The plethora of books and commentary on the recent and current crisis does not seem to be ending soon. On September 24 we get "Wall Street: Money Never Sleeps", Oliver Stone's sequel to his 1987 greed-is-good classic "Wall Street". I expect it to be weak and largely unhelpful caricature; early reviews in Cannes support my opinion.
But The Road from Ruin (published by Crown Group - 2010) is a worthy read. The authors demonstrate a rare erudition that places our recent follies against the backdrops of follies past. What have we learned from our recent busts and bubbles, and more relevantly, what haven't we learned? I was reminded of authors like Simon Schama and Joseph Rykwert who are able to effortlessly introduce seemingly endless but relevant insights into the narrative that help the reader make connections.
I was surprised to learn, for example, that John Law, the infamous Scotsman who was credited with the Mississippi Company bubble and bankrupting France in the 18th century, was not a scoundrel, but merely was ahead of his time. "Law's sin was not fraud, but over ambition. …In contrast to the miserable failure of the South Sea Company's commercial activities, the Mississippi Company's trading business proved to be a success. The value of French overseas trade quadrupled between 1716 and 1743." (p. 167).
Did you know that it was Clarence Barron (founder of Barron's Magazine) hired by the Boston Post in 1920 who blew the whistle on the original Ponzi scheme perpetrated by Charles Ponzi? (Ironically, Ponzi called his company the "Securities and Exchange Company" predating the current SEC by 13 years.)
And do you think that Frank Baum's "Wizard of Oz" published in 1900 is an allegory for America's debate on returning to the gold/silver standards? ("Oz" is the abbreviation for ounce, and Dorothy originally had silver slippers, not ruby.)
I did not know that the resort in Bretton Woods was selected in 1944 partially because of its lack of an anti-Semitic policy allowed US Secretary of the Treasury Henry Morgenthau to attend the proceedings.
There is method to the narrative. The authors take us, without regard to chronology, from the stock mania about tulips, the South Sea bubble, LTCM (Long Term Capital Management), Enron, the dotcom bubble, the J P Morgan (ipse) bailouts after the crash of 1907 after the collapse of United Copper Company stock, the S&L meltdown, the Icelandic disaster, Bretton Woods, the importance of Keynes, all the way up to President Obama's promises for financial reform. They missed the flash crash, the sovereign debt impact on the euro-zone, the current SEC investigations into the moral hazard of being on both sides of the Michael Lewis's big short, and the current regulatory legislations being currently considered. Economics may be a dismal science, but it is fascinating history.
I tip my hat to any authors who can segue gracefully from the 2009 epic Jon Stewart (Daily Show on the Comedy Channel) vs. Jim Kramer (Mad Money on CNBC) smack down, using Alexis de Tocqueville (why not?) on early American democracy in an effort to show up the increasing weakness of contemporary financial reporting. Well done. Plus they throw Jim Kramer a life-line and argue that he is hardly the parody that Stewart makes him out to be.
Ultimately, however, one comes away sobered with how little we have learned. The authors observe that we have made five "wrong turns". The first is that bubbles are the result of mere madness and delusion rather than "a consequence of the innovation process that can add to our prosperity in the long term." The second wrong turn is to assume that governments should never bail out the system in the middle of the crisis. Failing to save Lehman Brothers, in their opinion, was horrendously wrong. It is an equivalent to the Fed's failure to save failed banks after the 1929 stock market crash (a crash, they point out, that merely went to back to 1928 levels) which in fact led to the dark days of the Great Depression. The third wrong turn is to look only at the symptoms of the crisis of the hour rather than "tackling the underlying economic causes." The fourth wrong turn is to blithely assume that markets are self-healing and self-correcting. And the final wrong turn is to regulate in haste, as the authors describe the sound of so many barn doors being closed at once after the horses have fled. Does anyone truly think that the Sarbanes-Oxley reforms did anything at all post-Enron to improve corporate accountability in America?
The authors are not without an opinion on how we can repair things, and indeed their subtitle is "how to revive capitalism and put America back on top". I believe they have good ideas on the former, but I am not convinced they argued why those ideas would put America back on top. The book does conclude by standing homo economicus on his head and its authors point promisingly to an emerging trend toward behavioral economics as holding some promise, as well at the ideas introduced by Andrew Lo regarding the Adaptive Market Hypothesis. The provocative ideas and reasonable prescriptions are as abundant as the historical nuances and object lessons:
- Why not having the Federal Reserve provide a rational range for share prices during certain periods -- an irrational exuberance governor if you will -- can be used to mitigate wild swings without impeding the free movement of share prices.
- When a financial enterprise goes down, why not retrieve the "black box" equivalent as we do with airplanes that crash and create an agency like the National Transportation Safety Board (NTSB) to give an objective and technical disclosure of what went wrong, rather than use the perspective of "blame and denial".
- Let's start to measure productivity by including some measurement of a greater social good. At the very least, is this growth carbon neutral and sustainable? What can we learn from the philanthropic examples of Warren Buffet and Bill Gates?
- Support the aspiration of business management to adopt its own version of the Hippocratic oath as some students have started to do at the Harvard Business School.
- Encourage America to get over its negative reaction to the words 'nationalized bank'.
- Learn from the deep irony that we saw no comparable 'moral hazard' in allowing ratings agencies to be paid by those whose assets they analyzed.
- Give serious consideration to the advice offered by both John Maynard Keynes at Bretton Woods in 1944 and by Zhou Xiaochuan, head of China's central bank, at a G20 summit in 2009 to come up with a new reserve currency other than the US dollar.
- That is time to raise a red flag over the promiscuous 24-news cycle in financial reporting which tends to put out fires with gasoline.
- Merge the CFTC and SEC into a super-regulatory agency for credit default swaps and derivatives
- Monitor and expose (like whack-a-mole) financial "innovations" that exist primarily to circumvent new regulations (securitized debt and derivatives were perhaps "driven by the desire to finesse the Basel risk rules.")
Their most important observation and, in my opinion, the most important is that it is finally time to return to long term thinking in economics, and away from the short-term IWBG-YWBG (I'll be gone; you'll be gone) collusion that is beggaring our economies, our planet and our grandchildren.