Michael Lewis' FLASH BOYS: A WALL STREET REVOLT

I always pick up a volume of Michael Lewis' special brand of financial crisis literature expecting a whole lot of anger, a whole lot of despair, and a whole lot of edification about just how messed up our System of the World* really is. As I've mentioned before, it's kind of a sickness of mine. I can't stop reading about it, but to no end other than to raise my blood pressure, it would seem, because what can I do about it? I'm not an investor and never will be. I've been a politician and don't ever want to do time in that barrel again. And since my arms and hands went to hell, I don't even write much anymore. But still, these books.

But then comes Flash Boys: A Wall Street Revolt, and what's special about it is all there after the colon in the title. For while of course this book lays out in gruesome detail yet another way in which the world of high finance is designed to screw over the little guy, right alongside its anatomy of a giant scam is the story of a handful of very smart and very strange guys who not only figured out how it all worked, but figured out a way to fix the problem and actually put their plan in motion and created a whole new stock exchange built on the principles of fairness to the investor.

The problem these Flash Boys tackled is the kind of thing that should make any decent person's blood boil: with the computerization of all of the world's stock markets came a myriad of opportunities to rig the game against not just the ordinary Joe Blow investor throwing a few thousand dollars around trying to get rich, but also against all of the even more ordinary Joe Blow workers whose pension funds are being thrown around Wall Street, too. And of course those opportunities were not overlooked.

It's all to do with High Frequency Traders (HFTs), many of whom invested ungodly amounts of money in high speed data connections to the stock markets and to investment banks' dark pools, and in computer server placement as physically close to the machines that actually run these as possible, because this allowed them to engage in front-running. When their software bots saw someone buying shares in a particular stock, they triggered other software bots to buy up all of that stock that was available in fractions of a second before the original schlub's order was fulfilled, and thus to drive the price of that stock up a little, and make the schlub pay more for the stock than he should have, to the slight profit of the HFT. Thousands and thousands of times a day. Meaning ungodly amounts of money was transferred from small time investors, hobbyists, pension funds, hedge funds, what have you, to these HFTs, making an incredibly handsome return on their ungodly investment in fiber optic cable, land easements, construction fees and server real estate. Yeah, I know. And it gets worse, because this was all made possible by some newish Securities and Exchange Commission (SEC) rulings. That were, of course, made by members who have worked in and later tend to go back to jobs in the big investment banks, etc. Foxes, henhouse....

But so, most of Lewis' books that I've read so far have been concerned chiefly with financial villains, and this book certainly felt like another one of those for quite a while. I was hunting up my pitchfork and rounding up some torch-bearers (this was before Charlottesville, OK?) and ready to go knocking on doors in New Jersey, if not Manhattan itself.

But that's not who Lewis' Flash Boys are. The Flash Boys are Brad Katsuyama, once an obscure employee of the Royal Bank of Canada, and the team he put together to figure out why his trades had suddenly become impossible, and then to try to figure out how big the scheme was, and lastly to design and build a stock market that leveled the playing field again. I could almost cheer them as heroes, but in doing so, I'd be celebrating something that in itself still makes me mad, because this is what regulators are supposed to do, except over the years we've cut back on regulators' power, numbers (as in staffing), scope and compensation, all assuring that the revolving door between the public and private sectors of Wall Street keeps spinning faster than Karl Marx does in his grave. How many Brad Katsuyamas has this world produced, this man who would rather figure out a problem and fix it than figure out a problem and profit handsomely from it?

At bottom, Flash Boys is a pretty good detective story, unraveling and explaining very well a very complex and bewildering scheme in a way that gave me a nice strong illusion that I sort of understand it now, but am still powerless to do anything about it except vaguely cheer for Katsuyama and continue to nurse a major hate-on for Wall Street, even as I know that most of what makes my life possible is inextricably tied to its machinations, for good or ill.

Dammit.

*To borrow Isaac Newton's phrase by way of Neal Stephenson.

