Current Reading: Finance

Getting ready to teach a finance class to law students, again after an eight months' break, I figured I ought to do some mainstream reading to see what kind of notions were in the showcase. On the eve of the new semester, I squeezed in four (well, three plus--I'm still not quite finished with the last one). All worth my time, in instructively different ways.

The best of the lot is surely Charles Barnard, The Two Trillion Dollar Meltdown. It's hard to imagine a more helpful account of what has gone haywire in the financial system over the past few years, including an accessible under-the-hood account of some of the more momentous banking innovations. I look forward to stealing from this guy a lot, or at any rate paraphrasing a lot of what he has to say, and perhaps the worse for the paraphrase.

I'd say almost as much for Paul Krugman, The Return of Depression Economics. Krugman is kind of a cult villain in moonbat land, but even those who don't like his politics or his combatative style will have to admit he is (a) state-of-the art technician in macro theory; and (b) a top-notch explainer of abstruse concepts. You can see why Princeton students would want to pay 30 (40? 50?) thou a year to sit at his feet and listen (to what the rest of us can get for 20 bucks, or free). The book is hampered by the fact that it was first written ad an account of the Asian meltdown of the late 90s, then reengineered, rather hastily I must say, for the current uproar. There is a connection, of course, and history is part of the point here. But if he'd written from scratch, he wouldn't be quite so top-heavy with the collapse of the bhat. Also, I can't imagine how the publisher let him get away with that title. While it does, in a sense, accurately represent the contents, I suspect that the kind of reader he's looking for will simply not recognize that this book is for him (her).

Niall Ferguson's The Ascent of Money, I wrote about earlier. I got snide with him for getting confused about bankruptcy but then I conceded that the book was, overall, quite an excellent general over view of a long and complicated history. Still true, although after reading Morris and Krugman, you're reminded of just how broad-brush his presentation is--and must be, considering how broad the task he has set for himself. I oonfess that after having read the book, I couldn't bear to watch the PBS special: the sonorous anecdotes and the jump-cut video was new when I first saw Alistair Cooke's America nearly 40 years ago, but by now the formula is getting kind of stale.

Raghuram G. Rajan and Luigi Zingales Saving Capitalism from Capitalists, is a somewhat more complicated matter. As I say, I'm not quite finished with it, but I think I get the drift: if this were a Victorian political tract, it would be entitled Incumbency: An Account of the Evil Thereof, with Proposals for a Remedy. Their point is intelligible enough: crony capitalism is not capitalism; incumbents dig in and protect themselves against (further) competition. Freeing us from the dead hand of incumbency can make life better for all, and in particular, can give opportunities to the otherwise dispossessed. This is an important, if often overlooked, home truth. I'd say it is fairly generally accepted among economists* --perhaps particularly by economists writing about development, like Dani Rodrik or William Baumol. Indeed, it probably helps to explain the disconnect between self-conceived "liberal" economists (Krugman is a sufficient example) and the voting public on issues like free trade.

RZ hew consistently to their theme and they offer a collation of helpful instances of the evils of incumbency. They make passing reference to their recipe for reform: secure property rights; transparency (which would include mandated disclosure and quality accounting standards). They are also insistent on a point that is a hobbyhorse of mine: a market is a cultural artifact--markets don't just fall from the sky they can be tweaked and formed for good or evil, and we can't expect good results just by leaving them alone.

So far, so good. But unless they are planning a boffo final chapter, they don't seem as systematic as I would like. They cover a lot of ground at a brisk pace. I complained earlier that they really stewed the pooch on the details of bankruptcy and I while I haven't spotted that kind of slipup elsewhere, I must say it does make me wonder about how good they really are at other issues I know less about. So, well worth the effort, and I do expect to finish it, perhaps this afternoon. But to be used with caution.

Oh, and one other that I almost forgot: Kenneth Pomeranz and Steven Topik, The World that Trade Made. Perhaps the reason I forgot it is that it is not a book so much as a collection of anecdotes--a kind of readers' digest of snippets from the economic history of the (post-Medieval) modern era. Apparently these were written piecemeal for some sort of trade journal. There are no footnotes (although they do add a helpful bibliography). But the stories, one by one, are well told and mostly instructive. Amazon reviewers say that this would be a great prep book for the AP history exam. All I can say is that history must be a lot more interesting than it was when I went to high school.

