“As the use of derivatives grows, this deficiency will return to haunt us.” -When Genius Failed

When Genius Failed: the rise and fall of long-term capital management (2000)

Roger Lowenstein

Rating: 7/10

This book was quite technical (though the author did a good job of explaining terms overall), and a bit tough to wade through.  But the subject is crucial, hence the high rating.  Lowenstein takes a look at an elite firm (Long-Term Capital Management) and shows how their hubris, greed, and detachment led not only to their own downfall, but threatened to exasperate an economic crisis in 1998.  What’s really revealed, however, is that LTCM is merely a microcosm of how Wall Street and the financiers of the world seek only short-term profits at the expense of everyone else, even if that means some truly damaging consequences.

Then I came across the Fed’s speech about the 2008 crisis and its causes, and it basically reads like the Cliff’s Notes of Lowenstein’s book.  Thus, Wall Street, the Fed, and the financiers of the world learn no lessons from history, and carry on with business as usual, trampling 95% of the global population underfoot.  The system needs significant changes.

Below is a more detailed synopsis of the book for those with the inclination but not the the time to wade through the whole thing.

I.  Overview

• John Meriwether worked for Salomon Brothers in the 1980s, and got a group of PhDs together to create mathematical models to play the finance game; he eventually had to leave over a minor scandal (1991).
• JM created his own company (LTCM), pitching to a very elite clientele ($100 million investors)
• LTCM was incredibly profitable for 4 years (1994-1998), playing the markets of derivatives, spreads, bonds, arbitrage, etc.
  • They remained secretive (to Wall Street banks), and leveraged themselves to 30-1
  • Their models worked on the assumption that market was rational and efficient, and they would always bounce back from any losses
  • Running out of ways to make money, they ventured into areas where they had no expertise and greater risk was present
  • In 1998, a default in Russia set off a domino effect on the global markets.  LTCM began hemorrhaging money, and lost some 90% of its value inside 5 weeks.
  • The FED summoned the big Wall Street banks to orchestrate a bailout in fear of what the loss of LTCM’s $100 billion balance sheet would do to the global market.  They barely got it done.

