Book Reviews
Welcome to my book review section. In this section I will be posting occasional book reviews of finance oriented books that may be of interest and use to readers.
Crash Proof 2.0
This Time is Different: Eight Centuries of Financial Folly
The Great Depression Ahead
The Myth of the Oil Crisis: Overcoming the Challenges of Depletion, Geopolitics, and Global Warming
The Crash of 2008 and What it Means: The New Paradigm for Financial Markets
The Return of Depression Economics and the Crisis of 2008
Game Over: How You Can Prosper in a Shattered Economy
The Ascent of Money: A Financial History of the World
The Forgotten Man: A New History of the Great Depression
The Shack
Economics in One Lesson
Sway: The Irresistible Pull of Irrational Behavior
Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism
Ashraf Laidi
John Wiley & Sons, Inc.
5 out of 5 Stars
If you’re interested in why currencies move the way they do, this is an excellent book to start out with. It’s written in a way that a layman can understand, yet a reader should definitely be very interested in the subject before tackling the book.
The book isn’t written for the active day trader, but helps the reader understand longer term trends in currency movements. Laidi spends a couple of chapters discussing gold and oil and their relationship to currency movements, and I thought these chapters were excellent.
He also walks through each of the last 10 years and explains movements of the major currencies. The explanations do a great job in helping the reader assimilate his suggestions on why currencies move the way they do.
I also appreciated his short explanations on a few of the different theories regarding currency movements. The explanations are brief and not enough to use to act on, but still provide an overview, or refresher, of the major theories.
I don’t think this book is only for currency traders, and I highly recommend it to anyone who is trying to actively manage his or her own money. If you are trying to make decisions regarding how and where to invest, from either a country/currency or asset class perspective, this book will help facilitate your decision-making process.
Rick McCallister
December 18, 2009
Peter D. Shiff
John Wiley & Sons, Inc.
4 out of 5 Stars
“In effect, the U.S. government has committed the American public to the mother of all adjustable-rate mortgages.” What a great line about what the government is doing with our debt right now.
Peter Schiff is a very smart guy. I’ve seen him on numerous TV appearances and listen to his podcast often - he is very consistent and quick. The book is well done and easy to read. It’s written for the general public, so its high-level doesn’t contain a lot of supporting detail (unfortunately).
Schiff’s basic premise is that the U.S. doesn’t produce much anymore, and is borrowing from the world to live, mostly from Asia. He believes we will face severe inflation, and a dramatically falling dollar. It wouldn’t be a good idea to discount what he says – Schiff had his original book out before the 2007 melt down, and was in the press many times, predicting most of the problems that happened. You can easily find videos on youtube of him warning of the impending real estate and market crisis.
Schiff’s solution to the problem was and still is buying dividend-paying foreign stocks, mostly China, gold and natural resource stocks. His portfolios during the 2008 meltdown are reported to be have been down 40-70%. No doubt they’ve recovered significantly if not completely at this point (November, 2009). My problem with his position is that he says foreign markets are “the most conservative place for your money right now.” Schiff’s proven to be right so far about his macro view of what is happening in the world, but I don’t think most people wouldn’t call a 40-70% loss representative of a conservative portfolio.
In the long run, I think Schiff may be right about inflation and the dollar. The problem is, its not likely to play out exactly as he predicts so an investor should be careful about taking his investment recommendations lock, stock and barrel. Nonetheless, I highly recommend the book.
Rick McCallister
November 27, 2009
This Time is Different – Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff
Princeton University Press
4 out of 5 Stars
Obviously, the authors put a lot of effort and research into this book. The amount of data can be overwhelming and difficult to digest.
In the preface, the authors suggest that readers who are interested mainly in lessons of history for this latest crisis go directly to chapters 13 to 16 (the end of the book). I suggest that most people who are not keenly interested in a lot of detailed statistics over the last 800 years do exactly that. Economists or other professionals may be interested in reading through the rest of the book, as it contains fascinating data and analysis therein, but the text will be difficult to get through for most without a proper background. This is not because it is difficult or complex, but because the volume of data and charts makes it difficult to pick out the more important points.