Takeaway point: there really is an awful lot of good, intelligent, nontechnical writing out there. I'd love to kick back and just read a dozen more (isn't that what being a professor is supposed to be about?). But as the philosopher says, stuff happens. I know that 14 weeks from now, I will look back on a semester of either success or failure and wonder--what the heck happened to all my time?
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*Maybe it is the definition of an economist. Cf. Adam Smith:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is im-possible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and jus-tice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

Appreciation: The Man Who Doesn't Know Diddly Squat

I beat up on Niall Ferguson a few days ago for misunderstanding bankruptcy law (the phrase was "doesn't know diddly squat"). I haven't changed my mind on that post, but I could add that I hadn't read the whole book at the time. I have now had a chance to tackle the whole book (it was my first purchase with my new Christmas Kindle), and fairness requires me to add: the book as a whole is quite good very much worth the investment both in money and in time.

I think that Fergson's oeuvre has to be rated on the whole as somewhat uneven. His massive biography of The Rothschilds is a major production, the book that badly needed to be written on a fascinating and important topic. The Cash Nexus was fun but somewhat indeterminate. Colossus just bit off more than it could chew. The new one--that would be The Ascent of Money--is in a different category from any of its predecessors: it is a deliberately structured "popularization" (of sorts) on a specific and manageably well defined 's topic. And Ferguson makes clear that, whatever his skills as an original researcher, he's also well equipped to tell an immense (and immensely complicated) story in an accessible and comprehensible manner.

People who read books like The Rothschilds will already know most of what Ferguson has to tell here. Few of these, I think, would be able to present it with such clarity and grace. Quite a few people have attempted this sort of task: there are, when you stop to think about it, quite a few non-technical accounts of the history of money, investing, or some such. Some are really bad; some are okay, and only a few are really top notch. Ferguson's certainly counts as one of the best. Just skip those few pages about what he (thought he) saw in Memphis.

Niall Ferguson Doesn't Know Diddly Squat About Bankruptcy

I'm a big fan of Niall Ferguson: his biography of the Rothschilds (at any rate, the first volume) is one of the best finance books I ever read. His other stuff is somewhat uneven, but good enough that I was looking forward to his latest, The Ascent of Money: A Financial History of the World.

And indeed it is a good book--a survey overview of all of finance from the stone age to last Sunday, with a touch that is light and confident. But boy, he sure doesn't know diddly squat about bankruptcy.

He wants to make the point that the American economy works pretty well, despite a lot of bankruptcies. He goes to Tennessee. On the surface, you can see why he might choose Tennessee: that's the state that consistently stands at the top of the league tables on bankruptcies per capita. See, e.g., this chart, showing Tennessee with a bankruptcy rate of 1.1 per thousand people, higher than any other state, against a national average of 0.55 per thousand (Hawaii is the lowest).

In particular, he goes to the Western District of Tennessee, Memphis, but here is where he goes off the rails. He doesn't seem to understand that Memphis stands almost at the top of the chart (second, behind the Southern District of Georgia) in Chapter 13 bankruptcies--which, for Ferguson's purpose, isn't really bankruptcy at all. In the year ending September 30, 2007, for example, 77 percent percent of all bankruptcies in Memphis were Chapter 13s, against a national average of only 39 percent (Georgia Southern led with 80 percent Chapter 13s).

Bankruptcy groupies will have grasped the point already. For non-groupies, here is the point: in "straight" bankruptcy (Chapter 7), the debtor turns his pockets inside out and the trustee divides the take (usually nothing) among creditors. But the debtor's post bankruptcy earnings do not go into the pot. This gives rise to the old insight, not quite false, that the best time to go bankrupt is the day before you get the good new job.

In Chapter 13, by contrast, the debtor agrees to surrender some or all of his post-bankruptcy earnings to satisfy pre-bankruptcy debts. So Chapter 13, unlike 7, is not (or is only secondarily) about stiffing creditors. Chapter 13 is more like indentured servitude, or a kind of civil parole. If you are trying to prove that a commercial economy survives even when debtors stiff their creditors, then Memphis is the long way to put.

As it happens, I think his main point is perfectly correct: the system does work, even with a high rate of bankruptcy discharges-and for what it's worth, the system worked quite well, thank you, even before the notorious 2005 Amendments, which made it much harder to filing bankruptcy (without, I suspect, putting much more money into the pockets of creditors).

If Ferguson wanted to get it right, he would have been much better advised to go to the Eastern District of Michigan (Detroit), which led the nation in number of cases (33,799), of which 34 percent were Chapter 13s (not far off the national average). Or maybe Colorado, with 14,238 cases, of which only 16 percent were Chapter 13s. But as it stands, his argument just doesn't make a lot of sense.