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Recently read: Panic

[Originally published at the now defunct group blog explananda.com]


Posted on January 18, 2009
Tags: book_reviews

Michael Lewis. Panic: The Story of Modern Financial Insanity

If you want to learn how to read the news, the current edition of your favourite newspaper or magazine is not the best place to start. There, you’ll find assumptions, supposed facts, arguments, prejudices and opinions galore, but even if they seem dubious, you’ll often need to wait a long time to take the full measure of the errors. No, the best way to learn how to read the news is by spending time with newspapers and magazines that are long past their recycle date. Read those and see for yourself: almost all of the time almost everybody is completely fucked in the head. Once you’ve got solid confirmation of that most basic of facts about the world, you’re ready to open up (in your browser, of course) the day’s paper.

This is what makes anthologies of dated popular writing so valuable and interesting. Michael Lewis’ recent book Panic is an excellent addition to the genre.* It covers the story of several panics and crashes in the world of finance since the market crash of 1987. The selections for each crisis give an example or two of pre-crash reporting (sometimes eerily prescient, sometimes hilariously backwards), followed by a series of postmortems.

Lewis has been writing about the markets for a while now. He was present as a bond trader during the 1987 crash, and left the financial world afterward to write a smart, funny book about the experience, Liar’s Poker. And luckily for readers of Panic he hasn’t been too modest to omit selections from some of his more recent writing about the financial world. These selections are among the best in the book. In addition to the 1987 crash, Panic covers the Asian currency collapse of the late 90s, the bursting of the dot com bubble, and our most recent mess sparked by the collapse of the subprime mortgage market.

Rounding out the book is a helpful glossary by Chris Benz, one of five interns who helped Lewis put together the selections. The glossary will help orient readers who aren’t quite up on all the financial jargon. In the case of this especially ignorant reader—I don’t really understand yet exactly how even the most basic financial instruments are supposed to work—the glossary wasn’t quite enough to get me through a few of the slightly more technical pieces toward the beginning of the book. But the relentless logic of these crashes is clear enough: building prices, hype, outsized gains for those who get in early, followed by a stampede to the door that is typically cruelest to those latest to join the party. This does not mean that all crashes are created equal. Indeed, the selections are also well chosen in the way they illustrate differences as well. In one especially interesting essay, Lewis argues that the dot com bubble had socially useful benefits that the other bubbles clearly lack.

So, good stuff and probably worth your time.

Comments


Author: Steve Laniel
Date: 2009-01-18

See also, inter alia, Lowenstein’s “When Genius Failed” and Kindleberger’s “Manias, Panics, and Crashes: A History of Financial Crises”. Probably you already knew this, but … yeah. They’re good.

I’m inclined to bury my money under a tree in my notional garden.



Author: Chris
Date: 2009-01-18

I had Lowenstein’s “When Genius Failed” on my list already (thanks to your review, actually), but I didn’t have Kindleberger’s book. Thanks!

But I have to confess, I don’t even understand why, say, inflation happens. That’s how struggling-to-catch-up I am, and I wonder if it wouldn’t make more sense to stop and try to figure out the basics before reading more of these books. Nor, to give another example, do I really understand how stocks work. I get that a stock represents a bit of ownership in a company. And I get that some stocks pay dividends. OK, so I see why that would be good to have. But I don’t get why stocks that don’t pay dividends have any value, or why stocks have any value apart from the dividends they pay. Sure, they give you partial ownership of the company, but what good is that? Why can you take that to the bank? Because if the company were liquidated, you’d get a share of the assets? But if it were liquidated, it would be seriously on the rocks, so wouldn’t the anticipated liquidation price take some unforeseen but massive devaluation into account? You can see why portions of “Panic” were sort of over my head.



Author: Steve Laniel
Date: 2009-01-20

These are all excellent questions. Inflation in a particular good’s price – say, shoes – happens because demand exceeds supply. Two questions then follow: 1) why does demand exceed supply, and 2) how does that explain the global price level (i.e., the rate of inflation across all goods and services)? What would explain a change in the global level? I can think of at least one thing that would change global price levels: rising population. But that would take some arguing (population rises by 1%; wouldn’t the number of shoe manufacturers be expected also to rise by 1%?).

I honestly don’t have good answers here.



Author: Chris
Date: 2009-01-20

Are they good questions? I’m at that beginner’s point at which I find it difficult to tell even what is and what isn’t a well-formed question. (I recall when someone explained to me how hedge funds work, using leverage to, for example, make big bets on small arbitrage opportunities. It was simply a shock to me that organizations with so much capital to invest would turn around, borrow heavily, and then bet the borrowed money as well, since even if you stand to make so much money if it turns out well, won’t you stand to lose a lot of money if it doesn’t? And won’t you then get fucked on margin calls? But I figured that was a stupid question, since, duh, smart people were doing it. I’m very naive.)

I’m not sure how rising population would explain a global price rise, i.e., inflation in general. After all, isn’t a rise in population something that you can see a mile away, and start producing for in anticipation (as you point out)?



Author: Steve Laniel
Date: 2009-01-20

Right, your point about anticipating rising populations is a good one. And come to think of it: if productivity is rising, then wouldn’t pay go down? Obviously there’d have to be a lot of arguing going into a claim like that, but basically: we’re producing more per hour, so wouldn’t prices only rise if our new demand exceeded our new supply?

And yes, these all sound like excellent questions to me. “Why do objects fall toward the ground?” is a GREAT question, even now. “Newton says that objects are drawn toward one another at a rate proportional to the product of their masses and inversely proportional to the square of the distance between them” doesn’t even begin to constitute an answer. “Why does inflation happen?” seems like a question of a similarly fundamental and important type.

By the way, the comments feed for Explananda doesn’t work right. I only find out about comments several days after they’ve been posted. Sadness.



Author: Chris
Date: 2009-01-20

You’re right about the comments feed. I’ve known for a long time that it’s broken in this way (right from the start, I think), but have never gotten around to fixing it.