II. Specifics

• LTCM’s models were based on odds premised with no uncertainty—which is not how the market works.  (Using the newish computers and Internet to look over global trends, they had an aura of invincibility and infallibility; some of these similar models leaked to other firms from academia—the Merton and Scholes model).
• LTCM became illiquid which is fine—unless you have to sell in a hurry (they wound up not being able to when the crisis hit because doing so would have exasperated the crash and their losses).
• Unregulated derivatives (a side bet on the direction of stocks as opposed to actually purchasing stocks—which is regulated) (and unregulated derivatives were advocated by Alan Greenspan) started in 1981.  In 10 years, one type of derivative swaps soared to $2 trillion and then ballooned to $22 trillion by 1997.
  • Significantly, derivatives aren’t disclosed in any useful way to outsiders (and thus impossible to pinpoint risks)
  • Thus: Wall Street “bought into a massive faith game, in which each bank had become knitted to its neighbor through a web of contractual obligations requiring little or no down payment.”  By the late 1990s, most of WS was leveraged 25-1
  • Fears abounded about what a shock could now do to the entire system, but the banks didn’t care b/c they were focused on short-term profits
  • Since Mexico was bailed out, investors shoveled speculative money into Asia, underwriting the corruption there.  When Asia had its crisis, foreign investors pulled their money out, exasperating the problem further.
    • The IMF stepped in to bailout S.Korea, stabilizing the markets.  Investors then assumed Asia was isolated and that the IMF would bailout similar situations in the future.
    • John Succo (ran equity derivatives desk at Lehman Brothers) declared that senior management on WS didn’t know what their 26-year-old traders were doing.  He was forced to resign for such heresy.
    • More warnings came in from the Fed warning that banks put too much faith in the past as a gauge for the future (forgetting the shocks).
    • When Russia defaulted and the IMF refused a bailout, global markets began plummeting.  This sent investors running from any risk (since nuclear powers weren’t supposed to default).
      • Main Street economy was sound, but financial markets were overleveraged and overextended, and were panicking.
      • LTCM began hemorrhaging money but had trouble getting new capital to shore up their finances (being so highly leveraged, every percentage point loss resulted in tens of millions).  Their secrecy and aloofness came back to bite them; other banks began sniping at their deals, causing further losses as LTCM’s portfolio became known.
        • If LTCM’s assets dipped below $500 million, Bear Stearns would refuse to clear them, effectively sinking the firm.
        • Desperately, LTCM looked anywhere for money (banks, William Buffet, foreign or domestic); Goldman Sachs offered a potential saving merger, and when their analysts began pouring over LTCM’s books, they began playing their weakened positions (taking total advantage of inside info).
          • Goldman Sachs used to be known as a gentleman’s banker, but their tactics changed and became much more aggressive (‘bare-knuckled traders’).
          • They admitted they needed to protect their own positions which may have hurt LTCM, but didn’t apologize for it.
          • Eventually, the WS banks saw that by savaging the bloated firm, they risked bringing themselves down
          • After all the losses, LTCM became leveraged greater than 100 to 1.
            • Greenspan didn’t seem to understand that the lenders (banks) avoided regulations in order to cash in on the hedge fund.
            • Buffet, a potential savior, was able to dictate his offer ($250 million for a fund that had been worth $4.7 billion at the start of the year and was now worth $555 million) and gave them a 50 minute deadline.  The deal didn’t go through.
            • A deal with 14 banks (and over 100 lawyers) drafted a deal for the consortium to take over the fund (it needed all the partners’ signatures). One thought about holding out and letting the fund fail so he would not have to work for the banks for a “mere” $250k salary.  Eventually it went through.
              • The public got wind that the Fed initiated the deal, and a backlash against them for bailing out private investors and funds came on.  If investors knew they’d always get bailed out, they’d go after riskier deals and make more mistakes, causing further shocks.

III. Conclusions

• (Lowenstein) The government or the IMF keeps coming to the rescue of private speculators (S&L, big commercial banks that had overlent to real estate, Mexico, Thailand, South Korea and Russia (attempted but failed)).
  • Losses would deter imprudent risks; not allowing them to fail leads to more greed and thus risk
  • Greenspan constantly wanted less regulation (thrall to Ayn Rand), even calling for less sixth months after the crisis!
  • Prophetic words from the author:
    • “Will the investors in the next problem-child-to-be, having been lulled by the soft landing engineered for LT, be counting on the Fed [i.e. a bailout], too?”
    •  “As the use of derivatives grows, this deficiency will return to haunt us”
    • “Banks have repeatedly shown that they will exceed the limits of prudence if they can.  Greenspan endorses a system can rack up any amount of exposure they choose—as long as it’s from derivatives”
    • “The Fed’s two-headed policy—head in the sand before a crisis, intervention after the fact—is more misguided when viewed as a single policy.  The government’s emphasis should always be on prevention, not on active intervention.”
    • “the fathers of the crisis were the big WS banks, which let their standards grow lax as their pocketbooks grew flush.”
    • (Me) Egos and greed facilitated the crisis; financiers play with virtual money and our out-of-touch with the common man (the real economy) and the effects their actions can have on the global and domestic markets
      • No lessons were learned as we steamed ahead into the 2008 crisis, this time on the back of derivatives (swaps) on the housing market.  Lehman Brothers collapsed during the subprime mortgage crisis b/c of its policies—a special session of derivatives trading was held to account for their bankruptcy.  In some ways, it was AIG in the place of LTCM because they could not pay out when the house of cards came tumbling down which shook the whole market.  And Bear Stearns was failing, so the Fed gave a loan to JP Morgan who then bought BS.
      • The Fed’s speech about the 2008 crisis: “The scale of long-term risky and relatively illiquid assets financed by very short-term liabilities made many of the vehicles and institutions in this parallel financial system vulnerable to a classic type of run, but without the protections such as deposit insurance that the banking system has in place to reduce such risks.” (http://www.newyorkfed.org/newsevents/speeches/2008/tfg080609.html)

Devoured by our Consumption

As I’ve wasted countless hours on social networking sites, television, and once had a pretty crummy diet (apparently), I got to thinking about our consumption habits and the relationship to the products we’re supposedly consuming.