The only reason that I gave the book 4 instead of 5 stars is because it isn’t really what it is marketed to be. In the preface, the authors tell the reader that the book contains mostly tables and figures, and is not just a narrative, which is fine and they do a truly outstanding job. However, you do not get that view from the advance reviews or even from just reading the jacket cover. The fact that so much of the content is contained in the tables and figures will require the reader spend quite a bit of time analyzing those charts to glean the relevant information. The content is great, just not as easy to get at as you might be lead to believe.
Rick McCallister
November 4, 2009
The Great Depression Ahead
Harry S. Dent, Jr.
Free Press
2 out of 5 Stars
This book was very disappointing. I remember reading Harry Dent’s The Great Boom Ahead back in the mid 1990s and being impressed with his analysis on demographics. In fact, his analysis of demographics impact on economies and markets is still insightful. The problem with his current book is that he throws a variety of other “stuff” into his analysis, polluting the basic message of the impact of demographics on our economy.
Dent writes about how his prior analysis failed to work out exactly as he had projected. Because of this, he found other “cycles” to add to the picture to attempt to explain the inaccuracies in his predictions. He two new main ones he adds and discusses are the 32–36 year Geopolitical Cycle and the 29–30 year Commodity Cycle, but he also adds in the 5,000 year Civilization Cycle (based on only two cycles!), the 2,500 year Empire Cycle, the 500 year Mega Innovation Cycle, the 250 year Revolutionary Cycle, the 20 year stock market bottom cycle, the 40 year Generational Cycle, the Decennial Cycle, the 4 year Presidential Cycle, a possible new 3.3 year cycle, the 8.6 year Armstrong Cycle, the Annual Cycle, and finally the Seasonal Four-Month Cycle. And, I may not have listed them all.
Of course, that raises a big question. Even if you give him the benefit of the doubt on all these cycles being accurate, if his predictions were wrong before because he missed certain cycles, how does he know he’s not missing other cycles that will make his new predictions wrong?
I’m sure that some of the cycles that he mentions do indeed exist. The problem starts with the fact that Dent is attempting to nail down exact times for when these cycles begin and end to such a precise level that he is bound to be wrong on many of them. Then, he tries to combine them all and predict stock market performance based on the cycles. I believe that his lack of success with some of the timing and magnitude of his other predictions ought to demonstrate fairly well to the reader how inaccurate his predictions might be.
I’m giving the book two instead of one star because it still contains some good demographic information and analysis. Unfortunately, the reader must be very careful about how the information is extracted and interpreted because of the other assumptions thrown in. Dent’s prior work demonstrated that his demographic work has long-term applicability in terms of market direction but not the timing or magnitude. However, the reader should beware of acting based on the conclusions that he draws in this book that relate to the additions of all these “cycles.”
Rick McCallister
October 5, 2009
The Myth of the Oil Crisis: Overcoming the Challenges of Depletion, Geopolitics, and Global Warming
Robin M. Mills
Praeger Publishers
Rating 4 out of 5 stars
Countless books, web sites, podcasts, articles and more exist that promote the imminence of peak oil. If nothing else, I highly recommend this book if you want to get the “other side.”
As is obvious from the title, Mills does not believe that peak oil will be coming anytime soon. It’s not that he doesn’t think it will ever happen; rather, he believes that it is a long way off and that we will have developed other energy sources well before peak oil becomes a major issue.
I found Mills’ presentation and discussion of the opposing viewpoints outstanding. Often, books never even touch on opposing viewpoints. Mills’ entire book revolves around a discussion of opposing viewpoints. He discusses not only why he believes the opposing viewpoint is wrong, but also presents his own beliefs.
Mills presents an unbelievable amount of supporting data. For the casual reader, the level of detail and support may be too much. For example, in chapter 5, he goes through 31 different countries or regions and breaks down the oil situation for each area, footnoting his data all the way along. For someone not directly involved in the oil industry, this information may be a bit much, but I can’t fault him for including it as others may appreciate the level of detail. The contrast is striking compared with other information that I’ve read from proponents of peak oil that presented almost no supporting data.