100 Books #61 - James Rickards' CURRENCY WARS: THE MAKING OF THE NEXT GLOBAL CRISIS

If there is one thing over which I am pretty sure I have no control whatsoever, it is global finance. So why can't I stop reading about (and listening about -- oh, how I love Planet Money and Marketplace!) what's wrong with it? I'm pretty sure I've even wondered and wailed about this on this blog prior to now, but I'm too demoralized to check.*

But hey, if you're one of those people (and I have been!) who always kind of squints and says "huh?" when you hear about, say, the U.S. accusing China of "currency manipulation," well, this is a very good book to consult, to read cover to cover and, probably, to read again a few months later when all of its very clearly presented points and arguments have faded from your memory.**

Wisely, Rickards leads it all off with a fictitious scenario, gleaned from his direct experience participating in the first ever Pentagon-sponsored war games to focus on financial war, which nicely illustrates what are the weapons, tactics, strengths and weaknesses of combat via spreadsheet, ledger and currency peg instead of all the other ways that usually grab headlines. Financial war never grabs headlines, because it can never be made to sound scary enough.

This book, though, takes a pretty good stab at making it scary enough.

Rickards spends a good third or so of the book walking us through the currency wars that have already come and gone, for despite his book's title's suggestion that this is all potential, stuff that could happen someday, we're actually right at the leading edge of Currency War III.***

When an economy stagnates and nothing else seems to work (as in the American past, for instance, government stimulus or upticks in consumer behavior have done the trick), a relatively easy fix is to devalue your currency relative to everyone else's, making your exports more attractive to buyers around the world. This, of course, only works if no one else is doing this, and our history in employing this kind of tactic is grim; the first time we tried it led to the Great Depression and World War II, the second to stagflation in the 1970s -- and neither of those, Rickards points out, happened to a world as intimately economically interlinked as ours. There was no Eurozone in the 1930s, and the Yuppies of the 1980s whose spending sprees largely pulled us out of stagflation are now aging out of productivity and have done everything they can to make sure that the generations who have to pick up after them have little to no opportunity to mimic them -- everybody is in debt up to his or her eyeballs, in this country.

And so, what are the Fed and our elected officials doing to bring us out of our current severe slump? Well, what is "qualitative easing"?

Oh yeah, it's printing more money, to deflate its value, to make our exports more attractive to other markets, which only works when no one else is doing it.

Except, you know, everybody else is doing it, in some fashion or other, especially China, who while not printing extra new money of its own "on purpose" is forced to do so to maintain its peg to the dollar at current levels, which China very stubbornly wants to do so that its exports do not become less attractive to other markets. Other markets like us.

Of course, if things continue in this crappy vein, we're not going to be able, as ordinary American consumers, to afford their exports, no matter how attractive they are, especially if what Rickards and friends fear most, the collapse of the dollar, happens. And reading between the lines of this book, and remembering everything else I've read on not just finance but history and neuroscience and psychology and culture, it's really pretty much not a matter of if that will happen so much as when -- chiefly because policymakers elected and appointed vastly underestimate the risk thereof, so are not even remotely prepared to deal with it when it comes.

But all is only lost if we keep trying to apply the same bad solutions to our current problems, he says.**** If we can get ourselves out of the rut of the devaluation mindset and take some corrective measures, we may yet come out of this without proving all the dystopians right (or at least not completely right): break up those "too big to fail' banks (I'd be happy to see that), re-regulate if not outlaw derivatives trading (again, fine with me) and... well, go back to the gold standard, which is something you usually only hear from Ayn Rand/Austrian economics types but is starting to make more sense to me now that I have had a long, hard look at what has become of us under a system of that economists call "fiat money" (basically, money the value of which is controlled by government regulation, i.e., by politics) -- though I still don't find a return to the gold standard an entirely comforting thought: gold is very much a finite commodity, and no one has shown me how such a return to a gold standard isn't also a return to a zero-sum game -- even if instead of just gold we say "gold as part of a larger basket of commodities." And the people who think a zero-sum game is just fine, thank you, are always the ones who grabbed first and grabbed most and are perfectly happy to sit on top of what they grabbed until the end of time and watch the rest of us beg.*****

Oh, and by the way, China is buying up a lot of gold on the sly, apparently. And water rights. WATER RIGHTS, PEOPLE. Including water rights on water no one has ever exploited, like Patagonian mountain ice caps. Because someday, that might be the only kind of water available. Oh, don't get me started on water war stuff, too, in this post. Just don't.

And but so, you know, China already controls something close to all trade in rare earths, without which we cannot currently make much in the way of high tech gear. And they've been pondering the strategic niceties of economic warfare, asserting that when histories of the 20th century are re-written it will be stories of currency war that command the most attention, for years now.******

Which all makes me think that Jim Munroe's sadly snarky new film, Ghosts with Shit Jobs, isn't so much lo-fi science fiction as a documentary that fell backwards a few years through time.