Supersized!

Our health is being devoured by the consequences of our diet.  We eat overly-processed food high in fat, artificial flavoring, and lord-knows-what-else, which have resulted in epidemics of obesity, diabetes, high blood-pressure, and cholesterol.  More health problems also drive up our overall health care costs which, unless you have amazing insurance, eat away at one’s pay checks or savings to pay for deductibles and other non-covered costs.

Our economy is also being destroyed in part by our need for manufactured goods which are no longer made in the USA due to outsourcing (to keep profits from consumerism high).  Without manufacturing to balance our export/import ratio, we fall further behind economically by sending money to other countries but bringing less and less in from foreign buyers.

Financially, we’re chronically in debt.  Credit card debt (to fund our consumerism) devours our livelihood through high interest rates or even the inability to pay at all.  As wealth inequality has grown over the past several decades, we willfully took advantage of easy credit to participate in an illusion of prosperity.

The financial sector’s greed for more and more money led to shakier and seedier investment deals that ultimately threw us into a full-blow recession that ate $12 TRILLION of taxpayers’ wealth.  (Were the financiers held accountable? Hell no—many were even rewarded! But I digress…)

Further, school loan debt now exceeds credit card debt in the U.S. and was acquired in pursuing an education because every employer wants a college degree (despite falling standards in the U.S. educational system).

Information is a bit more complicated in some ways.  There’s a lot more information accessible in the digital age, so much in fact, that we seek ways to limit our exposure to avoid being overwhelmed by it all (or allow our search engines to limit it for us—without our consent).  We still surf the Web and spend many hours on social networking sites, texting, and other virtual activities.  This can come at the expense of actual interaction with real human beings; my favorite example is when I witnessed the family of four out to dinner all clacking away on their portable media devices rather than talking with each other (I wonder if they were texting each other?).  We expect instantaneous communication in all things thanks to the digital revolution, and this erodes our understanding of how real-life interaction works.

Our attention spans seem to have been cut down to a Tweet or less—anything longer seems interminable for some.  It’s even affecting how we watch movies; I was at a documentary recently about the financial collapse, and many in the audience (a more “experienced” generation) thought it was too long (at only 120 minutes to describe a complicated series of events stretching over 30 years).

We seem to want our information summarized (the sound-bite phenomenon), and this seems to come at the expense of ability to critically analyze those statements for validity, logic, or even rationality.

I’m not some naysayer of consumerism in an absolute sense; I just think we need a dose of moderation in how we go about it and perhaps put some thought into the long-term consequences of our actions.

Now if you’ll excuse me, I have to get back to expanding my virtual manor that I can’t afford in real life.

“Assume the worst of people and you get the worst.” -Ha-Joon Chang (Book Review)

23 Things They Don’t Tell You About Capitalism (2011)

Ha-Joon Chang

Rating: 10/10

This book is an amazing and enlightening work that every world citizen ought to read.  It succinctly breaks down what is wrong with our global economic market in terms that any non-economist can understand.  It throws new (to most of us) and important light on the flaws of conventional “wisdom” about free-market capitalism and how those policies over the past 30 years have created the systems and incentives for ongoing economic crises during that time (including our current one).  But Chang is not content with simply nay-saying the system: he also provides some general principles about how to rebuild the world economy to function better and more humanely.