However, Mills is not always fair. At one point relatively early in the book, he basically says that peak oil is discredited because prior predictions have proven to be false. He goes so far as to compare proponents of peak oil to prophets of the end of the world, which is unreasonable. Another time, he overstates his case and says that while oil “prices have risen sharply … at least until 2008, the global economy sailed on almost untroubled. This points out the fallacy of claims by peak oil theorists and Neo-Luddites of the inevitability of economic collapse.” I am not convinced that the claims are false just because the economy was in a good state up to 2008. The year 2008 was not exactly a joyride and peak oil theorists will tell you that it will get much worse. My point is that just because it has not happened yet is not proof that it won’t happen in the future.
Mills did a convincing job discrediting Hubbert’s Peak and explaining how we have enough alternative forms of energy, and the time and resources to deploy them, to avoid the economic meltdown proposed by some. In the end I came away feeling like the doom and gloom that I’ve read from some peak oil authors is overdone. It’s difficult for someone not deeply involved in the industry to really know what’s right, however, and I suspect that reality lies between Mill’s position and the peak oiler’s position.
Rick McCallister
September 16, 2009
The Crash of 2008 and What it Means: The New Paradigm for Financial Markets
George Soros
Public Affairs
Rating 3 out of 5 stars
George Soros George Soros was born in Budapest, Hungary on August 12, 1930. He survived the occupation of Budapest and left communist Hungary in 1947 for England, where he graduated from the London School of Economics. While a student at LSE, Mr. Soros became familiar with the work of the philosopher Karl Popper, who had a profound influence on his thinking and later on his professional and philanthropic activities. In 1956, Mr. Soros moved to the United States, where he began to accumulate a large fortune through an international investment fund he founded and managed. Today, he is Chairman of Soros Fund Management LLC.
George Soros is well known as one of the most brilliant investors of all time. I was really looking forward to reading about some of his insights into what has happened and what might happen in the markets.
What you end up getting was a somewhat rambling case for “reflexivity.” In a nutshell, reflexivity says that 1) the markets are distorted because of the misconceptions and misinterpretations that people have of reality and 2) the biases created can actually affect the fundamentals. This is in stark contrast to the prevailing Efficient Market Hypothesis (EMH), which basically states that because markets reflect all known information, they will tend towards equilibrium.
The above could be an interesting and fascinating discussion, especially from someone like George Soros. Unfortunately, the book is repetitive and drones on at times. Even though he calls himself a “failed philosopher,” it seems that he continues to hope that his philosophy of “reflexivity” will be his legacy.
Soros spends a small part of the book walking through some of his investment decisions at a very high level, but this discourse feels rushed and isn’t specific enough for the reader to really learn much about his thought process. He presents little actionable investment ideas or anything specific that someone could walk away with in terms of what to watch for in the markets.
In contrast with EMH, I agree with Soros that reflexivity is a new paradigm. I’d also agree that EMH has been taken to the woodshed in the last two years and doesn’t reflect reality in its entirety. Soros says that EMH has been “truly discredited.” However, as much as he knocks EMH, at the end of the book he admits that current models may be useful in modeling “near equilibrium” conditions.
In the end, I think the book could have been one-third its length, and then I would have rated it much higher. Given the success that Soros has had, I can’t imagine any investor brushing aside what he has to say; I just wish that he had been more concise and specific.
Rick McCallister
August 12, 2009
The Return of Depression Economics and the Crisis of 2008
Paul Krugman is the recipient of the 2008 Nobel Prize in Economics. He writes a tice-weekly op-ed column for the New York Times and a blog named for his 2007 book, The Conscience of a Liberal. He teaches economics at Princeton University.
Maybe I didn’t read the critical reviews closely enough before buying The Return of Depression Economics and the Crisis of 2008, but this book wasn’t quite what I expected. Paul Krugman is a well-known liberal who also wrote a book, that I haven’t read, called The Conscience of a Liberal. I expected The Return of Depression Economics and the Crisis of 2008 to spend a lot of time beating up conservatives and pushing Krugman’s own opinions. It did that to some extent, but turned out to be mostly a good history book on various recent economic crises. Krugman includes a discussion of the Latin American crisis of the 1980s, Japan's crisis that began in the early ‘90s and really continues to today, and Asia’s crash of the late ‘90s. He does a nice job relating those crises to the crisis that we are in today, and includes a discussion of hedge funds, Greenspan’s impact, and the shadow banking system.
