Alchemists of Loss: How modern finance and government intervention crashed the financial system Review

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(More customer reviews)I wanted to like this book. And I did in many ways. But not enough to give it a higher rating. I appreciated the detailed discussion of "Modern Finance". I appreciated the discussions of the various transgressions of financial institutions without blaming "the free market". The discussion of managerial capitalism was fascinating. Nuggets such as the impact of the estate tax on corporate structure were also illuminating. There is also an interesting and fresh discussion on how Greenspan's policies evolving over his term.
I did find some chapters were so dense with mathematical analysis that I mostly skimmed them. (To the authors' credit, they acknowledge such at the beginning of chapter 15 by suggesting that it could be optional for some readers.)
The broad recommendations of stricter monetary controls, reduction in the scope of deposit insurance, and restrictions on future bailouts of financial institutions seemed quite sound. The overall tone that our financial systems would be better served with less government actions and less regulation was also compelling to me (acknowledging my own confirmation bias.)
I did find chapter 16 to be a little muddy. The authors suggest various reforms of corporate governance while seemingly ignoring how these reforms might be implemented without additional government interventions. To my eyes, the authors fell into the trap that all we need is better regulations of financial institutions and corporations without acknowledging the incentives that governments and legislatures have when crafting such regulations.
For US readers, keep in mind that the book is mostly written from a UK perspective. Not completely, for sure, but enough that I was forced to pause regularly to make sure I understood what was being presented.

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Risk and Liquidity (Clarendon Lectures in Finance) Review

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(More customer reviews)The Clarendon lectures by Hyun Shin represent collection of ideas he has developed over the past 10-15 years.
Many of these ideas preceded the financial crisis and were in fact prescient as to how the crisis came about.
While the book touches in important ways on both aspects of its title "risk" and "liquidity", the ideas about risk
are the most potent and in fact drive the book's thesis about liquidity.
The key idea is simple and explained beautifully well: that much of modern risk management - both inside
banks and that which is adopted by Basel capital requirements - is highly firm-centric or partial equilibrium
in view. It does not recognize that individual agents, taking the same action in interest of reducing each one's
risk in isolation can in fact make the system more fragile. These common actions could be building exposures to
mortgage-backed securities because Basel has encouraged them to do by lower capital requirements, or liquidating
assets all at once since they have all hit their risk limits based on common model assumptions. That risk of the
system is thus ENDOGENOUS to the very rules that are designed to reduce this risk is a subtle point that can help
understand much of what went in lead-up and unfolding of the recent crisis. It also helps understand why financial
firms and their employees, working each in their own self-interests, found it surprising that the aggregate outcome
of their actions was so calamitous.
The book also builds rich ideas around liquidity in asset markets and on balance-sheets, in turn being endogenous
to choices of agents in the economy, and how measures adopted to limit agency problems such as mark-to-market
accounting can similarly exacerbate market liquidity in times when several firms are close to their risk management
constraints at once. The book then goes on to suggest sound principles for - especially MACRO-PRUDENTIAL -
regulation of the financial system, principles that recognize the fallacy of composition and that guard against the
fact that risk and liquidity are endogenous to regulation itself.
The author, as part of a group of colleagues at London School of Economics (along with Charles Goodhart in particular)
had forewarned in 2002 in a report that Basel risk-weights are likely to endogenously make certain asset classes
more systemic and the economic cycle more severe in a downturn. Their academic thinking, like that of some others,
however went unheeded. The hope is that the ideas in these Clarendon lectures will receive more serious attention
and can be kept in mind as financial regulation is rewritten. I encourage everyone interested in financial markets,
crises and regulation to read this important contribution, in academia, practice and policy alike.

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This book presents the Clarendon Lectures in Finance by one of the leading exponents of financial booms and crises. Hyun Song Shin's work has shed light on the recent global financial crisis and he has been a central figure in the policy debates.The paradox of the global financial crisis is that it erupted in an era when risk management was at the core of the management of the most sophisticated financial institutions.This book explains why.The severity of the crisis is explained by financial development that put marketable assets at the heart of the financial system, and the increased sophistication of financial institutions that held and traded the assets. Step by step, the lectures build an analytical framework that take the reader through the economics behind the fluctuations in the price of risk and the boom-bust dynamics that follow.The book examines the role played by market-to-market accounting rules and securitisation in amplifying the crisis, and draws lessons for financial architecture, financial regulation and monetary policy.This book will be of interest to all serious students of economics and finance who want to delve beneath the outward manifestations to grasp the underlying dynamics of the boom-bust cycle in a modern financial system - a system where banking and capital market developments have become inseparable.

