Roger Lowenstein

This book was a fascinating glimpse into what caused the dot com bubble (and subsequent burst). If you changed a few of the names, it could honestly describe any of the myriad economic f-ckups of the last two decades: the great recession, hedge funds buying up and destroying beloved companies, fallouts after IPOs like Theranos, Uber, WeWork, even crypto.

It's truly amazing how little the moneyed classes have allowed the US government to regulate finance, and how much the 99% have suffered as show more a result. I mean, no less than 4 years after this book was published, banks destroyed the economy *AGAIN* (and to a much larger extent than in the dot com crash) and we bailed them out. Nothing was learned.

And the creative accounting that fueled Enron was only a preview of what the next generation of tech IPOs would do. I think the author makes an important point that a company needs to have actual value to support their share price, but when CEOs are allowed to lie about new paradigms of technology (even though they really just run a cab company), then stock prices are going to become inflated. In the absence of honest accounting and disclosures that humans can meaningfully read, I fear we're going to keep witnessing this occur any time a new type of tech is developed. (The Internet, apps, crypto, AI, whatever the next thing is...)

While the book is 20 years old, it's still worth reading. The only part of the book that suffers is that the names may be unfamiliar to readers. And if you were born in the 90s, that probably applies to corporation names as well (at least the ones that didn't stick around). I remember enough news about Enron and WorldCom that I didn't need to do any Googling, but if you're younger than me you may not be familiar with them. show less

Many people have strong opinions about the Federal Reserve, despite not having a clear idea of what it is, what it does, how it's structured, or who's in charge. However, even if that describes you, don't feel so bad, because ignorance has been practically a second father to the Fed since the beginning. America's allergy to central banking has endured from the founding, through multiple painful financial crises and recessions, and even through to the relatively peaceful and prosperous show more present. As Lowenstein ably demonstrates through his description of the Federal Reserve Act's drafting, debate, and passage, the Federal Reserve's complex structure and arcane operations are less a product of smoke-filled rooms than the unavoidably complicated nature of high finance, as well as the often-terrible political compromises necessary to shepherd such a controversial piece of legislation through the drama of the Progressive Era. Since the "End the Fed" movement is still with us, as it most likely will be for some time, it's worth reading on why the Fed exists, what problems its creators were trying to solve, and how it ended up quite the way it did.

Nowadays, central banks are a given in the international financial landscape - less a feature than the foundation. Yet despite the best efforts of Alexander Hamilton and many other government officials during the early years, the US did not get a truly permanent central bank until just before World War I. Despite otherwise rapid economic growth, in comparison to European nations the US had an unusually fragile monetary system that was vulnerable to frequent panics and recessions. Individual banks issued their own notes, which made taking out loans and redeeming debts across state lines difficult. Rural banks in particular had asset flows that tracked the harvests, which could leave their reserves critically low if too many farmers needed to withdraw at once. Local banks had to rely on public perception of their stability and trustworthiness, which meant often that they went bust very suddenly, completely wiping out deposits. Many banks had deep ties to corruption-intense industries like railroads that were subject to intense, unstable bursts of speculation. And, since nothing travels faster than bad news, nationwide financial contagions could spread in a flash but take years to recover from. Yet public mistrust of centralized government, which was even shared by Presidents such as Andrew Jackson, meant that America more or less muddled through recession after recession, relying on the private sector to clean up its own messes.

The low point was the Panic of 1907, a particularly harsh but certainly not the only bank crisis/recession around the turn of the 20th century. Borne of a misbegotten attempt to corner the market on copper, the collapse of the instigator's firm led to a wave of bank closures. In normal conditions in a fractional reserve system, it isn't an issue when banks owe each other large sums of money, since only a small percentage of deposits will ever be withdrawn at a time. But when credit becomes scarce, each bank tries to call in its debts from all the others, and with a sufficiently leveraged system where the total amount of loans outstanding can be greater than the total amount of reserves, everyone goes bankrupt. In most European countries at the time, the central bank would step in and, in the words of Economist editor Walter Bagehot, "lend freely, at a penalty rate, against good collateral", but in the US, Wall Street was forced to rely on the person of JP Morgan to coordinate relief as the banking crisis became particularly pronounced. Thanks to his personal reputation and his powers of persuasion, Morgan was able to calm the markets and arrange for some measure of stability, but it was clear that this state of affairs couldn't continue. The United States needed a central bank, and so Senator Nelson Aldrich and banker Paul Warburg began their efforts to design one.