There were a few interesting comments in the book that surprised me. Krugman uses a babysitting co-op example from the 1970s to help explain some economic concepts. It is a useful and helpful analogy. But, to my amazement, he says, “And so the co-op’s story ought to inoculate us against fatalism and pessimism. It seems to imply that recessions are always, and indeed easily, curable.” (emphasis mine) He uses the word “always” strongly in that context based on an extremely simple analogy. It is quite a stretch to draw such a strong conclusion from a simple analogy. Another quote that I found surprising was with respect to Japan’s crisis, “…why not just print enough money to keep spending up so that the economy makes full use of the capacity it has?” I can think of many reasons not to do this, such as the debt load created, inability of congress or the fed to reign in spending or money,e tc. He certainly knows the same arguments and probably disagrees with them; unfortunately, he doesn’t bother to address them. He just leaves that statement hanging there. I found that disappointing, as I would have liked to have read his arguments.
While I didn’t agree with all of Krugman’s conclusions, I liked the book. Most of it told of historical events, and while he threw in his analysis and conclusions, and took a few potshots at conservatives, I believe that anyone from any political or economic persuasion should enjoy reading it. It is thoughtful, well written, and easy to read. It is not written as a textbook, but in a style that anyone can read and enjoy.
Rick McCallister
July 25, 2009
Game Over: How You Can Prosper in a Shattered Economy
Stephen Leeb
Hatchette Book Group
Rating 2 out of 5 stars
Stephen Leeb is the publisher of newsletters that have a combined readership of 300,000 subscribers. He also serves as the editor of The Complete Investor newsletter. Leeb earned his BS from the University of Pennsylvania’s Wharton School of Business, MS in math from the University of Illinois, and PhD in psychology from the University of Illinois during the same year.
Let’s hope that Stephen Leeb’s doomsday scenarios don’t play out very soon. The problem with this book is that he says they will, but he fails to make his case with facts and figures.
Leeb’s basic point is that the world is running out of its finite natural resources more quickly than we think, not in small part because of the tremendous growth coming out of the emerging markets. This may well be true, but the reader will have a very difficult time deciding for himself or herself based on the evidence presented – because there just isn’t much. As I read the book, I felt like I was sitting at a dinner table with smart, well-read people who had thought through these issues but were just bantering back and forth about how things might turn out. “Imagine if this happened… no, but what if this happened… yeah and then this would happen...” So those things may be true, but at the dinner table, they weren’t able to produce the evidence for their arguments.
I found it a bit odd that Leeb uses his own newsletter as the source for many of the charts and figures that he did present. Somehow, that doesn’t seem kosher to me. If he edits the newsletter, where did the newsletter get the data?
I don’t think that Leeb is a kook with crazy ideas. Everything he said may well be right on. That our finite resources will become very scarce and expensive is logical. That the growth of China and India is contributing dramatically to that problem makes plenty of sense; I just wish that he had presented his concerns with more data to allow the reader to judge the accuracy of his scenarios.
I read the last section of the book, titled “Investments for a Chaotic World,” with great interest, and I felt that he did this section very well. Here, Leeb presents his investment recommendations (gold being his top choice). They seem well thought out, and he presents some very specific choices , including specific stocks, ETFs, and commodities.
I found the book interesting and easy to read. If you’re looking for investment ideas with respect to resource shortages, I recommend the book. Overall, however, I’m only giving the book two stars because of the lack of support in his presentation. For someone to take any of his investment recommendations based on only the issues as presented in the book would take a huge leap of faith.
Rick McCallister
July 16, 2009
The Ascent of Money: A Financial History of the World
Niall Ferguson
Penguin Press HC
Rating 4 out of 5 stars
Niall Ferguson is the Laurence A. Tisch Professor of History at Harvard University, a Senior Research Fellow of Jesus College, Oxford University, and a Senior Fellow of the Hoover Institution, Stanford University.