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Stabilizing an Unstable Economy Review

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(More customer reviews)This classic work of political economy, first published in 1986, has valuable lessons for us today. Minsky studies the recessions of 1975 and 1982, economic theory, institutions, particularly banks, and finally presents an agenda for reform.
Financial traumas have led to ever-worse recessions, in 1970, 1975, 1979-80, 1982, 1987, 2002 and the present. As he notes, "the normal functioning of our economy leads to financial trauma and crises, inflation, currency depreciations, unemployment, and poverty in the midst of what could be virtually universal affluence - in short, .. financially complex capitalism is inherently flawed." Yet he believes, "the collapse of aggregate demand and profits, such as occasionally occurred and often threatened to occur in pre-1933 small government capitalism, is never a clear and present danger in a Big Government capitalism such as has ruled since World War Two." Life is disproving this hope.
What causes these recessions? Minsky writes, "the Wall Streets of the world are important; they generate destabilizing forces. ... This instability is not due to external shocks or to the incompetence or ignorance of policy makers. Instability is due to the internal processes of our type of economy. The dynamics of a capitalist economy which has complex, sophisticated, and evolving financial structures leads to the development of conditions conducive to incoherence - to runaway inflations or deep depressions." Strangely, capitalism can't handle capital: "capitalism is flawed precisely because it cannot readily assimilate productive processes that use large-scale capital assets."
What is to be done? He warns, "Meaningful reforms cannot be put over by an advisory and administrative elite that is itself the architect of the existing situation." Then he stresses, "The emphasis on investment and `economic growth' rather than on employment as a policy objective is a mistake. A full-employment economy is bound to expand, whereas an economy that aims at accelerating growth through devices that induce capital-intensive private investment not only may not grow, but may be increasingly inequitable in its income distribution, inefficient in its choices of techniques and unstable in its overall performance." But, as Minsky acknowledges, capitalism cannot deliver full employment: "Capitalist market mechanisms cannot lead to a sustained, stable-price, full-employment equilibrium."
He proposes, "Public control, if not out-and-out public ownership, of large-scale capital-intensive production units is essential." He suggests nationalising the railroads and the nuclear power industry, as private enterprise runs both so poorly.

He also notes capitalism's other failures: "the market mechanism ... cannot and should not be relied upon for important, big matters such as the distribution of income, the maintenance of economic stability, the capital development of the economy, and the education and training of the young." It seems we can't rely on capitalism for anything.


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Congo-Paris: Transnational Traders on the Margins of the Law (African Issues) Review

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(More customer reviews)"Congo-Paris" is a fine example of the recent trend in anthropology away from the localized study of communities and towards analysis that transcends geographic boundaries. Not that this study is "multi-sited" (to use the dominant buzzword): MacGaffey and Bazenguissa conducted their fieldwork for the book entirely in Paris, interviewing dozens of subjects from both Congo-Brazzaville and Congo-Kinshasa. But Paris is just one venue in these transnational subjects' life histories as they range back and forth across national, legal, commercial, and cultural frontiers.
While the authors set out to validate the Congolese quest for relief from political and economic hardship at home, the image they present of this loosely-defined community of traders will do nothing for its image abroad. These individuals define themselves through the act of quietly circumventing the rules (particularly import duties and immigration laws), resisting governmental authority without manifesting any visible signs of dissent. This is understandable, given the corrupt and authoritarian Congolese regimes of recent decades. But the transnational traders' ethos of stealthy noncompliance extends to their overseas existence as well, with the result in these Parisian cases being a gamut of criminal activity from smuggling and apartment squatting to drug dealing and theft. "Model immigrants" they are not, regardless of whether their behavior represents a survival strategy. One wonders just how representative this underworld is of the larger community of Congolese living in Paris, and whether those Congolese living more lawful existences there object to being tarred with this brush of illegality.
Such moral qualms aside, I give "Congo-Paris" high marks for its thorough and penetrating analysis of its subjects, a very difficult group to interview given its members' legal status and clandestine activities. No doubt its success owes much to the collaboration between MacGaffey (British) and Bazenguissa (Congolese). The book also skillfully negotiates the difficult and shifting theoretical territory of anthropology to bring outside perspectives to bear on its subjects. Finally, it makes a strong case for redefining anthropology in the context of ongoing processes of globalization. I suspect that we will be seeing a good many more studies like this one in the future.

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