The Ascent of Money

by Niall Ferguson

 

My attempt to grapple with economics and finance is a recurring theme of this blog (alongside my love/hate relationship with fantasy). This post falls right into that category.

Ferguson’s main argument with The Ascent of Money is that financial innovation leads to an increase in economic activity and, in the long run, individual prosperity, even if there are some bumps along the road. That this argument seems a bit defensive, in the wake of the recent market crash, doesn’t necessarily mean that it’s wrong. Ferguson writes as if he knows he’s fighting an uphill battle: convincing us, the unwashed masses, that banks and hedge funds aren’t responsible for our current predicament. In my opinion, he partially responds to this by dumbing down his explanations, presenting simplified histories, and essentially ignoring examples that don’t fit in neatly with his argument.

For me, this isn’t a problem most of the time. Ferguson’s histories of everything from credit to insurance are enlightening to a layman such as myself. I do have a problem, however, when I finally feel comfortable enough to have questions of my own, questions that Ferguson doesn’t really want to answer. The Ascent of MoneyOf course, it’s a book; perhaps it’s unreasonable of me to expect that the author is only presenting information exactly on the level of my understanding. That book would be impractical, and it probably wouldn’t sell a lot of copies. On the other hand, unanswered questions feed into this feeling I get, the feeling that when it comes down to it, financial experts don’t really want us to understand how the system operates. It might make us question the status quo.

But let’s turn from cynicism back to the book itself. I do feel like Ascent helps put into context the new financial techniques that are partially responsible for the most recent financial crisis. To hear Ferguson tell it, finance has always been an arms race between, on the one hand, whatever geniuses have the newest ideas on how to make money, and, on the other, industry regulators. From the invention of bonds to the first stock market to the derivatives of the last couple decades, people who handle money for a living are always looking for new ways to take the money they have and use it to create more money. Whether because these new schemes are initially too complicated to effectively oversee, or because those meant to oversee the schemes have a stake in seeing them succeed, or perhaps because there’s no regulation at all, the latest financial ideas often succeed wildly in the short term, only to do lasting damage to existing markets in the long term.

I’m guessing that’s not the message that Ferguson wants us to get from his book. As I said before, his thesis is that financial institutions, while often willing to use other people’s money for what turn out to be risky endeavors, actually help people by providing financial stability. For example, though the first insurance companies definitely made money, they also provided a needed safety net for widows; a service that the government couldn’t really provide. On this broad point, I agree: developments in the field of finance have generally made people better-off. But the connections between credit, debt, and wealth creation can’t be ignored. Even when the system is at its most efficient, there will be winners and losers, and when the system becomes unbalanced, there may all of a sudden be many, many more losers.

Again, I’m grateful that Ferguson acknowledges this truth; it makes his argument for the necessity of financial institutions that much stronger. Michael Lewis, in Boomerang, muses that people are justifiably angry about the way their financial futures were disappeared in the Great Recession, despite the lack of a natural vent for that anger. Ferguson, while willing to accept that people aren’t really sold on the glorious benefits of finance right now, essentially wrote Ascent to argue the opposite case. Rather than bemoaning a lack of easy targets for our ire, he readily identifies the responsible parties, and then proceeds to make a solid case in their defense.

As much as I complained about it, I didn’t actually hate The Ascent of Money. Ferguson clearly sees his role as defending the financial world from the wrath of the hoi polloi- but that’s fine, because he’s even-handed, and he never implies that finance has the ability to create a perfect world. Ascent can be pretty dry, but if you’re interested in the subject matter, go for it.

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Boomerang

by Michael Lewis

 

In this semi-sequel to The Big Short, Michael Lewis travels across the globe to get a sense of how the real estate crash in the United States affected formerly solvent and prosperous nations. He calls it “financial disaster tourism,” and it’s a spot-on description. While the crisis began in the United States, it quickly spread across the world, eventually leading to a sovereign debt crisis in Europe. Lewis follows the money- or, more accurately, the debt- from country to country, meeting government officials and others to try to get a feel for what, exactly, just happened.

As Lewis explains in his introduction, he was tipped off by a man he was interviewing for The Big Short (who was subsequently dropped from the book) that the crisis wasn’t over just because governments bailed out the banks. The bailouts, in fact, only temporarily solved the problem; bank debt was merely converted into sovereign debt. While the United States is ostensibly much less likely to go bankrupt than a private company, bailouts provided only the illusion of solvency, in reality setting the world up for a bigger crash to come.