I don’t think it’s possible for a history book to be as compelling a read as a good novel, but this book by Niall Ferguson gets very close. I found the book hard to put down at times, as I was engrossed in his telling of different phases of our world’s financial history. What makes the book fascinating is how he looks at major world events through a financial lens, explains how financial changes, innovation, and even stagnation contributed to, or sometimes were the major causes of, worldwide social and political developments.
A perfect example is how John Law – a convicted murderer, professional gambler, and possible spy – convinced the French to reform its finances in extreme ways. Eventually, Law took control of the entire French economy – and destroyed it. Hearing how he did it was interesting enough, but the destruction was so severe that France never recovered. Ferguson believes that Law’s actions may have led indirectly to the French Revolution.
While he mentions earlier periods, details fail to really emerge until the 14th century, and even then most of the book focuses on the 19th century and onward. This makes sense because this is when more financial innovation began. The book spends more time on the last 50 years, maybe even the last 20, than any other period. Which brings up one of the reasons I gave this book only 4 stars – the book was apparently written to accompany a TV series, and after reading it you will notice its disjointed nature. There are gaps and some of the chapters are somewhat oddly constructed. Knowing that the book was to accompany a series of TV shows indicates why Ferguson wrote it that way; unfortunately, doing so somewhat reduces the quality of the book.
The only other complaint I have is with the afterword, which Ferguson titled “The Descent of Money,” a play on Darwin’s “Descent of Man.” The entire afterword tries to draw parallels between biological evolution and the evolution of the world’s financial system. It’s an interesting analogy, but Ferguson pushes it too far and spends too much time trying to explain why they are similar but not the same.
In the end, that’s a minor complaint. I highly recommend the book, and I believe that anyone with an interest in history – financial or not – will enjoy the book immensely. The book is targeted at the layman, and it is a fun and easy read for someone with no financial background at all. The financial professional shouldn’t shy away from this book either, as it is one of those books that everyone can learn from.
Rick McCallister
July 8, 2009
A New History of the Great Depression
Amity Shlaes
2007 HarperCollins Publisher
Rating 4 out of 5 stars
Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations and a syndicated columnist for Bloomberg.
Rather than using figures and charts, Amity Shlaes tells the story of the Great Depression by following some of the greatest political figures of the period. The only downside to the book is that her rapid-fire name-throwing at the reader can be difficult to follow. Nonetheless, the book is a fascinating look at the politics of the Great Depression and how they impacted the country.
The Great Depression isn’t a terribly good parallel to today, but it’s somewhat scary to see that some of the mistakes made then are being made, or at least are being talked about, today. Shlaes emphasizes how the government’s rally against business and against the wealthy, and its takeover of certain private functions, drove the country into a deeper and much longer depression than may have been otherwise. She quotes FDR in 1931 saying that people “look to us for more equitable opportunity to share in the distribution of the national wealth.” Their understanding of economics was not as great as it is today; let’s hope that the practice of economics has improved as well.
Shlaes doesn’t state much of her opinion in the book, but she is well known as a conservative economic commentator and this is apparent throughout the text. I found the book reasonably balanced, but believe that she chooses quotes and stories that back the positions she believes in. She often states as fact the thoughts and feelings of the figure that she’s discussing—one can only hope that she’s accurate. The way she quotes and tells the vignettes, however, is what makes the book fascinating. One quote was from Will Rogers upon the first election of FDR: “The whole country is with him… If he burned down the Capitol, we would cheer and say, ‘well we at least got a fire started anyhow.’” Sounds a lot like the national feeling when Obama was elected (granted, FDR had a much higher percentage of the vote than Obama did), and we now see some of the biggest changes in government now since FDR swept into office.
If you’re interested in economics, the Great Depression, or in our current economic condition, I recommend the book. It’s a different look at the Depression period, fun to read, and impossible not to learn something new.