So if you're getting from this that Currency Wars is one of the scariest damn books I've ever read (and I've read all the Jeff Sharlets), then you're getting it right.

And like I said, there's really nothing I can do about it, except tell people about this book. Five stars, drawn with a very shaky hand.

*Well, except for one thing. Rickards spends most of Chapter 9 putting paid to the idea that economics somehow became a natural, instead of a social, science in 1947 or so, asserting that stealing science's clothes and giving each other Nobel prizes may have been fun, but the economists were no better at foreseeing or preventing financial crisis in 2008 than they were in 1908, thank you very much:

University biologists working with infectious viruses have airtight facilities to ensure that the objects of their study do not escape from the laboratory and damage the population at large. Unfortunately, no such safeguards are imposed on economics departments.

This made me smile even as I remember an incident in 1987 when I told my high school teacher that just because he was drawing a bunch of graphs on the board that didn't mean it was science. I feel weirdly vindicated, at least until I remember that said teacher basically told me to shut up and go back to reading that hobbit crap. Which, as there is ample evidence of on this very blog, I pretty much did.

**Which, of course, you won't notice has happened until you try to have a conversation about this stuff over mah jong with someone who gets all of his or her news from Rush Limbaugh, if your life is anything like mine.

***I haven't yet decided whether or not saying something like "World War III is here, and it's a financial war" is entirely accurate, but I'm leaning towards a yes, there.

****There is a whole section advocating for a shift on the part of policymakers toward the newish sub-field of behavioral economics that I won't even try to summarize here because I'm still thinking about it, but it's pretty damned interesting, and not just because it returns economics to the soft social sciences in general but also because it incorporates research and conclusions from complexity theory, psychology and neuroscience in place of lies, damn lies and statistics. Of course, behavioral economics can be as correct and awesome as it wants, but it does us no damned good if it isn't put to use, which Wall Street and the Fed do not seem likely to do as they're quite happy with the current system, however broken it might be, that allows them to bamboozle regulators with pseudoscience and way too much data. Sigh.

*****I must confess, though, that the section in which Rickards goes into great detail on how a return to the gold standard, at this stage of the game, might work, my eyes glazed over a bit.

******Oh, and there's a laughable passage in this book where someone makes the argument that our cultural exports to China can yet save the day, or at least the balance of trade. You know, software, Hollywood films, music. Because, yes, great respecters of intellectual property, the Chinese. I'm sure paying the full retail price for Blu-Rays of Celebrity Apprentice is definitely part of China's overall politico-economic playbook.

100 Books #12 - Michael Lewis' BOOMERANG: TRAVELS IN THE NEW THIRD WORLD

My name is Kate Sherrod, and I have a problem.

I seem to be unable to resist indulging in my bad, unhealthy, depressing habit of snagging every remotely interesting-sounding book about the current financial crisis that I see. And reading them quickly, even though, at this point, I'm pretty sure I've read every perspective on it available, if not every one imaginable.

But then, see, there's always something new to be found. And this book is a great example -- even though I had previously read early versions of two of the chapters when they were articles in Vanity Fair.

For what Michael Lewis has done here is visit two of the "PIG" countries* to try to get a grip on what happened there, and continues to happen, as well as making stops in Iceland (they of the brand-new high-flying bankers-who-should-have-stayed-fishermen and also of ordinary citizens who have flat-out refused to bail those bankers out), Germany and California**.

It was the German chapter that I found most eye-opening, despite the fact that Lewis spends a lot of it amused at watching his interpreter-driver come to grips with a book purporting to expose Germany's natural character (as, esentially a bunch of badly closeted fecophiliacs, obsessed with dirt but preferring to appear otherwise, to appear spotlessly sterile and clean; clean on the outside, dirty on the inside). For as many books as I have read on this subject, I had never thought to ask why Deutchebank and other German banks were so willing to participate in the sub-prime mortgage debacle that the American investment banks cooked up. I was too fixated on the greed and suicidal stupidity of the Americans to concern myself with the apparent cluelessness of the Germans.

But Lewis wasn't -- which is why he's a bigtime financial writer and I'm a doofus poet living on Mars -- and he wanted to know why the German bankers had acted so witlessly in the years heading up to the crisis. And what he found had a lot to do with that whole national character thing - dirty on the inside, clean on the outside. Since the USA's banking sector appeared to be well-regulated, to have serious rules, then why wouldn't its financial products be as good as the American bankers said they were? The forms were being obeyed to the letter, after all.

