Saturday, October 19, 2013

Bailout Nation

Version 0.3

Reactions to Bailout Nation by Barry Ritholtz

Quite an interesting book and worth a recommendation just because it didn't have any obvious political slant. After finishing it, my opinion would be that there are some holes in his reasoning and even in his data, but it has a lot of good background information and I didn't feel like he wasn't grinding any axes.

Let me start with some of the data points. One category I liked was the references he provided, ranging over a wide range of topics. On pages 17 and 18 he mentioned Stephen Mihm and Bruner and Carr on older background topics. The book by Tim Metz mentioned on page 54 sounded quite interesting. Page 61 cited Paul Krugman and Philippe Jorion. On page 72 he mentions Roger Lowenstein's interesting-sounding book. I've read some of these authors and he motivated me to want to read many of the new ones. My conclusion here is that he has looked at a lot of data.

However, another kind of data point involved places where I disagree with his interpretations of his data, or even his reasoning. Kind of a triple-play from pages 131 to 135. For example, he cites Disraeli's aphorism that "What we learn from history is that we do not learn from history." However, the point he had just made was exactly the opposite, that the bankers should have learned from the bailout of LTCM that they should expect to be bailed out.

Next he describes Reagan as "the intellectual father of the modern radical deregulatory movement." He actually repeated that claim on page 237. I just can't buy Reagan as "the intellectual father" of anything. Perhaps an "ideological father", "emotional symbol", "charismatic leader" or even "religious driver", but NOT "intellectual". Actually I think he makes my point most clearly by the key words that appear later on page 237: "unwavering belief", "distaste", and "advocacy". Nothing intellectual in there. Reagan knew what he wanted to believe, and he really cared about his beliefs, but Reagan's main reality was today's teleprompter. (To contrast with Dubya's relationship with reality, Reagan didn't know but really cared, whereas Dubya didn't know and didn't care.)

Back to page 135, where he almost contradicts himself. He says that Clinton believed in both government and markets, and then says that Dubya went farther, whereas his actual argument is that Dubya believed ONLY in markets and basically hated government. This is not "a huge step farther", but actually heading off in a completely different direction.

On page 149 I disagreed with the assertion that the consequences of government are especially troublesome. It's a matter of size and force, not the simple reduction to "government" that matters here. If the consequences of the American national government tend to be large, it's just the correlation with that governments size and strength.

On page 168 I was interested to notice how one of my banks (in Japan) lost so much money with a belated investment in Merrill Lynch. Heck, I might as well name names and say it's Mizuho Bank, which is actually a post-forced-merger name. (Then again, based on my experiences, ALL of the Japanese banks can only be measured on the scale from "bad" to "terrible", and Mizuho (probably Fuji when I opened my account) is just somewhat towards the worse end of the scale. Near as I can recall, ALL of my Japanese banks have been forcibly reorganized and renamed over the years.)

Chapter 14 is called "2008: Suicide by Democracy", and I felt this argument is ridiculous. The problem is NOT democracy but the kleptocracy or plutocracy that is running things. My philosophic position here is that most businesspeople are fine and upstanding, but the game is crooked, which is quite compatible with his message. However, he is suggesting it is a democratic problem, whereas I am convinced the source is that the crooked game is created by bad laws written by the most cheaply bribed professional politicians, and they are working for a tiny group of the greediest and least ethical businessmen who see bribery as a great investment. He does touch on the theme in the book, but actually quite lightly. On page 249 he even divides the problems between "bad philosophy" and "mob rule", but I strongly disagree. Greed is not a real philosophy, and the democratic "mob" is not paying the bribes. 

On page 178 he says there wasn't any pattern to the bailouts, but I think that he is ignoring some of the political factors. My own hypothesis is that much of the reason that Lehman wasn't bailed out was partisan political factors.

On pages 179 and 180 I have to confess I was quite amused by his jokes and cited jokes about Dubya's withdrawal from the financial problems. The joke on page 216 about Citi was also funny.

On page 232 he listed and ranked the culprits, but I disagree with his inclusion of "Borrowers and home buyers". His argument was based on the irresponsibility of such borrowers, but at least twice in the book he notes that they lacked even basic financial skills. The situation as he represented it was that skilled expert salespeople were trying to persuade them to take out these mortgages, and I can't blame suckers just because they are suckers for some new scam. Even if the suckers objected that they could not afford the mortgages, the scam artists were experts in telling them why they could afford them, mostly with the idea of selling at a higher price or just walking away.

Though he mentioned philosophy, I think he never makes his clear. To me, the philosophic problem is the worship of cancerous growth. Therefore my solution would be the amoeba growth model. I think that large companies should be divided just on principle. It actually should be an objective of government to encourage more freedom, where freedom involves meaningful and unconstrained choice among several alternatives, not the single non-choice of the monster that is too big to fail.

A final conclusion? A thought provoking read, and it had a lot of good history here. However, I think his philosophy is weak or shallow and you have to treat it as data with some opinions, and not a solid set of reasoned conclusions.