Rick McCallister
June 27, 2009
Wm. Paul Young
2007 Windblown Media
Rating 5 out of 5 stars
This book has nothing to do with finance. As such, I’m not going to discuss the book here, except to say that it was an incredible book. The first few chapters are tough, because they involve the death of a little girl, but once you make it past that it part, the story takes on a different tone. The book is about the nature of God and our relationship with him. Read it, it could be life changing.
Rick McCallister
June 11, 2009
Economics in One Lesson
Henry Hazlitt
1946, 1797 Three Rivers Press
Rating: 4 out of 5 stars
This is a great book for readers both with and without a background in economics. It’s an easy-to-read primer on the issues if you don’t have a background; if you do have some background, the author will get you thinking about some of the issues more thoroughly or remind you to think from a different direction.
First, the “one lesson” is presented. Essentially, the lesson is that in economics you need to look just not at the immediate effects of an economic policy on a targeted group, but also at the long-term effects and the impact on all groups. Seems simple and obvious, but isn’t always practiced.
The book consists of about 25 chapters, each covering a different policy issue such as public works, public savings, price fixing and rent control. It then discusses each policy’s immediate and future impacts and stretches your thinking to groups other than just the target of the policy. This is the magic of the book: no matter your political philosophy or economic background, Economics in One Lesson will help you see some of the issues in a new light.
It is very anti-Keynesian and somewhat Austrian in its outlook. It also fits more on the conservative side of the political spectrum. I do wish that it contained supportive data for the positions it takes, but that really isn’t the purpose of the book and it doesn’t purport to do that. It also would have been nice to have better and more complete arguments against Hazlitt’s point of view. Nonetheless, I suggest Economics in One Lesson to anyone with an interest in economics or even politics, particularly in today’s economic and political climate.
Rick McCallister
May 29, 2009
Sway: The Irresistible Pull of Irrational Behavior
Ori Brafman and Rom Brafman
2008 Doubleday
Rating: 3 out of 5 stars
Ori Brafman is coauthor of The Starfish and the Spider and a renowned organizational expert who regularly speaks before Fortune 500, governmental, and military audiences. A graduate of Stanford Business School, he lives in San Francisco.
Rom Brafman holds a Ph.D. in psychology and has taught university courses in personality and personal growth. His current research interests focus on the dynamics of interpersonal relationships. He has a private practice in Palo Alto, California.
I read this book hoping to gain additional insight into the decision-making process. I decided to buy the book based in part on the first line on the inside of the book jacket: “Why is it so difficult to sell a plummeting stock…?” It turns out I was “swayed” by that one line – the book was about decision making, but in a much more general sense than just financial markets.
Sway is a very easy read, of interest to anyone wanting to know more about people and their behavior. I can’t really recommend it to someone looking for a detailed analysis of behavioral economics or finance, because – unfortunately – there is no focus on those areas. In fact, the book is mostly full of stories and anecdotes rather than analysis of the ideas in question. The main targets of discussion include:
· Pain Aversion –we don’t want to experience loss more than we do want to experience gain.
· Commitment – it’s difficult to change once you’ve committed to a particular path.
· Value Attribution – the worth you place on something is very dependent on our initial impression. In other words, what we expect is often what we get.
· Fairness – many decisions we make have more to do with how fair the transaction is than to what the benefit is to us.
The discussion that I found most fascinating, though, looked at how we approach a task. According to the book, we can approach a task either altruistically or from a self-interested perspective, but not both. Once we approach something from a self-interested perspective, it takes over our altruistic intentions. Shifting from altruistic to self-interested intentions might even motivate us to not take on the task. For example, while we might do something for altruistic reasons, we might not do it for compensation. If offered compensation, we might lose our altruistic intention and drop from the task completely. From an economic perspective, it is interesting to consider how monetary incentives may not perform the way we would expect or hope.
From an investment point of view the most significant take away from the book is the chapter on loss or pain aversion. I’ve personally seen this in action many times and it can lead to bad decisions. This chapter is worth the price if you think you’re caught up in that issue, but it is at such a general level it won’t do much other than, perhaps, make you aware of the issue.
I’m rating Sway 3 out of 5 stars because, while it is interesting to read and people unfamiliar with the subjects may learn something, the book doesn’t go into enough depth. Nonetheless, I think any reader will find sways that have impacted them and identifying those may be beneficial.
