Category: History
The Partnership
For the proud Sachs family, the failure of Goldman Sachs Trading Corporation became a very public humiliation. In 1932, Eddie Cantor, the popular comedian and one of forty-two thousand investors in Goldman Sachs trading Corporation, sued Goldman Sachs for one hundred million dollars while regularly including in his vaudeville routine bitter jokes about the firm. One: "They told me to buy the stock for my old age…and it worked perfectly…Within six months, I felt like a very old man!"
That is from the new Charles D. Ellis book The Partnership: The Making of Goldman Sachs. So far this book is a very good history and it has more economic and historic substance than The Snowball.
Sentences to ponder
Call it the biggest carry trade in history.
Here is more.
In case you had forgotten
SOX [Sarbanes-Oxley] was sold as the way to prevent future market bubbles and crashes.
That’s Larry Ribstein reminding us. And here is Arnold Kling reminding us:
A Central Banker should stand up to fear-mongering. Even when it comes from a Treasury Secretary.
And here is Robin Hanson reminding us of his favorite lessons:
Medicine isn’t about Health
Consulting isn’t about Advice
School isn’t about Learning
Research isn’t about Progress
Politics isn’t about Policy
How big was the Nazi premium?
Every now and then I like to post about history:
Firms connected with the Nazi party outperformed unaffiliated firms
massively. Their share prices rose by 7.2% between January and March
1933 (43% annualised), compared to 0.2% (1.2% annualised) for
unaffiliated firms. The politically induced change was equivalent to
5.8% of total market capitalisation. This is a high number by
international standards. Johnson and Mitton (2003) estimate that
revaluation of political connections in Malaysia during the East Asian
crisis wiped 5.8% of share values. While comparable in magnitude, it
took 12 months for this change to occur.
Here is more, interesting throughout.
Glass Steagall: The Real History
Many wise people are now recognizing that the repeal of Glass-Steagall was one of the few saving graces of the current crisis. Let’s thank President Clinton (and Phil Gramm) for that wise bit of deregulation. The following potted history of the law, however, is all too typical:
Glass-Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Crudely speaking, in the 1920s commercial banks (the types that took deposits, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and trading stocks. When the bubble popped in 1929, exposure to Wall Street helped drag down the commercial banks….The policy response was to erect a wall between investment banking and commercial banking.
Given a history like this people wonder how repealing the law could have been a good thing. But a significant academic literature has investigated these claims and rejected them. Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates. Randall Kroszner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks. A powerful book by George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham. My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor). Finally, my own work (pdf) unearthed the real reasons for the separation in a titanic battle between the Morgans and Rockefellers.
Thus, the history of banking before Glass-Steagall and now our recent experience after is consistent, generally speaking unified banking is safer and repeal was a good idea.
Did the Gramm-Leach-Bliley Act cause the housing bubble?
No. That is one common myth among the progressive left. Because it involves financial deregulation and the unpopular Phil Gramm, the Act is vilified and assumed to be part of a broader chain of evil events. Here are some of the articles which promulgate the myth that the Act caused or helped cause the housing bubble. One version of the claim originates with Robert Kuttner, but if you read his article (and the others) you’ll see there’s not much to the charge. Kuttner doesn’t do more than paint the Act as part of the general trend of allowing financial conflicts of interest.
Most of all, the Act enabled financial diversification and thus it paved the way for a number of mergers. Citigroup became what it is today, for instance, because of the Act. Add Shearson and Primerica to the list. So far in the crisis times the diversification has done considerably more good than harm. Most importantly, GLB made it possible for JP Morgan to buy Bear Stearns
and for Bank of America to buy Merrill Lynch. It’s why Wachovia can consider a bid for Morgan Stanley. Wince all you want, but the reality is that we all owe a big thanks to Phil Gramm and others for pushing this legislation. Brad DeLong recognizes this and hail to him. Megan McArdle also exonerates the repeal of Glass-Steagall.
Here is a good critique of GLB, on the grounds that it may extend "too big to fail" to too many institutions. That may yet happen but not so far.
The Act had other provisions concerning financial privacy.
Maybe you can blame some conflict of interest problems at Citigroup and Smith Barney on the Act. But again that’s not the mortgage crisis or the housing bubble and furthermore those problems have been minor in scale. Ex-worker has a very sensible comment. The most irresponsible financial firms were not, in general, owned by commercial banks. Here’s lots of informed detail on GLB and the bank failure process. Here is another good article on how GLB didn’t actually change Glass-Steagall that much.
Here’s a Paul Krugman post on GLB; he attacks Phil Gramm but he doesn’t explain the mechanism by which GLB did so much harm. The linked article has no punch on this score either, although you will learn that Barack Obama has scapegoated GLB, again without a good story much less a true story.
I may soon cover the Commodity Futures Modernization Act as well.
…are doomed to repeat it
Systemic risk can render drastic action necessary. But what about the prospects for the long term? Will they truly look up? David Leonhardt writes:
The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.
Barry Ritholtz – who runs an equity research firm in New York and
writes The Big Picture, one of the best-read economics blogs – is going
to publish a book soon making the case that the bailout actually helped
cause the decline. The book is called, “Bailout Nation.” In it, Mr.
Ritholtz sketches out an intriguing alternative history of Chrysler and
Detroit.If Chrysler had collapsed, he argues, vulture investors
might have swooped in and reconstituted the company as a smaller
automaker less tied to the failed strategies of Detroit’s Big Three and
their unions.…Speaking of which, Detroit’s Big Three have come back to Capitol Hill
lately, lobbying for billions of dollars in handouts. This time, their
executives insist, they’ll use the money to solve their problems.
