The interest now in this 12-year-old book is that it was written 12 years ago. "Devil Take the Hindmost" could stand for a critique of the Reaganomics-created financial panic of 2008 with the change of a few names.
You were warned. In 1999, the easy-to-read Edward Chancellor was writing about bonds "known as 'toxic waste' by the traders who handled them. They have been described as 'among the most speculative instruments ever offered to American investors' " by the trenchant Martin Mayer in "Nightmare on Wall Street: Salomon Brothers and the Corruption of the Market Place." That was published in 1993.
So, you see, despite what you have been told since October 2008 by the shills for deregulation, the Community Reinvestment Act had nothing to do with it, ACORN did not cause it, government meddling with market forces was the not behind the crash. These bonds were virtually unregulated, and the derivative swaps they supposedly "supported" were totally unregulated. No government had any idea even how many of them were out there ($55 trillion, more or less, as it turned out).
Talk about 20-20 foresight!
The book needs to be read in context. Top financial advisers like Alan Greenspan and Larry Summers, not to mention a raft of Nobel Prize-winning economists, said that hyperspeculation, debt, exotic instruments and international flows of hot money were good, because they increased liquidity and spread risk. Greenspan went so far as to say that government need not trouble itself to observe these markets because "counterparty surveillance" would ensure that most borrowers were good risks.
A look at earlier episodes, which Chancellor had done for them already, would have caused any sane person to call for the men in white coats.
It would not be hard to find examples of speculation that go back even before the invention of money. Clay tablets from Sumeria show shady mortgage deals at the dawn of history, not different in any important respect from what Countrywide or Wamu were doing. But Chancellor specifies "financial" speculation, the kind enabled and loved, for a while, by organized exchange markets.
He glances at the tulip mania, which was a little early to be a true financial speculation, and gets into his stride with the "projectors" on the London Exchange in the 1690s. This was about the earliest example of a free financial market and it promptly did what free financial markets are designed to do: It crashed.
Although Chancellor has excellent background explanations, citing some of the best formal studies, of why markets crash, even a child can see why they do. Financial markets are like a game of musical chairs. When the music stops, as it always must, then someone is left without a seat.
But if everybody is leveraged, which tends closer and closer to being the case as a boom runs to climax, then not just one chair is taken away, but all the chairs, and everybody falls down.
Chancellor's book was written and largely inspired by the collapse of Long-term Capital Management, a fund advised by two Nobelists and fabulously remunerative for a time. LTCM was leveraged to a level that is anybody's guess but maybe 100 to 1.
More recently, the investment house that started the latest rout of Wall Street, Bear Stearns, was leveraged around 40 to 1. Some of the other houses may have been leveraged even more. It's hard to tell. They are not transparent even when their managers are honest, and their managers are not often honest.
In any event, it is plain to see that if one man leverages himself 100 to 1, while the rest of the market stays at some more prudent level, say 10 to 1, then one of two things will happen: Our plunger, call him Wantrocks, will make a lot more money in an expanding market than anybody else, and all the little pissant journalists who swarm Wall Street will write stories for the Wall Street Journal or Investors Business Daily about what a genius he is.
If he winds up his operation and takes his winnings, he will go down as a Wall Street legend. The more usual result is that Wantrocks goes bust. Most "wolves of Wall Street" play till they are busted, and the more you are leveraged, the sooner you are busted.
If you are leveraged 100 to 1, your sector has to contract by only one percent to wipe you out.
Now, what happens if almost everybody is leveraged 40 or 50 or 100 to 1? Let's say 50, to be conservative. The market contracts by 2 percent. Everybody is busted. That's what happened in late 2008.
And the reason for that is not far to seek. From the late 1930s until the late 1980s, there weren't any financial panics. It wasn't that the markets were dull. There were booms, the "go-go years" of the '60s etc. After each contraction - the business cycle is as reliable as if not quite as regular as the cycle of the seasons - the losers were shaken out and the economy continued its splendid expansion.
Once the Reaganites (or Friedmanites, or Randians or Miseans or whoever you want to blame for the intellectual rot) got in, there was promptly a financial panic in the savings and loan sector, which had been - wait for it! -- deregulated.
What prevented general panic for six decades was the Glass-Steagall Act and related New Deal circuit-breaking safeguards. G-S mandated two kinds of banks: risk banks, the Wall Street wolves; and safe banks, the kind you or I put our paychecks in. Hot money was mostly attracted to the risk banks, so that when some idiot ruined a bank, which happened from time to time, all the other banks weren't ruined as well.
The antiregulatory, free market forces hated this. They wanted all banks to rise and fall together, believing that all would rise forever. As Chancellor's review of railway manias in the 1840s, loans to Argentina in the 1890s (he could have but did not mention French loans to Russian railways about the same time) and Coolidge "prosperity" should have informed them, markets go down as well as up.
None of this was a secret in 1999, although aside from Charles Kindleberger, there were not a lot of competent authors writing accessible books about bubbles. (Kindleberger's "Manias, Panics and Crashes," as readable an economics text as has ever been penned, was simultaneously a pathbreaking theoretical work that is referred to by all competent economists: That is, you never heard Sen. Phil Gramm mention it; Gramm being a self-proclaimed - he was credentialed - economic maven and the chief political sponsor of the murder of Glass-Steagall.)
There has been a spate of books in the past three years about financial markets, many of them excellent and some of them even enjoyable to read if you did not lose any money in the crash (as I did not; as a New Dealer, I saw it coming). It will be well worth your time to reach back and also read this older volume.
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Dirty and Used!
Received what I thought was a new book. Book arrived obviously used and dust cover missing. Had absolutely no clue that it was used!
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- peter rabsonReviewed in the United Kingdom on February 15, 2022
Fine over view about the history of money.
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- Peter BReviewed in Australia on October 23, 2022
Kindle formatting & typo's unreadable