His methodology is pretty sound (as far as I can tell), and his evidence is convincing.  Indeed, I only found one place where I questioned one of his solutions (though I wasn’t able to give it the most critical analysis on my first read).  Chang begins each chapter by: 1. telling us about the “thing” (remember, there are 23 “things”); 2. telling us the oft-touted myth about that thing; 3. telling us the untold story (and reality) about the thing; and 4. presenting his evidence and solutions for that thing.  (He even presents several ways to read his book and directs you to the “things” that might matter for a particular reading.  And yes, he simply calls them “Thing 1” throughout the book for ease of reference).

I won’t go into detail over all 23 things here (of course), but I will point out some of the tid-bits that I found particularly poignant.

There is no such thing as a free-market.  As Chang points out, all markets have some sort of rules and regulations, some of which we take for granted (e.g. child-labor laws).  In fact, as the economy has come to be dominated by corporations, those economies are also more fully-planned since successful corporations tend to be carefully-planned themselves (otherwise they’d fail).  So the idea that we should not regulate the market is not only fallacious, deregulation over the past 30 years has actually caused more problems and slowed growth, despite the rhetoric.  Related to this, trickle-down economics has not worked out as planned, either.  The wealth has only trickled upwards (as evidenced by the US having the largest wealth disparity of any developed country).

Companies should not be run in the interest of their shareholders.  Since most of those shareholders tend to have little interest in the long-term fortunes of a company (they’re focused on short-term profits), and managers run those companies to maximize such profits (and satisfy shareholders), the companies are inevitably harmed in the managing policies.  Labor forces (i.e. workers) are collateral damage as cost-cutting (i.e. layoffs) occur.  The government has lowered corporate tax rates which have helped wealth inequality skyrocket, and the average citizen’s borrowing has likewise gone up to get in on the “apparent” wealth.  This has led to slower per capita growth as long-term investment has been slashed.  Harming the companies’ long-term viability, focusing on quick, short-term profits, and increased wealth concentration has resulted in a failing economic system.

US managers are overpaid.  In recent months, the ridiculous paychecks that CEOs and managers receive (including their bonuses and severance packages), have come under some scrutiny.  Chang points out that not only do our CEOs make 2 to 20 times what other countries’ managers do, but their earnings have also increased 10 times since the 1960s (while the average workers’ wages have remained virtually stagnant, accounting for inflation).  Of course, American companies are not 10 to 20 times more efficient, productive, or successful either temporally or geographically, so this needs to be rectified as well.  Worse, the CEOs are not held accountable for failing (and are often rewarded with severance packages when they do fail!).  Remember the crisis way back in 2008?  Know any financier or CEO that went to jail or was held to task?  Yeah, neither do I.

Bigger government can help growth and the economy.  Some folks point to Europe and the boogeyman of socialism as an evil that capitalist America must avoid at all costs.  What they don’t tell you is that several of those socialist countries have had equal or better growth that the US, even during our booming 1990s.  As with nearly all of the “things” Chang addresses, it’s not a matter of pure absolutes (i.e. big government is good or bad).  It’s a matter of the right kind of thing and the right kind of policies (e.g. a large welfare state that has good policies [Scandinavia] is better than a welfare state with self-defeating policies [the US]).

Developing countries need our help and it’s about time they received a leg up from us.  Not only is this the right and humane thing to do, it will inevitably help the world economy become more stable (along with other changes Chang recommends to rebuild the global economic system).

There is plenty more to digest including the liquidity (and ratios) of financial assets, limited human rationality, the fallacy of us living in a post-industrial world, and so forth.  I hope this brief summary hasn’t made things more complicated (not my intention), because the book is very digestible.  Rarely do I come across books that are paradigm-shifting and life-changing, but I’d venture to say that Chang’s 23 Things is such a work.

“If once the people become inattentive to the public affairs, you and I, and Congress and Assemblies, Judges and Governors, shall all become wolves.” -Thomas Jefferson

This will be a shorter entry about these topics than I normally write for a variety of reasons, the largest of which is because people better qualified than I are speaking to these issues and probably have more intellectual street cred.

