History Rhymes:  A Reading List for Economic Change (TakeTwo)

PracticalDad Note:  There’s a reason that I don’t do much writing when the kids are around and things are hopping.  In this instance, I looked up as everyone cheered for an American Olympic gymnast and bang! I’d inadvertantly hit the key that posted the previous incomplete article to the site and RSS…so here’s the second effort at the article.  My apologies.

History doesn’t repeat itself, but it does rhyme.

                    – Mark Twain

It’s been five years since the start of the global credit crisis, which has morphed and metastisized from a bunch of over-leveraged homebuilders and mortgage lenders to nations seeking bailouts and the potential collapse of a multinational political union and currency.  We’ve witnessed multiple scandals that don’t seem to scandalize and an alphabet soup of European acronyms; but while there are excellent websites to keep tabs on the ongoing trainwreck, it’s difficult to understand events in any kind of historical context.

Historical context?  Seriously?

Fiat currency, regulatory capture, gold standard, widespread corruption…these are not new instances and their reoccurrence simply gives the lie to the nonsensical notion that history ended with the collapse of the Soviet Union.  Twain was correct when he noted that history might not repeat itself, but it does rhyme.  Consequently, it’s helpful to have a sense of where we’ve been before to gain an insight to where we might have to go again.  If you have some time for reading, I’d suggest the following series of books that would provide a good overview of that particular topic.

The Money Men (H.W. Brand, 2006) – This is a good overview and relatively easy read for the start as it touches upon five Americans who were intimately involved in the finances of the country through its first hundred and fifty years.  Commencing with Alexander Hamilton, it examines the roles of the trailblazer (Jay Cooke), the crooked (Jay Gould), the rescuer (J.P. Morgan) and the power-hungry (Nicholas Biddle).  It’s particularly the conflict that arose between Jackson and Biddle’s Bank of the United States that highlights the ongoing tension between and a democracy and the monied interests.  The present day upshot of that story, which culminated in the Panic and Depression of 1837, is that resolutions are sometimes painful with much collateral damage.

The Robber Barons (Matthew Josephson, 1973) – Josephson’s book looks at the usual cluster of industrialists and financiers from the legally unfettered Gilded Age of the late 19th century (Carnegie, Rockefeller, Vanderbilt and Jay Cooke) and introduces you to others, such as Daniel Drew, who was a master at manipulating the stock market and particularly enjoyed taking advantage of economic upheaval (There’s good fishing in troubled waters).  What’s interesting as you read is to consider how many of these names are also now the names of colleges and universities.

The Panic of 1907 (Robert Bruner and Sean Carr, 2009) – As economic chaos goes, this wasn’t a particularly terrible blow to the entire economy and scarring was contained to the financial and banking sector as it arose from bank overleveraging and speculation.  What’s notable about this event however, is that it set the stage for the creation of the Federal Reserve System in 1913 as politicians and bankers realized that there really was a need for a central bank to act as the lender of last resorts for the national banking system.  In this particular instance, the banker of last resorts was J Pierpoint Morgan (you’ll remember him from The Robber Barons).  In a series of episodes akin to what we’d consider a situation comedy, Morgan provided nighttime wagon loads of cash to meet the demand of panicking depositors when the doors of selected institutions opened the next morning.  How did he decide what banks were worthy of the money?  By sending in his trusted lieutenant, Benjamin Strong, to evaluate the banks’ books through the night before and if Strong gave the thumbs up to Morgan, the wagons would be dispatched.  Thumbs down?  Those institutions died like defeated gladiators.  Had Morgan not acted, the episode would have left a much greater dent in the economy.

The Lords of Finance (Liaquat Ahamed, 2009) – This centers upon the four principal central bankers – French, American, British and German – of the tumultuous first quarter of the 20th century.  It examines the personalities of the four, including American Benjamin Strong (from The Panic of 1907) and the efforts of the four to manage their respective currencies through the chaos of that period.  There are two topics of particular interest to today: first, the role of gold as a backing to a particular currency and the effect of managing a currency without having a solid standard of value to anchor it; second is the tragedy of Weimar Germany, which opted to devalue the Deutschmark as a means of addressing a crushing national debt.  This doesn’t mean that our own period is bound for hyperinflation, but it’s certainly instructive in the lessons.

The Big Short (Michael Lewis, 2010) – Michael Lewis has a gift for telling a story, for getting to the essence of something and making it understandable to a layperson and that’s precisely what he’s done with the heart of the financial crisis.  This is the book that explains how the financial crisis of 2008 was born, and borne, within an obscure, opaque financial product that was marketed to the global community.  It lays out the collapse of ethical standards and the unbelievable myopia of a financial community that truly drank it’s own Kool Aid before hitting the skids in late 2007.  This is the one book that I’ve both given and suggested to others because it’s the keystone to understanding the mechanism in layman’s terms. 

House of Cards (William Cohan, 2010) – Before Lehman Brothers went down in 2008, the financial community got a foretaste of what was to come with the collapse of Wall Street firm Bear Stearns.  It starts with the events of the firm’s last several days before it’s purchase by JP Morgan Chase for $2 a share (at one point within the previous two years, it had traded at over $170/share) and then shifts backwards to explain how it got to that point.  The ultimate lessons are (1) what happens when a firm is too highly levered by debt as it chases performance, and (2) what happens when the assets (as explained in Lewis’ The Big Short) are so opaque and illiquid that they are almost impossible to value and sell. 

Econned (Yves Smith, 2010) – Yves Smith is the nom de blog for a retired Wall Street executive who began chronicling the absurdities and excesses of the financial system in her website Naked Capitalism.  Smith lays out the changes in the Economics field and how the practitioners and academicians successfully managed to sell a soft science (psychology based) center wrapped in a hard science shell starting in the middle of the 20th century so that they became the priests of the financial and monetary field.  When they became the unchallenged priests by the end of the 20th century, the stage was set for decisions that fit well into a theoretical realm but horribly in the actual world in which we live.lin

With kids, who has the time to read this stuff anyway?  If I’m going to be a good father, I can’t spend my time engrossed in reading unless it’s with Junior and Goodnight Moon or Peter Pan, right? 

The truth is that these are books that I’ve read over the course of late nights for the past several years and they’ve gone a far way to helping gain a grasp on what all of this means.  My recommendation for the best start is to attack Lewis’ The Big Short for a synopsis of the product and spread throughout the global community.  Then go back to Brand’s The Money Men with special emphasis upon the section for Nicholas Biddle, who led the Second Bank of the United States when it clashed with Andrew Jackson in the 1830s; this is a foretaste of the same issue that we face today as the monied interests line up to control the political system in which the rest of us live.

I would say happy reading, but there’s nothing happy about it. 

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