For conspiracy theorists, this is where the story really begins. There are plenty of books out there with titles like "The Creature From Jekyll Island" that imply that the creation of the Federal Reserve was some kind of sinister plot foisted on an unwary public to debauch the currency/tighten the grip of Wall Street/empower a tyrannical federal government/extend the tentacles of international banks/destroy freedom/etc. However, as Lowenstein shows, the eventual passage of the Federal Reserve Act in 1913 was only one step, though the crucial one, in the long struggle to give the United States a modern banking system with the powers of crisis-prevention that we now take for granted. Many of the peculiarities of the Federal Reserve that intrigue people - its quasi-public/private structure, its dispersion into regional banks, its insulation from direct public accountability, its somewhat circuitous control over the money supply, the fact that dollar bills say "Federal Reserve Note" instead of "U.S. Government note" - are less the product of deliberate conspiracies than the many rounds of bitter negotiations and painful compromises it took to get a bill through Congress during an unusually turbulent period in American governance.

The Progressive Era's expansion on the powers of the federal government is under-appreciated today, maybe because the similar expansions in the Civil War/Reconstruction and the New Deal are easier to explain to high schoolers. It's easy to see why the federal government would assume new responsibilities when during a civil war or economic calamity, less easy when the catalyst is monetary and administrative structural reform. However, you can't understand the Federal Reserve without understanding something about where its progenitors were coming from. Senators like Nelson Aldrich (patrician Rhode Islander, a pawn of Big Sugar), Carter Glass (conservative Virginian, of later Glass-Steagall fame), and Latham Owen (populist Oklahoman) had their own motives for pursuing reform, but in trying to draft a passable bill, each had to face some tough political questions:

- Ordinary people might not like a government bank because it's the government, unless they're farmers, who will love it, but banks will hate it because it's competition - what should its powers be?
- Conservatives want Federal Reserve directors appointed by bankers, but Progressives want them appointed by the President - what's the best way to balance independence with accountability?
- Many people hate the idea of a single central bank, but splitting it into several regional banks (as many as 20 in some drafts) could be dangerous in a crisis, and that still leaves no direct involvement by states themselves - how should it be structured?
- Notes issued by the federal government directly and backed by "full faith and credit" would involve the least corporate control, but notes issued by the Federal Reserve and backed by member banks reserves would quiet inflation worries - what legal status should money issued by this bank have?
- The original plan was outlined by Senator Aldrich, a backer of the hated tariff and a notorious tool of the sugar trust in his home state, as well as Paul Warburg, a foreign banker - can the people trust anything about it?
- And what would the creation of a central bank imply about other important issues of the day, such as the gold standard vs free coinage of silver, or about high tariffs?

Unfortunately, all of these touchy questions were debated in an unusually turbulent political environment. The election of 1912 featured a three-way race between incumbent Republican William Howard Taft, Democrat Woodrow Wilson, and Progressive Theodore Roosevelt, whose friendship with Taft was ended by Roosevelt's disappointment at his conservativism. The election exposed the limitations of the two-party system to accommodate all of the different disputes at play: the ideological battle of conservatism vs populism vs progressivism, the economic struggle of bankers vs farmers vs merchants, and the regional arguments of Northeast vs South vs West. And in many ways, the victorious Democrats might have been the last party you'd expect to lead a successful banking reform initiative, not only because their base of support in the South was hostile, but also because notorious anti-banker and perennial candidate William Jennings Bryan became Secretary of State in the Wilson administration. Yet Wilson, whose background as a Princeton professor included political science and public administration, was convinced that America needed a legitimate central bank.