First, I think everyone can agree that there are some serious flaws in our government systems.  Yes it’s relatively stable, but it can be inefficient, grid-locked, and maddeningly nonprogressive.  Perhaps that’s better than revolutions, revolts, or even changing parliamentary coalitions, but that’s not my point today.

The United States is in the midst of an economic crisis—and I use that word quite deliberately.  We have issues we need to address and they go far beyond the quagmire of partisan politics we see and hear every day.  Both sides are to blame, despite their hyperbolic claims.

This article is written by an economic expert who has covered national finances for 20 years whose main point is that political groups are putting their interests above the greater good of the country and are weakening the nation as a result.

George Friedman has been in the intelligence business for some 20 years and is an expert on geopolitics—the forces that govern our interconnected world.  His article compares three economic crises (the US, Europe, and China) and the political antecedents and reactions to these crises.  He warns that politics and the economy are intimately linked, and can feed each other into a viscous cycle until one of them breaks.

Warren Buffet is the third richest person in the world ($50+ billion) and he argues that Congress should stop coddling the rich.  If he sees the sense in increased revenue sources for the government, maybe we should listen to him.

Not the all corporations are the boogey man, but something needs to be done about their influence and power in controlling the nation’s interest.  Not only did the Supreme Court equate corporations to people (and granting them the protections and privileges that that entails), but, in the same ruling (Citizens United v. FEC), the Court also ruled to remove limitations on “soft” money from political campaigns (soft money is a loop hole allowing massive contributions to support federal candidates in a slightly round-about way).  By the way, the cost of the 2012 presidential election is expected to reach $1 billion.  And for all you parents out there, this article describes the detrimental effects corporations have on our children, from targeted advertising to toxic contamination.

Finally, if we can get past our partisan politics, Mickey Edwards, a former member of Congress, describes how we can all get back on the bandwagon to fixing our country in 6 manageable steps.  Since he’s been there and seen the problems, again, we might want to listen to him.

I hope you take the time to read these articles and think about these issues. The country’s fate is in our hands because we, the people, elect those who represent us and make the decisions that will put the United States on the road to recovery, or keep it on the tracks to a fading world power.

MyAddiction

I never thought I would enjoy shopping for clothes, and that maxim generally holds true for me.  Accompanying my wife on a clothes shopping excursion feels like the 7th level of hell to me.  Nor am I into “fashion” (whatever that means).  Heck, I have trouble deciding if two shades of green “go” together or not.  However, something has recently happened that I can barely believe I’m going to say.  Recently Amazon offered a pseudo-exclusive shopping experience called MyHabit, and I’m kind of addicted.  To help sell this thing, they are also offering $25 off your order through the end of the summer.  To sweeten the impulse-buying pot, there are no shipping costs in the US, and some of the items are actually priced $25 or less (meaning they’re basically free).

So I decided to give it a whirl.  These are brand names/designers that I have never heard of—or would normally turn my nose up at them as hoity-toity nonsense.  But then a strange chain of events began to occur, starting with the premise that new sales occur every day at 9am PT.  I used to mosey on over to the site a bit after that start time (an hour or more), and notice that everything at that magic $25 or less price was sold out.  So I would head over a bit earlier each subsequent time, but to no avail.  I quickly realized what was probably happening was the equivalent of e-bay “sniping” in reverse—a mad virtual dash to refresh the site and throw everything possible in your cart that you might want (though there’s a 10 minute time limit to keep items in your cart) as soon as the sale became available.  This was confirmed when one fateful (and embarrassing) afternoon I was refreshing every few seconds starting at 11:59 and when the new sale came up, went immediately over to the men’s section, looked for my size, only to see that the items were already in members’ carts.

Kinda like that scene from Dawn of the Dead...

