The best thing about Yves Smith's formidable new account* of the late meltdown is her gritty and granular narrative of how banking went from being a somewhat pampered and overpaid service industry into being a gang of pirates. By all appearances, Yves was there for much or most of it; she saw investment bankers get sucked away from partnership into corporate form; she saw the market-driven pressures that drove them into sussing up the M&A market; she witnessed the silent but ineluctable shift from investing to proprietary trading, and the rise to dominance of the risk-taking animals, to the point where the animals ran the zoo, and where they lost all contact with any exterior reality as they came to play the game for the game itself as a contact port where nothing counted for so much as winning for its own sake.
Almost as good is her detailed insider of account of the rise of the non-bank transactions: securitization, repos and (particularly) "insurance contracts" aka "swaps"--including the fullest account that I have seen of Magnetar, the arsonist who learned how to build structures of dfry sticks so they could burn them down and collect on the underpriced insurance. Smith is particularly good at picking up on insights that would have been obvious to alert insiders, though not so visible from without--as for example, how much the debt market was driven by the near-insatiable appetite for triple-A paper which inevitably led more and more suppliers to try to produce product for the market.
She leads off with an extended narrative o n the rise of "mathematicization" in finance. It's well done and mercifully accessible, although the typical reader of this book is likely to have encountered a version of the story (perhaps in more abstruse form) elsewhere. I think she is less successful in tying the "excess of math" meme into her "corruption of the market" mantra. That is, having shown how mathematicized economics tended to sand down all the rough spots, she goes on to describe a pattern of market behavior in which economics, mathematicized or otherwise, is little more than a bit player. It's a world where institutional incentives drive greed and competitive bravado, and where the economic models are at best an excuse, not a real driver of behavior.
In the same vein, she doesn't seem to have fully worked out her own notion on the place of "the market" in the economy. Apparently she's lived all her life in a world of banks and transactions and in so many ways, she seems to be comfortable there. She thinks we've overdone it on free trade, and she has some kind words to say about unions. Well enough, but does she really want to go back to the days when protected car companies and protected unions colluded to sell us crap cars while they split the profits? To printers who sat up all night setting bogus?: To railroad crews who drew a days' pay for taking a nap? To a steel industry who deferred the inevitable for two or more generations with evasions and excuses for which the rest of us had to pay?
I think these questions are merely rhetorical. And the corollary is that this book is not a grand design for a new economy. Probably a good thing, that; we've had more than our share of grief from grand designs. It is a splendid insider account of our recent financial past, from an alert insider with a developed sense of decency and a fine sense of balance. Highly recommended, put it on the short list.
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*ECONned (2009). The silliest thing is the title, but maybe we can blame that on the publisher. And FWIW, the book is not just a rehash of her must-read blog, Naked Capitalism, although nothing in the book will come as a great surprise to faithful readers of the blog.
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