So yes, while the Greeks were busy not paying taxes and being woefully un-civic minded and the Irish were busy selling Irish real estate to each other and the Icelanders were busy doing something other than fishing for once, the Germans were willfully not looking for the evil little man behind the curtain. And California, well, California, as I observe in my second footnote, needs a whole 'nother book maybe.***

So yes, I have a problem, but with books like this still out there for me to enjoy and learn from, it's not a problem I'm much interested in solving at present. Which makes me just like everybody else.

*PIG now being the financial dude acronym for the quickly sinking/defaulting nations of Portugal, Ireland and Greece.

**His hillbombing mountain biking interview with former governor Arnold Schwarzenegger alone is probably worth the price of the book, guys, and would probably make an awesome book with more material. Apparently, someone else already wrote it and yes, a sample of California Crackup is already on my Kindle. Did I mention that I have a problem?

***Though a Cadillac Desert comparison does come to mind. Just as the Colorado river is now way over-allocated and doesn't make it to the ocean anymore because the original allocations were made in a record flood year, so too California's budget; everyone (by which I mean state employees and retirees) got used to what they were getting in fat years and refused to give it up in lean until boom! California is completely dysfunctional and heading for ruin.

100 Books 28 - Erin Arvedlund's TOO GOOD TO BE TRUE: THE RISE AND FALL OF BERNIE MADOFF

I'm not going to spend too much time on this one, because I've already lost over a week.

Too Good to be True is actually quite a good title for this overlong, overwritten, under-edited book, while it's subtitle "The Rise and Fall of Bernie Madoff" is not. Sure, this one is very informative on the subject of Madoff and his phony hedge fund Ponzi scheme, in its way, but it does not follow a smooth narrative curve like that "rise and fall" bit implies. Instead, one is treated to a very lightly edited pile of pages in which a handful of sentences make verbatim appearances over and over again (yes, it would seem I've stumbled onto the nonfiction equivalent of A Feast for Crows) and in which "paragraph*" simply refers to "a group of sentences that have nothing much to do with each other but are arranged to look like what ordinary users and readers of English might consider to be a paragraph with the use of random indenting." Ditto "chapters." Ugh.

This should have been a fascinating read for me. I love charlatans; one of my favorite films of all time is Orson Welles' F for Fake,, in which Welles riffs elegantly and amusingly on the famous art forger Elmyr de Hory, his biographer Clifford Irving (who went on to commit his own tremendous hoax, a complete fake biography of Howard Hughes) and Welles' own "War of the Worlds" prank. Stories of forgeries and cons delight me even if they often also make me angry, as Madoff's stupefying stunt most certainly did.

But instead, I could barely finish this book, and might not have were I not already quite behind on reading 100 books this year, eyeball deep in a literary example of the sunk cost fallacy. As it was, I required lots of breaks from it in the forms of some other, far more engaging and delightful, books I'll be blogging about here soon.

Madoff is definitely a man who deserves a place alongside Elmyr and Irving and their fellows in the pantheon of fakers. The financial swindle he achieved -- and his success in keeping the details forever out of our purview by pleading guilty from the outset and denying us the discoveries of a jury trial -- is the largest ever, and might still have been going on had not the housing/sub-prime bubble collapsed in 2008, triggering a run on his faux hedge fun by all of his investors (well, at least all of those who knew they were his investors, for, one thing I learned from this book, a lot of people who had invested in other "instruments" actually had their money hoovered up by the Madoff machine, for he was paying a lot of hot shots a lot of money to funnel investment into his phony fund) that yanked the apex of his pyramid right down when even his hoary originals, who had happily been collecting phony dividends for decades, started asking for their principal back.