So Lewis travels to Europe, as the debt crisis unfolds in Iceland, Greece, Ireland, and Germany. He seems to take pleasure in noting that while the whole world experienced the same boom and subsequent bust, each nation handled itself differently. Iceland, for example, which Lewis notes has around 300,000 people- half the size of Washington, DC- almost overnight moved from a fishing economy to a banking economy. BoomerangIcelanders started studying finance and investing their money all over the world. While this may have seemed like a good idea at the time, the bubble eventually burst, and Iceland was rudely awakened to the fact that maybe banking wasn’t the most solid of foundations on which to build their entire economy.

When he makes it to Greece, Lewis can’t believe the amount of shenanigans going on at all levels. The government pulls tax collectors off the streets during an election year, and taxes are generally seen an inconvenience to be avoided if at all possible. Even monks are tied up in a national scandal, related to shady real estate deals. Nobody trusts each other, lying and corruption are rampant, and the country can’t decide whether it wants to reform itself or not. The phrase “It’d be funny if it weren’t so tragic” kind of applies here. Possibly more accurate: “It’s pretty hilarious, though I’d imagine it’s not so funny if you happen to be Greek.”

And, indeed, I felt a little worse about laughing at the Greeks when Lewis finally made it to America. One of Lewis’ sources, an analyst named Meredith Whitney, believes that American government finances at all levels are in shambles, but that the federal and state governments will be able to push the hurt down to municipal governments. Many of these cities would likely go bankrupt keeping all of their promises- mostly pensions- and this in turn would alter the fabric of American society. When Lewis asks Whitney where the worst will hit, she directs him to California.

His trek through the Golden State is startling, to say the least. Lewis first spends a day interviewing former Governor Arnold Schwarzenegger, though it seems more like an excuse to go on bike ride around the beach while Ahnold talks about his life (which admittedly sounds awesome.) After his romp with the Governator, he travels to the cities of San Jose and Vallejo, California. San Jose appears to be in a bit of trouble, what with an overpaid public sector and falling tax revenues, but Vallejo is downright scary. When Lewis shows up, the only thing going on in the city seems to be a massive property auction. City hall seems closed, but Lewis eventually locates the city manager and his staff of one. Through Lewis’ talk with the Vallejo city manager, it’s hard to shake the feeling that if this is where America is headed, we might be in trouble.

Lewis writes books about either sports or finance, employing the same combination of careful research and fantastic storytelling for both. This makes it odd to read Moneyball, about a man who shook up Major League Baseball by coming up with a cheaper way to win, and then read books like The Big Short or Boomerang, which deal with the worst economic disaster in my lifetime. The latter, specifically, forecasts an even worse crash to come, and doesn’t provide much hope that we can avoid it. It’s just a bit jarring for me, as if Lewis is saying, “There’s no way that society’s going to survive the coming calamity. Don’t even try to avert it. Now, let’s talk about football.” He’s telling us that the sky is falling, but he doesn’t seem too concerned, which is itself somewhat unnerving.

Even at his most depressing, though, Lewis always entertains and informs me. Boomerang isn’t a work of optimism, that’s for damn sure, but it’s hard not to be amused by Lewis’ travels. It’s also hard not to be terrified.

Friday Night Lights

by H. G. Bissinger

 

If you haven’t heard of this book, you might have seen the recent, and popular, TV show of the same name. Or the movie, which came out around ten years ago. Or hopefully you’ve at least heard of either of these.

If you haven’t, the expression ‘friday night lights’ refers to high school football (college football is played on Saturday, pro football on Sunday), particularly in towns where football games are the biggest events of the year.

Now, I didn’t grow up in such a place. When I was in high school I never went to a game, and the only time I can remember going to a high school game was when I was around eight. I went with my friend, whose brother was on the team, but we kids mostly just played around under the bleachers. Even when I started enjoying sports, and though I still have pride in my high school, I never had much interest in going to W-L football games, and most of my friends were the same way.

But in Texas, it would seem that things are different. Friday Night Lights indicates that, at least in Odessa and at least in the 1980’s, city life virtually revolved around high school football: the Friday night game was the highlight of the week, football season was the highlight of the year, and for many kids playing varsity football would be the highlight of their lives. Bissinger relates the story of Permian Panthers’ 1988 season primarily through the eyes of a diverse group of players, whose biggest dream is winning a state championship.

Friday Night Lights is about more than one team’s extraordinary efforts on the football field. Bissinger, almost by accident, finds himself exploring deeper, and darker, themes in 1980’s America. It begins with Odessa’s clear educational priorities. The school district, after a prolonged fight against desegregation, ended up drawing new school boundaries to ensure that Permian would get a larger share of black students, seen by the school as potential football stars. Varsity players often did not have to do their homework or even attend class. And academic achievement was largely ignored. One football player, Brian Chavez, is a star with the Panthers, which takes precedence over his other main achievement- being valedictorian.