Rick McCallister
May 22, 2009
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism
George A. Akerloff and Robert J. Shiller
2009 Princeton University Press
Rating: 2.5 out of 5 stars
George A. Akerlof is the Daniel E. Koshland Sr. Distinguished Professor of Economics at the University of California, Berkeley. He was awarded the 2001 Nobel Prize in economics.
Robert J. Shiller is the best-selling author of Irrational Exuberance and The Subprime Solution (both Princeton). He is the Arthur M. Okun Professor of Economics at Yale University.
Laced with examples and stories of how “Animal Spirits” impact our economy, this book is an enjoyable read. The authors’ main point is that the study of economics, as taught in universities, focuses too much on just the numbers and graphs and dismisses the “thought patterns that animate people’s ideas and feelings, their animal spirits.” Chapters on confidence, fairness, corruption and bad faith make many good points about how impactful these are on the economy and how, overall, our emotions lead us to decisions that the numbers might not say are rational.
These are excellent points. However, the book doesn’t quite do the job of pulling everything together as convincingly as it might. It goes overboard in many ways without substantiating its arguments. The authors say that they started writing the book in 2003, but it read more like it was thrown together and rushed out the door to sell in our current economic environment.
As a quick aside, the title might seem a little odd to someone not familiar with “Animal Spirits”. The term comes from John Maynard Keynes, a well known economist from the 1930’s, whose writings are the basis of Keynesian Economics. Many current economists base their viewpoints on Keynes’ concepts, particularly when arguing for support of the stimulus package. In any case, in his famous 1936 book The General Theory of Employment, Interest and Money, he used the term “Animal Spirits” to describe the thought patterns mentioned above. Now the term “Animal Spirits” is widely used in economic circles when discussing emotion and its affect on human behavior.
One of the best chapters in the book is on Money Illusion. Money Illusion occurs when people don’t take into account the real, or relative, value of things. Instead they only look at the nominal value when making their decisions. In plain English, this means that people forget about the impact of inflation when making purchasing, investment, salary or other decisions. . I see examples of this every day when talking to clients and colleagues. Akerlof and Shiller make the excellent point that since the 1960’s the concept of Money Illusion was driven out of mainstream macroeconomic thought.
The authors don’t support all of their arguments well and I don’t agree with all of their arguments in this chapter. For example, they argue that, without Money Illusion, mortgages would all be indexed somehow to inflation; but they are ignoring one’s need to have the certainty of fixed payments for planning. Since one cannot know how things will be adjusted in the future, they opt for a fixed payment stream. This does not necessarily imply that Money Illusion is involved in the decision (although it certainly may be in some cases). They take their argument too far here.
Page 173 spells out, in a fairly clear manner, the authors’ political points of view. “Without intervention by the government the economy will suffer massive swings in employment. And financial markets will, from time to time, fall into chaos.” I find this selection stunning in what it leaves out. Government involvement in the Great Depression clearly caused tremendous swings in employment and amazingly large moves in the financial markets. To say that government will prevent them strikes me as surprisingly naïve. I do believe we need to change how and what we regulate, but throughout the book the authors seem to suggest government involvement as the panacea.
Clearly, the capital markets need some rules and regulations under which to operate, and those areas with lax or no regulations (i.e. credit default swaps) contributed greatly to the economic position we’re in. However, the book goes overboard in its recommendations of government regulation and control without sufficient support for its argument.
Apparently this book has been read by some of the top policy makers in the Obama administration. I hope that the issues the book raises with respect to “Animal Spirits” are reflected in their policy, while many of the solutions presented in the book are not.
Overall, this is a fairly easy and quick read, and although I’m rating it only 2.5 stars, I recommend it for the layperson with an interest in economics and in looking at some of the reasons for the situation in which the U.S. -- and the world -- find themselves. My caveat is that, should you choose to read the book, you are very careful in accepting the authors' solutions to solving our economic issues.
Rick McCallister
May 12, 2009
Paul Krugman
W.W. Norton & Co. Ltd.
Rating 4 out of 5 stars
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