Which is to say that Madoff did it exactly right. He built a reputation as a whiz-kid and a man of probity, computerizing markets before most people even knew that a mouse was not a microphone and cozying up to the financial industry's regulators when most people were still regarding them as tiresome foes instead of the willing partners Madoff and Greenspan and that whole despicable crew seduced them into being. At the height of his influence, Madoff was the man who taught all the new green lawyers starting their careers at the Securities and Exchange Commission (knowing they need only put in a handful of years before they could leap to the private sector and make the big money, the corrupt cops turning pro as criminals) how Wall Street works! He chose his prey well, too, avoiding those who knew how hedge funds actually worked and how to read a balance sheet and zeroing in, instead, on socialites who could be trusted never to run the numbers or ask how his amazing strategy worked or ask to see evidence that their money was being used to buy stocks at all, every man and woman of them an Emperor parading naked through Manhattan and Palm Springs and London and Paris, believing they were modeling exclusive designs (for part of Madoff's secret was implying always that not everyone was cool enough to invest with him, so that being offered the opportunity to fork over your cash to fund his yacht-intensive lifestyle was a sought-after privilege!).

See? Fascinating. But I chose the wrong book about it, and now am so sick of the subject that I'm disinclined to hunt down a good one. Boo!

100 Books 13 - Tyler Cowen's THE GREAT STAGNATION

The Great Stagnation: How America Ate All The Low-Hanging Fruit of Modern History,Got Sick, and Will (Eventually) Feel Better:A Penguin eSpecial from Dutton - Tyler Cowen

There's a wee bit of monomania going on in The Great Stagnation, which kind of befits its subject, the current economic downturn and how it is unlikely to really end anytime soon. Cowen's fixation as he ponders our plight is on the idea of "low-hanging fruit" and what it means when it's all gone. It's interesting to contemplate and Cowen makes a lot of good points with it but it's also pretty simplistic, and the resulting book suffers from a lot of confirmation bias.

What Cowen means when he refers to low-hanging fruit is the idea that, as a (North American) society, we've exploited all of the easy answers to our economic problems to the full: cheap energy, automation, global transportation, getting everyone into a public education system, abundant and unspoiled land, etc. From his perspective of omniscient hindsight, all of the innovation we've achieved to date has been easy*; it's future innovation that's unthinkably difficult because we've done it all, used it all, tapped it all out.

Married to this idea, Cowen pronounces what amounts to doom for our recovery from the current crisis, seeing even the signs of hope and change like the internet in the most negative light possible. For instancewhile it's nice that people are finding non-material ways of satisfying themselves, he says, that satisfaction does not help the economy -- but his reasoning here seems flawed. The fun we have on the internet (and he focuses unduly on the internet as a source of fun and maybe, occasionally, of education and collaboration. Maybe), you see, is really hard to measure using conventional statistical tools. It doesn't show up on old-style measures of productivity, for instance, and its effect on things like Gross National Product as currently evaluated is close to invisible. Rather than calling for new tools or new measures, though, Cowen simply pronounces our intangible internet fun an economic dud. The low-hanging fruit is gone, but don't look for a ladder.

Cowen also seems to be ignoring something else I see every day on the internet, which is innovation. When I go surfing, it's hard not to encounter an elegant new idea for managing riverine pollution, say, or a device that can allow its owner to tote hundreds and hundreds of books around in an object that weighs less than a single paperback. Cowen dismisses these as mere attempts to squeeze more juice out of the low-hanging fruit; I see them as ways that more people can benefit from it than currently do, an issue he does not bring up at all. In his world, there is only the West and its only our needs and our growth and forward progress and increase in living standards that matter. I find this more than a little reprehensible. But maybe, you know, I just don't get it and it's really great that we're worrying about how we're not as rich as we thought we were while there are still lots of people in the world who like both kinds of food, rice and rice.

Microfinance doesn't count as an innovation, either. Or portable water purifiers.

What's really good about this book, though, is the argument Cowen makes about the tendency in the West to use intellectual property laws and copyright to stifle others' efforts to improve their living standards. Whether it's hamstringing gadgets and content with DRM and other means of creating artificial scarcity to protect legacy businesses or banning age-old practices like seed saving, these kinds of practices can and do hold everyone back except for the elite few who benefit from them and have the resources to persuade political authorities to keep them in place. That doesn't just retard our Western GNP growth, but our future as a species.

On the whole, though, well, I'm glad this book was short. I'm loath to put books aside this year as I plod towards the 100 books goal, but were I not feeling self-imposed pressure to finish what I start no matter what, I might have given this one up, not due to its difficulty or its dullness (for it is not a dull book) so much as to my having read it all before. There are lots of books out there to explain the financial crisis and tell us we're stuck for a while and this is not a standout in that field for me. *I've got to wonder, though, what, say, Edison or Ford or George Washington Carver would say, if told that their innovations had been so easy or obvious!