ... med&st=cse

http://www.time.com/time/business/artic ... 70,00.html

I don't intend to go through the book itself but the reviews by themselves are a good read.

WW

[Shakespeare]

The last great liquidity crisis to hit the global financial system happened 94 years ago, at the end of July 1914

One hopes that this liquidity crisis is not followed by similar events to those of August 1914.

[Bylo Selhi]

The charges laid against us

Suppose that Buffett had deducted from the returns on his own investment – his own, not that of his fellow shareholders – a notional investment management fee, based on the standard 2 per cent annual charge and 20 per cent of gains formula of the hedge fund and private equity business. There would then be two pots: one created by reinvestment of the fees Buffett was charging himself; and one created by the growth in the value of Buffett’s own original investment. Call the first pot the wealth of Buffett Investment Management, the second pot the wealth of the Buffett Foundation.

How much of Buffett’s $62bn would be the property of Buffett Investment Management and how much the property of the Buffett Foundation? The – completely astonishing – answer is that Buffett Investment Management would have $57bn and the Buffett Foundation $5bn. The cumulative effect of “two and twenty” over 42 years is so large that the earnings of the investment manager completely overshadow the earnings of the investor. That sum tells you why it was the giants of the financial services industry, not the customers, who owned the yachts.

[Doug]

I'd like to thank Bylo Selhi for providing the link about what would have happened if Berkshire Hathaway had been operated as a hedge fund. If everyone who is invested or going to invest in hedge funds had to read that article, it might be the death of hedge funds.

When it comes to investing, I'm a beginner. However, the more that I learn about investing, the more skeptical I become of those selling investment products and services.

[George$]

The charges laid against us

Suppose that Buffett had deducted from the returns on his own investment – his own, not that of his fellow shareholders – a notional investment management fee, based on the standard 2 per cent annual charge and 20 per cent of gains formula of the hedge fund and private equity business. There would then be two pots: one created by reinvestment of the fees Buffett was charging himself; and one created by the growth in the value of Buffett’s own original investment. Call the first pot the wealth of Buffett Investment Management, the second pot the wealth of the Buffett Foundation.

How much of Buffett’s $62bn would be the property of Buffett Investment Management and how much the property of the Buffett Foundation? The – completely astonishing – answer is that Buffett Investment Management would have $57bn and the Buffett Foundation $5bn. The cumulative effect of “two and twenty” over 42 years is so large that the earnings of the investment manager completely overshadow the earnings of the investor. That sum tells you why it was the giants of the financial services industry, not the customers, who owned the yachts.

Bylo - would the same point not be more clear - if the 2-20 principle was applied to the accounts of his fellow investors in Berkshire (rather than only his own shares).

Or am I missing something?

[randomwalker]

All the news that's fit to fund
John Honderich
TORONTO STAR
Feb 01, 2009

If traditional news outlets could no longer afford to do the investigative stories that inform public debate and influence a community's quality of life, who could? The former publisher of the Star explores five options.

http://www.thestar.com/News/Ideas/article/580452

[WishingWealth]

For the SOROS fans.
Longish article in Financial Times.
http://www.ft.com/cms/s/2/9553cce2-eb65 ... fd2ac.html

The credit crunch according to Soros

By Chrystia Freeland

On Friday, August 17 2007, 21 of Wall Street’s most influential investors met for lunch at George Soros’s Southampton estate on the eastern end of Long Island. The first tremors of what would become the global credit crunch had rippled out a week or so earlier, when the French bank BNP Paribas froze withdrawals from three of its funds, and in response, central bankers made a huge injection of liquidity into the money markets in an effort to keep the world’s banks lending to one another.

Although it was a sultry summer Friday, as the group dined on striped bass, fruit salad and cookies, the tone was serious and rather formal. Soros’s guests included Julian Robertson, founder of the Tiger Management hedge fund; Donald Marron, the former chief executive of PaineWebber and now boss of Lightyear Capital; James Chanos, president of Kynikos Associates, a hedge fund that specialised in shorting stocks; and Byron Wien, chief investment strategist at Pequot Capital and the convener of the annual gathering – known to its participants as the Benchmark Lunch.

The discussion focused on a single question: was a recession looming? We all know the answer today, but the consensus that overcast afternoon was different. In a memo written after the lunch, Wien, a longtime friend of Soros’s, wrote: “The conclusion was that we were probably in an economic slowdown and a correction in the market, but we were not about to begin a recession or a bear market.” Only two men dissented. One of those was Soros, who finished the meal convinced that the global financial crisis he had been predicting – prematurely – for years had finally begun.

...

WW

[WishingWealth]

Review of the book: The Tyranny of Dead Ideas
Letting Go of the Old Ways of Thinking to Unleash a New Prosperity
At Center for American Progress.

http://www.americanprogress.org/issues/ ... ranny.html

America is at a crossroads. In the face of global competition and rapid technological change, our economy is about to face its most severe test in nearly a century—one that will make the recent turmoil in the financial system look like a modest setback by comparison. Yet our leaders have failed to prepare us for what lies ahead because they are in the grip of a set of "dead ideas" about how a modern economy should work. They wrongly believe that

* Our kids will earn more than we do
* Free trade is always good, no matter who gets hurt
* Employers should be responsible for health coverage
* Taxes hurt the economy
* Schools are a local matter
* Money follows merit

These ways of thinking—dubious at best and often dead wrong—are on a collision course with economic developments that are irreversible.

In The Tyranny of Dead Ideas, Matt Miller offers a unique blend of insights from history, psychology, and economics to illuminate where today's destructive conventional wisdom came from and how it holds our country back. He also introduces us to a new way of thinking—what he calls "tomorrow's destined ideas"—that can reinvigorate our economy, our politics, and our day-to-day lives. These destined ideas may seem counterintuitive now, but they will coalesce in the coming years in ways that will transform America.

A strikingly original assessment of our current dilemma and an indispensable guide to our future, Miller's provocative and path-breaking book reveals why it is urgent that we break the tyranny of dead ideas, for it is only by doing so that we can move beyond the limits of today's obsolete debates and reinvent American capitalism and democracy for the twenty-first century.
...

WW