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BOOK REVIEWS
Crisis hindsight
By Chan Akya
I have been reading a number of books on the latest financial crisis, by a
whole bunch of luminaries. Most have taken a unidirectional if not completely
one-sided view; in other words, the authors, due to their professions or their
particular ideology, have chosen to approach the crisis by looking through a
prism of their own making. That handicap has cost many of them the ability to
write a cogent and powerful analysis. As we will see, most failed - with one
notable exception.
 When
Markets Collide: Investment Strategies for the Age of Global Economic Change
by Mohamed El-Erian.
Being almost the first off the block with a book about the financial crisis
even as it started unfolding on our screens in early 2008 (the MTV generation
doesn't really believe that there was a year as long ago as 2007 nor that
anything important happened then), PIMCO's investment chief Mohamed El-Erian
appeared to have a winning hand in his book. Almost predictably, it won
accolades including the "Financial Times and Goldman Sachs Business Book of the
Year" award. (See also
Show me the exit!, Asia Times Online, February 21, 2009, for the views
of my colleague Julian Delasantellis.)
Imagine a doctor who was sent to review Olympic sprint champion Usain Bolt and
started off by talking about his food habits ("he eats a lot"), his muscle
strength and so on; imagine also that for whatever reason Bolt falls sick. The
doctor will then be in a position to convert all his analysis of the factors
explaining Bolt's champion ways to those explaining his illness. In other
words, having already written about the habits of champions, he will have to
lay the blame for the sickness on those very habits. This will probably leave
the reader perplexed at best.
That little fantastic analogy pretty much explains what El-Erian has tried to
do with this book.
My suspicion is that it could well have started out life as an internal
discussion paper at Harvard outlining the secular asset allocation choices of
the future - that is, US bonds good, Western equities bad, Chinese stocks good,
commodities good ... (many endowment funds and generic pension funds are
under-invested in "emerging markets").
That's the reason the primary thesis of the book wasn't anything about the
financial crisis per se. Rather, it was about the increased sophistication of
financial markets in disaggregating risk in a time that a number of other macro
factors, including the rise of China (El-Erian is always careful to phrase this
as the rise of "China and India"), happened even as investors embraced new
financial techniques (collectively referred to as behavioral finance, but that
would be overstating it).
In effect, it is clearly a book that was concocted when El-Erian still ran the
Harvard Endowment Fund and well before the financial crisis started breaking
out in 2007.
Thus, when the crisis did break out, El-Erian may have been scrambling to use
as much of his "previous" book as possible and essentially outlining - in
almost comic fashion at one stage - how "no one" expected things to unravel as
quickly as they did.
Also unfortunately for anyone not well trained in the jargon of financial
markets, El-Erian's prose may seem impenetrable. Even for those of us with
reasonable familiarity of the jargon, there is something suspiciously casual
about the way it is strewn around this book, almost suggesting that El-Erian
would have liked nothing more than to summarize his whole book into the space
of his old monthly columns in PIMCO.
The second thing that rankles is the failure to deconstruct the credit ratings
process: PIMCO being a major investor in fixed income, one would have imagined
that El-Erian had a few choice words to say about the rating agencies. Perhaps
the choice of publisher (McGraw Hill, which also owns the rating agency
Standard & Poor's) proved to be a constraining factor.
The point isn't an idle one: very few people in the world of investments
actually have the power to change the way rating agencies operate, El-Erian is
one, his colleague Bill Gross is another, as is Warren Buffett.
Buffett can be excused in this list because he manages a whole lot of companies
nested within his private-equity like insurance company and because he owns a
big stake in Moody's, the other leading ratings agency. I cannot fathom the
rationale for El-Erian and Gross keeping silent on the vagaries of credit
ratings, though: there are a few obvious suspicions, but nothing worth going
into in print.
As an aside, El-Erian may well have made a good judgment call on what to write
by ignoring the rating agencies: earlier this year, McGraw Hill dropped the
book Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World
Economy by Barry Ritholtz, ostensibly because the publisher wanted
greater corroboration even as others in the media, including Ritholtz,
speculated that the book was dropped because it had been overly critical of the
three main rating agencies - Fitch being the third. He ended up publishing
through Wiley in May; I have not read the book but intend to.
As for that little award from the Financial Times and Goldman Sachs, I can only
speculate that El-Erian's role in PIMCO - both as an advertiser/contributor to
the Financial Times and as a major business counterpart for Goldman Sachs - may
have swung some votes. Just a suggestion, of course.
 Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for
Global Capitalism by George Akerlof and Robert Shiller.
Akerlof and Shiller are renowned economists who over the past few decades have
established truly path-breaking analysis in the field of economics. Akerlof's
"user car" problem outlining the effects of asymmetric information and
Shiller's work on "irrational exuberance" in various asset markets are worth
reading for their original takes on the subject matters.
Akerlof and Shiller have also written many good books. This co-authored
production isn't one of them. I argue that from the point of view of my expectations,
that is, that I was thinking of a book on the financial crisis and when the
title popped up it was almost a no-brainer decision to buy it.
Firstly, for all the talk of behavioral finance in the preface and through the
early chapters, the authors missed a giant trick: namely the implosion of
prudence in the life of an average American as credit became overly cheap,
itself a result of hardworking Chinese factory workers somehow contriving to
lend them 105% mortgages at effectively triple-A ratings.
After first failing to spot the global aspects of the funding situation that
turned the crisis into an epic snowball, Akerlof and Shiller then miss out on
the impact of the very topics of which they are experts, namely what happens
when asymmetric information flows are finally overturned, or in more prosaic
terms, how do people behave when they realize that they hold instruments of
comfortable fiction (that is, highly rated bonds, issued by US companies, that
are worth precisely zero).
None of this is to say that the "average" reader will not glean a lot of
information from the book: far from it, there are numerous parts that provide
lucid explanations of otherwise inaccessible topics - on financial market
volatility for example, the "natural" rate of unemployment, the "money
illusion" and so on.
All-in-all, this is a useful book in itself, but far too arcane and academic
for readers more interested in finding out how their economies were run
aground.
 The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It
Means by George Soros.
Any book by a significant market personality invites both expectations and some
dread. From my perspective, buying a book about financial markets from the man
who was held singularly responsible for a spate of currency crises in the 1990s
seemed initially to be a bit of a difficult choice.
One would half expect that a ruthless hedge fund trader like George Soros would
simply stick a nice picture on a hardcover book and sell it for US$20, leaving
the buyers with an otherwise blank book. As it turned out, by actually putting
words into the book he does a whole lot worse.
Don't get me wrong. Soros is clearly a gifted trader with razor-sharp
intellect, an ability to combine a comprehensive macro view with the
excruciating levels of details that are required to actually make money from
those views. That much is clear.
What is left for readers to puzzle over is that the basic precept of the book -
reflexivity - is itself based on an interpretation of the works of Karl Popper
as applied to mass financial markets. This is dangerous ground for anyone, not
the least for someone like Soros who actually has a history of making money at
the expense of more traditionally oriented economic and financial modeling of
answers.
The linkage between reflexivity and crisis isn't established in the liturgical
but rather through the use of colloquial, thus rendering visions of the apple
falling on Newton's head rather than the more determined pursuit of a rational
explanation in the fashion of David Hume.
Having established that actions by individuals have reactions from other
individuals, another of Newton's laws that stands as a simpler albeit
patent-free explanation of reflexivity, Soros then ties himself up in knots by
suggesting that the global financial system has created too many inflection
points for itself - in effect conjuring up a permanent state of crisis.
The problem with that explanation is that the global financial system isn't a
self-contained organism but rather one that transmits the financial flows of
the global economy while layering the process with increasingly complex
instruments with which to hood its own profitability.
Secondly, the explanation fails in this case because demand for the complex
financial products created by Wall Street came from new, rather than
established, sources - that is, an exogenous fault line that hadn't been fully
absorbed into the world of financial decision-making; the very factor that
Soros discards as irrelevant.
Lastly, this book was perhaps the most difficult for me to read in terms of
both the sheer verbosity as well as the apparent circular logic employed. There
were many points at which I asked myself, "Hasn't he mentioned this already?"
It makes an ideal gift for one's mother-in-law, to put it kindly. (See also
Tarnished 'truth', Asia Times Online, August 2, 2009.)
 Dear Mr Buffett: What an Investor Learns 1,269 Miles from Wall Street
by Janet Tavakoli.
First off, I must admit to having a lot of admiration for Janet Tavakoli.
Despite her frequent appearances on television, she is an intelligent analyst
whose command of the arcane world of securitization mixed with a brutally
honest analytical framework makes it a pleasure to hear and read her
work.
Continued 1
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