How could this be?  Unless someone was using a computer script and taking advantage of the machine’s ability to react in nanoseconds compared to my reaction time which is measured in lethargic “regular” seconds.  But then an insidious thought dawned on me: maybe those items didn’t actually exist—maybe they were merely shiny unattainables meant to draw us in to browse the other items that were priced higher and that we might buy on a whim (or as a consolation prize for missing out on free clothes).  I became convinced that I must either 1) be quick enough to buy one item priced at $25 or less, or 2) prove that the thing is a scam.

So far I’ve achieved neither, much to my wife’s amusement.

Taking a step back, I wonder how I could have gotten suckered into these mad virtual dashes for items I wouldn’t even look at in a regular store.  Perhaps it’s my competitive nature and my need to win.  Maybe it’s the idea of getting something for “free.”  It could even be a subconscious need to subject myself to ridicule or as an object of bemused fascination by others since I’m blogging about it.

I’ve had two interesting reactions to MyAddiction.  The first was a female friend who asked if “I was turning into a woman” because I was trying to buy my daughter something cute on the site.  (Last time I checked, I had not, in fact, transformed).

The other was a female cousin who, after I pointed her to some shoes she might like, said: “You get total style points for pointing this out to me and since you are a male relative, 100 bonus points.”  (Thanks cuz!).

Both made me laugh.

At any rate, I’ll keep looking to score that great deal (til the end of the summer anyways), and maybe pick up something fashionable for my own wardrobe which has only just begun to shed the vestiges of the 1980’s…

“It’s the economy stupid.” -1992 Election campaign slogan

So I’m no economist or financial guru, but here’s my take on our global financial system.

Once upon a time, the value of things was tied to something tangible. Whether it was 2 goats for a pig or the gold standard, you knew exactly what your wealth was actually worth. For a variety of reasons, the US and the rest of the world moved off the gold standard and now have Fiat currency; that is, money backed by people’s faith in its value.(!) Mix into this the role of central banks that regulate a country’s money, set inflation rates, and perform other assorted feats of magical financial mumbo jumbo. Add the stock exchange were “shares” in a company are bought and sold (NYSE) which can even be done entirely in the virtual world today (NASDAQ). Finally, add the inherent irrationality of human beings, and, as I see it, we’re heading for an inevitable disaster. But let’s look at each of these briefly in turn.

Fiat Currency:

Most countries have economies based on this sort of money (except for some tribes where yams are still the currency of choice). As long as we believe in it, the bills and coins are worth something. If we stop having faith in the currency (i.e. the government), its worth (i.e. value), plummets. It’s kind of like if we all decided to use Monopoly money—as long as everyone agreed, we could.  Another problem is that with no tangible backing, the central bank (see below) can keep printing more in the face of hyperinflation, as was seen in Zimbabwe in 2008 with an inflation rate of 79,600,000,000%.

Central Banks:

Some people wanted to privatize the control of our country’s money (they were financiers). Others wanted the government to retain control, per the Constitution. Our Federal Reserve System is the result of these competing interests, though its powers have expanded from its inception. (The plan for the creation of the system was drawn up in secret by representatives of such financial titans as JP Morgan at Jekyll Island.  Their hope was to keep the wealth of the US concentrated in the hands of firms, particularly those on Wall Street.  It appears to me that they succeeded).   But the system’s failure to perform one of its purported main functions—the prevention of financial crises or speculative asset bubbles—is rightfully being called into question.

These banks are groups of people who sit around, behind closed doors, to decide the fate of our virtual money.  It’s this “virtual” aspect of our wealth that is the most disturbing to me.  What is more transient that something that doesn’t actual exist?  And the thing with closed doors is that they tend to prevent people from seeing what’s going on or being discussed–and that’s exactly how they want things.

Stock Exchanges:

They're either trading or waiting for mother bird to drop food to them.

