Crisis Economics: A Crash Course in the Future of Finance

Quick Thoughts:

1. This was a tough book for me to get through.  I'm not sure if the subject is getting stale, the book was stale, or if I was just too sleepy for reading this book on the train in the morning (Tough week).  I think the latter may have had much to do with my sentiments, because my reading in the afternoon was much more fun.
2. The authors do a great job of going step-by-step through the recent crisis.  They show how large the unregulated shadow banking system had become.  They combine this with their deep knowledge of economic history and the steps which occur during any financial meltdown.  It is notable that Nouriel Roubini, one of the authors, is widely known for sounding warnings of the potential crisis well before the meltdown.
3. I really enjoyed the section in the book when they go through what different major economists believe needs to happen during a crisis.  They do a good job of showing the problems that both liberal and conservative economists run into if their theories are carried through to their conclusions.  In the crisis that just occurred, our government played rescue and threw lifelines to all banks in order to save the financial system and the economy.  This has created huge problems in terms of moral hazard.  Banks now know they can take on extremely large and irresponsible risks and get a bailout from the government.  On the other hand, the middle of an economic meltdown isn't exactly a great time to allow entities to fail due to all the linkages in the financial system.  Letting AIG fail would have damaged far more than just AIG.
4. After reading this book, I'm very interested in how the authors feel about the financial reform bill that just passed.  They had a number of suggestions for how to reform our system, and from my reading some of these ideas were taken on by congress.  My instinct is that the authors will feel that the reforms did not go far enough and will result in another crisis.  These guys are regarded as pessimists, so I can't imagine that they will be very encouraged by a political settlement.
5. I enjoyed the outlook section of the book at the end where they go region-by-region and issue-by-issue and discuss potential threat and opportunities.  They are extremely concerned with the US current account deficit.  They are certain that it is unsustainable and will end badly even if we take their suggested mitigating steps. 
6. I will say that the book is very clear.  The authors make economic concepts intuitive for the reader.  Given my level of exhaustion last week, I should picked a different book for the morning.  However, I will say that the authors have me thinking about reading some of the more conservative economists (Like Hayek), so I can better understand the moral hazard issue.

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Simply Complexity: A Clear Guide to Complexity Theory

Quick Thoughts

1. I didn't really care for this book.  The good moments were outweighed by several, "So what?" moments.
2. That said, the author did a good job of getting me to understand that there is a mathematical framework for understand complexity.  When you think complexity, he wants you to think stock markets, traffic jams, biological processes, and other areas of life where many 'particles' act in a self interested manner and are greatly influenced by the structure of their surroundings and their interaction with other 'particles'.  A complex system can have outcomes that appear random but can be modeled.
3. I felt like the mathematical tools and models he was describing were probably outstanding for video game simulations.  Like controlling the way that traffic appears in games like SimCity.  But, I wasn't sure that they ever could be more than just one of many tools in predicting real life outcomes.  My impression was that the author believed studying complexity was the most important way to predict real life outcomes.
4. I was reminded of the idea that you shouldn't trust your models too much (See The Black Swan).  Just because you can develop a framework that can imitate certain incidences, doesn't mean that the framework is entirely accurate.  If you are driving and the map says to take a left to get on the highway, but the road is closed, you don't take a left.  Real life intrudes on models all the time and makes their predictive value less than expected.  I think that the author was in love with his mathematical models.  I got the impression that if real life started acting in way that was inconsistent with the model, then this author might instinctual say that real life was wrong and we should keep using the model because life will get back to normal.  I think that he'd get over these instincts, as he is a man of science.  But, once again, you shouldn't trust your models too much.
5. I was particularly annoyed by a chapter on the stock market where he claimed that by using complexity theory, a person could develop a system that would make a lot of money on the market.  I call this kind of thinking using a system.  Often using a system works for long time, until it doesn't anymore.  And then the people who used the system end up way, way, way behind (See LTCM).
6. I was also fairly annoyed at his decision to spend the final pages of the book going through quantum mechanics.  I could very well be missing the point of this section of the book, but I had no idea how this fit into his ideas on complexity.  It seemed like an attempt to link his ideas on complexity to still another area of research.  I didn't buy it.
7. I will say that I found his discussion on treating cancer interesting.  I'm not sure if the medical profession is using his ideas, which basically consist of diverting resources away from cancerous cells, but if they are and it works then it's good to see that these models can and do have real world applications.

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Irrational Exuberance

Quick Thoughts:

1. This is an older book, originally issued in 2000, updated and re-issued in 2005, and then re-issued with no substantial update in 2009.  The timing for the 2000 and 2005 releases is pretty incredible given that the book is basically about stock market/housing bubbles.  He warns that the markets are significantly over-valued.  And he was right.
2. What's really interesting about this book is how the author blends work on behavioral economics with finance.  Students of finance are always introduced to the Efficient Market theory which is basically the idea that investors are rational and will make rational plays in the market.  Frankly, its a core assumption for much of the hard mathematical work of finance.  So this book takes finance and blends it with the core assumption of behavioral economics that people will behave irrationally.
3. So you can guess where this going.  Financial markets can and will behave irrationally.  The author is pretty clear that we can't know the exact reasons for the creation of "bubbles", certainly not with mathematical precision.  But, he does make it clear that certain behaviors repeated over and over again, make it a certainty that markets will become over-valued.  He adds that once its realized by enough people, watch out below.
4. The book does a good job of chronicling historical market run-ups and how they are treated by the greater investing public and the press.  He also takes studies in behavioral economics and uses them to illustrate specific irrational aspects of market history.  Then he has his own studies which he cites that very convincingly demolish the idea that financial market participants are fully rational in their trades.
5. The book is definitely on the dry side.  I'm lucky to be reading it on a commute with no significant distractions.  I wouldn't make this beach reading.  That said, I think the book's points are well taken and I'd definitely recommend it to anybody who is playing the investment game.  His thoughts are excellent and should make you ask key questions about your investment strategy.  It will also help to make you more aware of the forces in the overall market that can really damage your portfolio.

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The Black Swan: Second Edition: The Impact of the Highly Improbable: With a new section: "On Robustness and Fragility" (Paperback)

Quick Thoughts:

1. This book felt LONG.
2. The main idea in the book, that the bell curve is misleading and its reliance by all types of social scientists (economists, psychologists, financial experts) whom we rely upon, has left us more prone to improbable events that will definitely occur, is well stated.  The first half of the book is a good read just to get the author's insights.
3. At first, I found the author's completed disdain of journalists, historians, philosophy departments, pundits, and noble prize winners somewhat enjoyable.  He writes from a position of superiority and lets the reader in on his viewpoint.  But it got old.  By the end of the book, the author felt like a know-it-all with a large chip on his shoulder.
4. I'm not sure I can really recommend the extended version of the book that I read.  The financial crisis of 2008 got the author a lot of attention.  There is a section the original book (published in 2006) where he stated his opinion the banking system is weak and had the potential to blow-up.  And he was right.  But seriously, the additional section added in 2009,  reads like an "I told you so".  He comes across as arrogant and I found it annoying at best, condescending at worst.  Sure, he's a smart guy.  Sure, he's made a ton a money with his ideas.  Does he have to gloat so much?  Does he have to insult everybody all the time?
5. In the end, I found that his complete confidence in his own viewpoint was an overcompensation for something.  I just had no insight into what.   I believe there is a baseline insecurity here that he is covering up.
6. I'd only read this book if you wanted to experience what everybody else was talking about.  Otherwise, I'd pass.

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