While the later part of the book can seem tedious unless you're interested in the minutiae of historical lobbying efforts, Lowenstein highlights Wilson's direct involvement as a major factor in getting the bill passed. It's a fascinating counter-example to many other instances of successful reform, such as Barack Obama's more hands-off approach to the Affordable Care Act, but is more in line with other historical examples such as LBJ and the Great Society legislation. While some of Wilson's other initiatives such as the League of Nations failed despite him ruining his health over it, his shepherding of the bill in this instance made the difference. The legislative horse-trading also makes you appreciate the fine line between pandering to special interests and speaking up for forgotten voices - there's no logical reason for the Fed's 12 branches as opposed to 11 or 13, but sometimes you have to buy some votes, and the true alternative to a flawed bill isn't a better bill, but no bill at all. The Federal Reserve's mandate would be enlarged and expanded by successive bills, but the foundation was finally set.

The Federal Reserve has not always done a great job, as even its staunchest supporters would recognize. Whether you buy Milton Friedman's theory in A Monetary History of the United States that the severity of Great Depression was the Fed's fault or not, it's indisputable that its twin missions of price stability and full employment have been heavy burdens, and its responsibilities have only increased over time. Many people would like to get rid of it entirely, and technology has produced possible alternatives like bitcoins that seem worthy of exploration. Certainly there's a debate to be had over the proper method of ensuring accountability for individuals who wield such dangerous power. However, you can dislike how something is run without wanting to blow it up entirely, and contemporary accounts like Neil Irwin's The Alchemists suggest that for all its flaws, the Fed is about the best institution you could expect, given its history, its mission, and the political and social constraints that it operates under. Seeing the messy story of its origin, recounted by Lowenstein with his typical skill and diligence, reminds us that the American political system is designed to produce compromise, not perfection. Ultimately we get the Federal Reserve we deserve. show less

I’m not a big fan of non fiction, but I heard Lowenstein interviewed on NPR and found what he had to say quite interesting so I tried his book in which he outlines the influence of economic strategies on the progress and outcome of the Civil War. I found it fascinating. Well written, Lowenstein took what could have been a dry subject and kept my interest throughout. He explained some complex subjects in a way that made them easily understood. It is all here…the role of the central show more government, the differences between what is tolerated in the north and the south, finances, services, taxation. I gained more insight into not only the Civil War era, but also into some of our politics today.

Thanks to NetGalley and Penguinpress for the DRC show less

The main story here runs 1993 to 1998, from the start of LTCM to its collapse. There are lots of bits and pieces to the story. There is the arrogant confidence of the partners. There's how they bamboozled big bucks from investors. There's the backdrop of the ups and downs of Asia, Russia, etc., bonds and spreads and currencies and equities going up and down. This is a pretty short book that runs through the basics but doesn't drill down too deep anywhere.

The book does quite a good job of show more explaining to those not in the know about various financial bits and pieces. The star of the show is the Black-Scholes pricing for options. Lowenstein explains how this is based on random walks and Gaussian distributions. The whole LTCM business was based on crazy complex mathematical games. Lowenstein unpacks the games quite well.

My biggest complaint here is the way he diagnoses the errors of LTCM. I would point out three levels of mismatch between the efficient market hypothesis and reality. The most basic is the prevalence of fat tailed distributions in the place of Gaussian distributions. The next level is that the market is dominated by human behavior with all its wildness, e.g. folks getting swept up in whatever panic or enthusiasm of the day. The third level is that reality always stretches past any mathematical model. Lowenstein mentions all three of these problems, but he seemed to scramble them a bit. Fat tailed distributions can be modeled mathematically with wonderful precision - of course, there are many such distributions, but one can accumulate a shelf-full of books about them (trust me on this!) Even human behavior is not utterly impossible to model mathematically. No doubt even the breaking of waves on a rocky shore is going to exceed precise mathematics, and human behavior much more so. But if I were building models to support risk management on large portfolios, I'd be building fat tailed models that incorporate models of human behavior... and still leaving room for those frontiers of reality that exceed models. One method for addressing those frontiers is to work with multiple scenarios and with multiple models.

The copyright of the book says 2000. I'd say the copy got finalized in the early months of 2000. It'd be interesting to get another look at LTCM from the perspective of the 2000 crash, and especially of the 2008 crash. What's around the corner now, one is inspired to wonder! show less