In the 12th century, bankers began trading in debts; this quickly led to bankers trading in government securities. Just as quickly, this led to folks spreading rumors intended to lower confidence in the government and hence the prices of its funds (this was soon outlawed of course). One of the first companies to sell shares to raise capital was the Dutch East India Company (1602). Later, this process evolved into the modern market where shares in companies and the value of commodities fluctuate day to day.

In today’s global economy, not only are nations’ fortunes interconnected, but the actual markets themselves are merged (NYSE Euronext). Thus, we are well established in a “we-fall-or-rise-together” type fate. That’s why Greece’s default can send shock waves through the global market.  Imagine what the loss of faith in America’s financial system is going to be? (As of 8/8/2011, the market had already dipped 12% over two trading days, representing trillions of dollars in wealth that just evaporated–because it’s only virtual!)

Further, most trading is done by companies managing funds for individuals (rather than the individuals doing it themselves).  While this might take some of the “newbie” effect out of the market (overly-reactionary sells for example), it leaves us at the tender mercy of brokers in firms who are out for their bottom line.  Right Fab?  We trust our money to money managers which in turn concentrates wealth in a few giant corporations.

Human Irrationality:

Sure, we have the capacity for rational thought and action, but more often than not, it is irrationality that guides our decisions. How do I know? Allow me to present some evidence.

1. The popularity of this guy:

Yeah, he's got a memoir, too.

2. Binge drinking (which results in the inversion of one’s diaphragm or, you know, death).

3. Survivor is on its 23rd season while Firefly was canceled after one.

4. The Mullet:

What could he possibly be taking a picture of?

5. An entrenched two-party system, Gerrymandering, and a lack of campaign finance reform. (Oh, snap!)

It’s this sort of irrational behavior that can also make the markets wildly fluctuate.  For example, rumors of a company not doing well can send its stock plummeting in a self-fulfilling prophetic swirly.  Never mind that the company might be doing o.k., just the thought of it doing otherwise can cause ripple effects.  These effects get larger when countries are involved-because private investors are involved in government securities and thus nations are subject to the same mass-psychological forces! Some argue that the stock market is for people looking to stay in for the long-haul, and those that don’t understand this facilitate dips in the market.  But guess what? If it’s their money, they can do what they want with it–that’s the principal idea behind your free market.  Though the NYSE apparently does have a built-in “circuit breakers” should the market plunge too much in a day.  They just close their doors.  Yep, you can’t do anything with your money or investments if they say so.  So much for that free market.

To conclude (perhaps simplistically): Money used to be tied to something tangible (silver and gold).  Bankers/financiers developed the stock exchange.  Wealth became concentrated in the hands of a few individuals and corporations.  Bank failures and panic occurred.  Bankers develop a plan to create central banks to “prevent” such things from happening (and give bankers more control over financial markets).  Wealth continues to be concentrated on Wall Street in the hands of a few individuals and corporations.  Shady financial dealings of the 1920’s facilitate the stock market crash of 1929.  Oversight is put into place by Congress to prevent such things from happening again.  Nixon moves us off the gold standard to fiat currency.  The central banks thus gain more power (freed from the constraints of a standard, they can do pretty much as they please).  A massive market drop in Hong Kong cascades around the world on Black Monday of 1987, leading to the largest percentage drop in the US market’s history.  Shady financial dealings in the 2000’s facilitate the housing bubble burst of 2008.  Congress bails out Fannie Mae and Mac who are deemed “too big too fail.”  The depressed housing market continues to affect the financial markets around the world.  Wealth continues to be concentrated in the hands of a few individuals and corporations at the expense of 90% of the US population.  And it’s all virtual (fake) money now.

So what the heck can we do about all this?  Honestly, I have no idea.  The gold standard did have its own problems (short-term fluctuations due to monetary and other shocks).  There are too many people for an effective barter system to work.  Maybe the current system is the least of all evils.  But given what I’ve seen, it certainly needs some pretty important reforms.  And I hate having to choose the “least evil” choice because that’s not really a choice at all, and certainly no way to run a financial system (or country for that matter).