Bissinger doesn’t stop with Texas education policy. He critiques 1980’s American economic and political culture, and the disaffection many felt from our leaders and their policies. Friday Night Lights is, at its core, about the false promises of America, and the uncommon endurance of the American Dream.

If that sounds grandiose, yeah, it is a bit. Bissinger takes pretty powerful, self-evident examples, and attempts to use them as evidence of an entire nation’s failings. Though I was born in 1989, I didn’t really live through that era. My guess is that Friday Night Lights would have had more meaning for me if I had actually experienced the 80’s, experienced desegregation and oil busts and booms and the 1988 presidential election. The book might be seen in a whole new light with the proper cultural context. So it is unfortunate that I never got that chance.

On the other hand, I get the benefit of Bissinger’s retrospective. He claims to have received death threats from Odessans, who understandably felt betrayed by an outsider who came into their town, had unique access to the team, and seemed to be caught up in the glory of the Permian Panthers. Bissinger makes it clear that he was indeed caught up in the team’s season, regardless of the problems the book exposed.

Similarly, the reader, too, gets caught up in the story of an unlikely group of kids that seems destined for great things. Rich and poor, black and white, the Panthers have their share of ups and downs through the season, struggling to prove that an undersized team from the middle of nowhere can achieve great things.

Friday Night Lights is more than a sports story, it is a very interesting critique of American society. I would highly recommend it, if you think you can handle it.

The Big Short

by Michael Lewis

 

I think I was meant to like this book, for several reasons. First of all, I have read a couple of Lewis’ other books, The Blind Side and Moneyball. Both were excellent, and yes, I am the type of hipster that will tell you I read the books before the movies came out. (I never saw The Blind Side and I thought Moneyball was good, but not great; both films received Oscar nominations for Best Picture.) Lewis was able to blend histories of football and baseball with the personal stories of Michael Oher and Billy Beane to make entertaining, informative, and at times touching books.

I’m fascinated by Wall Street culture, at least as portrayed in films such as Wall Street and American Psycho, and I was hoping to see a bit of that and how it played into the subprime mortgage crisis. Although I sympathize with anti-Wall Street protests, it’s still fun to get a peek at their world. I mean, you don’t need to like gangs to enjoy The Sopranos or The Wire. Gordon Gekko is a great character, even though I hate what he stands for.

I was also curious about the collapse of the economy, which I blame for not having a good job and for everything else I don’t like about my life. I paid attention to the news a lot in 2008, and I still didn’t really have a clue as what set it off, how and why the government got involved, and how I would be affected. If anyone could explain it all in a way that I could understand, it would be Michael Lewis.

Well, The Big Short did show the Wall Street hubris I had been expecting (though I think that Lewis’ 1989 semi-memoir Liar’s Poker would have more of this). It also did an excellent job of explaining the crisis in a way that any idiot, like me, would understand. Essentially, the book tells the story of what happens when banks give home loans to people who almost certainly won’t be able to pay them back. The loans are packaged together and sold as a bond, which contains some loans that will be worthless and some that will be paid. This bond is then chopped up, combined with others, and sold as a CDO to disguise the fact that they often contained bad investments. Banks and huge Wall Street firms soon got knee-deep in other wacky derivatives that were so far removed from what they represented that investors never realized it was a house of cards. If you want an explanation that wasn’t written by an idiot, The Big Short should be very helpful. Though I had to refer back to Lewis even for my weak summary, I can assure you that I understand the economics of the crisis much better than I did before.

Understanding all these obscure financial concepts is never the problem here. The problem is that Lewis tells the story by focusing on the handful of people who saw the crisis for what it was and decided to bet against the subprime mortgage machine, directly and indirectly. Some are insiders, some are not, and some are more likeable than others. For me, just keeping them straight was hard, and I kind of wish Lewis had stayed away from their personal lives and focused on their involvement with the market. I never developed an emotional connection with any of them, and I think it doesn’t help that all were making money off of an apocalyptic scenario. Some of Lewis’ protagonists even admit this as well: all were feeding the doomsday machine and stood to profit substantially when the machine finally broke down.

I get it, or I think I do, that Lewis chose these people as the subjects of The Big Short because they were the only ones to see the mess coming, the only ones so confident that they were right that they were willing to put their money, hundreds of millions of dollars, where their figurative mouths were. They are not, however, the ‘good guys’. That they were right does not change the fact that they made money while failing to prevent millions of homebuyers from being taken advantage of. Perhaps if Lewis had included some of the 99% in the book, it would have had the emotional anchor that made his other work special.

If you want to understand the subprime mortgage crisis, this account is superb; seriously, if you’re curious at all, read it. But I don’t think they’re going to make it into a movie anytime soon.