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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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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Bursts: The Hidden Pattern Behind Everything We Do

Quick Thoughts:

1. This is a quick and entertaining read.
2. The author seems to believe that people are on the cusp of being extremely predictable.  In some ways, he continues the the same assault on bell curves that was in 'The Black Swan'.  He believes that we function by way of 'power rules' which basically mean that we do things in bursts (Hence the title of the book).
3. I felt that the author was getting ahead of himself.  The best evidence in the book came from his research into cell phone records.  His team used them to see where people are when they make calls and found that they could predict (with an accuracy between 80% and 95%) where the person would be next.
4. That sounds pretty impressive, and the author goes on to suggest all the positive/negative things people/companies/governments could do with this information.  
5. This seems about as accurate as predicting the weather.  It really breaks down if you try to carry the prediction out over time.  If patterns were static this kind of information would be very powerful.  But patterns change all the time.  People move, have kids, change jobs, meet new people, etc...  Any of these life events can significantly change our movement patterns and completely screw up somebody's algorithm for predicting where people will be.  Also, is 80% predictable a good algorithm?  I think we're farther away from making good predictions than the author believes.
6. I feel like the author confirmed, with data, what police detectives have known for awhile.  If you follow a person, chances are they will go to the same places, on the same days, at the same times.  If want to know where they will be, look at their history.
7. The author blends the history of a failed crusade that resulted in lots of bloodshed.  I'm not convinced that it helped his overall points about our predictability.  I found the history lesson entertaining and a nice break from his research presentation.  I kept hoping he would find some brilliant way to connect the two themes of his book (The history lesson with the research presentation).  If he did, then I missed it.

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