Peace out.

“…hear the hog squeal of the universe.” -The Jungle

Rating: 9.5/10

This work is amazing in several aspects.  First, Sinclair really makes the reader identify with the plight of the protagonist Jurgis.  It can quite literally depress one’s spirit reading about his trials and tribulations, but then again, that’s probably the point.  You get so used to the monetary struggles of trying to earn a nickel or even a dollar, that living on such meager means becomes your world as well as Jurgis’.  You’re then thrown into a brilliant juxtaposition of an owner’s opulent home where useless objects cost tens of thousands of dollars; not only is this disparity thrown into stark relief, but you feel sick with it.

Further, Sinclair’s “jungle” theme permeates the story through and through. From the urban jungle where people are forced into a survival-of-the-fittest lifestyle, to the country “hobo-living” Jurgis adopts, it appears nowhere is exempt from the rules of the jungle.  (Nor is this rule incidental to America-you quickly find out that the same sort of predators existed in his home country of Lithuania, he was simply not as ignorant there nor filled with the rosy-eyed hope of America’s opportunities).  Not only is man-eat-man behavior displayed “at large” within the society, but also in microcosms in the packyards, the streets, and saloons.  Even internally, Jurgis struggles with his base, animalistic urges as he tries to superimpose a veneer of higher morality over it.  But when push comes to shove, one must eat and that will always take precedence (as will the means to ensure you do so).  Sinclair makes a somewhat clumsy attempt at the very end of the book to show that a noble cause can elevate a man’s “soul” (intentions, thoughts, actions) above our basic needs.  But of course, by working within the confines of his new found party, he has his basic needs taken care of and thus has the luxury to contemplate on higher ideals (a la Maslow’s hierarchy of needs and, to a lesser degree, Aristotelian Ethics).

This book is incredibly relevant today, if only the semantics have changed.  Wealth disparity is still an overwhelming problem (90% of the US population holds a mere 15% of the wealth but some 75% of the debt).  Substitute “financial trust” for “meat trust” and the story remains largely the same.  Less may be literally scraping by (though some are), but the majority of us toil away while remaining in debt.  We have some creature comforts that mask our oppression, but little else.  Those with money remain in political, and thus ultimate, power.

Some favorite quotes:

“consider the activities of the stock-manipulator, the paralyzing of whole industries, the over-stimulation of others, for speculative purposes; the assignments and bank failures, the crises and panics”

“…in a society dominated by… commercial competition, money is necessarily the test of prowess, and wastefulness the sole criterion of power.”

“When one comes to the ultra-modern profession of advertising…the science of persuading people to buy what they do not want”

“Beneath the hundred thousand women of the elite are a million middle-class women, miserable because they are not of the elite, and trying to appear of it in public; and beneath them, in turn, are five million farmers’ wives reading ‘fashion papers’…”
Considering the moral aspects of the thing: “The low knavery and the ferocious cruelty incidental to them, the plotting and the lying and the bribing, the blustering and bragging, the screaming egotism, the hurrying and worrying.”

“They [those in financial power] would tell you that governments could not manage things as economically as private individuals”

“One could not stand and watch very long without becoming philosophical, without beginning to deal in symbols and similes, and to hear the hog-squeal of the universe.”

“…and he learned that America differed from Russia in that its government existed under the form of a democracy.  The officials who ruled it, and got all the graft, had to be elected first; and so there were two rival sets of grafters, known as political parties, and the one got the office which bought the most votes.”

“They were swindlers and thieves of pennies and dimes, and they had been trapped and put out of the way by the swindlers and thieves of millions of dollars.”

“…for how many millions of such poor deluded wretches there were, whose lives had been so stunted by Capitalism that they no longer knew what freedom was!”

“This Jesus of Nazareth!…This agitator, law-breaker, fire-brand, anarchist!”