Alaskan state politics, circa 1976
"You were against statehood?"
"Oh, sure. Oh, sure. Before then, three-quarters of the people here weren’t here. Eight or nine hundred people ran the Territory. Ten thousand now run the state. Where it used to take one person to investigate you, it now takes two to four. The state spends too much. If a tree blows down, two guys from the state come with a chain saw. The state has sold the state out. To the unions. To the oil companies. The oil companies have more power than the legislature. The capital move [away from Juneau] is a lot of talk. That’s all it is, a lot of talk. What we need is not a new capital but better legislators than we have. I’d say leave the capital where it’s at. The state can’t afford it. There is no economy. They’re dreaming about all this oil money.
That is from John McPhee’s excellent Coming into the Country, a study of Alaska recommended to me by several MR readers. Here is a short 2002 piece on switching the capital of Alaska and the oddity of putting it in Juneau. Here is a useful map. Here is a picture of Juneau and from the air. Googling "Juneau traffic report" does not in fact bring up any traffic reports.
Good Money
At the dawn of the industrial revolution as workers left the fields and moved to industrial employment the demand for a means of payment increased dramatically. Workers, once paid in kind, needed to be paid in a medium they could use to buy the necessities of life. Small-tender bank notes, however, were illegal and in Great Britain the production of coin was monopolized by the Royal Mint which failed to provide enough high quality coin to meet the demands of workers and business. Silver coin, despite the efforts of Sir Isaac Newton, was overvalued and fled the country. Gold was too expensive to make coins suitable for workingmen and the Mint could not or would not produce high-quality copper coins.
Good Money is George Selgin’s explanation of how enterprising button makers solved what Sargent and Velde called The Big Problem of Small Change thereby making the industrial revolution possible. Selgin is a monetary theorist so you might expect a dry account of monetary history but the mint-battle between Matthew Boulton, whom Wired once named the ultimate CEO, and copper-king Thomas Williams propels the story forward. If you can imagine, Good Money is something of a cross between Friedman and Schwartz’s A Monetary History of the United States (although not as broad in scope) and a business epic like Barbarians at the Gate. I also liked how Selgin draws on newspapers, novels, limericks and tavern songs to illustrate the problems and events of the time. This bard was both a good economist (he has Gresham’s Law!) and public choice scholar.
‘Tis Gold buys Votes, or they’d have swarmed ere now,
Copper serves only for the meaner Sort of People
Copper never goes at Court
And since on Shilling can full Twelve Pence weight,
Silver is better in Germany
‘Tis true the Vulgar seek it, What of that?
They are not Statesmen,-let the Vulgar wait.
The money problem influenced and was influenced by all of the major events of the day so Good Money is also an economic and political history of the industrial revolution. Here’s an interesting tidbit. Company stores were not so much a way for firms to rip off employees (why not just pay them less?) but were rather a means of economizing on coin. Selgin shows how the shortage of coin sheds light on a number of other otherwise peculiar business practices.
What lessons can be drawn from the history of private coinage? Private money circulated only if it was voluntarily accepted as a means payment. Thus the primary problem faced by private firms was how to create trust and credibility. To encourage circulation, for example, issuers promised to redeem their tokens in gold (which the Royal Mint did not). In turn, the promise to redeem gave producers an incentive to make their coins difficult to counterfeit, which they did by making the coins beautiful – numismatists will appreciate the full-color illustrations of the private coinage produced by Boulton and his rivals – as well as technologically advanced.
Today, the big problem of small change is no longer such a big problem, although shortages of wanted coin continue to occur sporadically around the world (e.g. here and here) as well as surpluses of unwanted coin. Nevertheless, the basic problems of private coinage were trust and credibility. Modern issuers of digital cash face the same problems and thus Selgin’s history is a valuable reminder about the scope and potential of alternative monetary institutions.
Full Disclosure: I was enthusiastic about Good Money when I read it in manuscript which is why it is published by the University of Michigan Press and co-published by the Independent Institute where I am director of research (n.b. you can buy Good Money at the previous link at a small discount to the Amazon price).
Why are some countries free and others not?
I am to speak on this topic in Buenos Aires (details here) and I was considering the following threads:
1. The Catholic capitalism of the Italian Renaissance and to what extent does it refute Max Weber?
2. Facundo and Martin Fierro, or where Domingo Sarmiento and Steve Sailer go wrong.
3. Why didn’t either the gauchos or the conquest of Siberia lead to the Turner thesis?
4. Why the old buildings in Oamaru, New Zealand remind me of Chile and what that means for the current Latin economic pecking order.
5. What does the pre-war Japanese growth miracle tell us about the postwar Japanese growth miracle?
6. "Betting on refrigerated transport" as a theme in Argentine history.
Or maybe I’ll do something else altogether.
They tell me that dress for the event is "elegant casual." Yikes! This, of course, leads to classic cycling in the sense outlined by William Riker. Since I cannot be elegant (certainly not by B.A. standards), I cannot be casual either.
The talk should eventually show up in print, although possibly only in Spanish in Argentina. I’ll get you a link if there ever is one.
Who first predicted the mortgage crisis?
The Mortgager and Mortgagee differ the one from the other not more in length of purse, than the Jester and Jestee do in that of memory. But in this the comparison between runs, as the scholiasts call it, upon all four; which, by the bye, is upon one or two legs more than some of the best of Homer’s can pretend to; — namely, That the one raises a sum and the other a laugh at your expense, and think no more about it. Interest, however, still runs on in both cases; — the periodical or accidental payments of it just serving to keep the memory of the affair alive; till, at length, in some evil hour, — pop comes the creditor upon each, and by demanding principal upon the spot, together with full interest to the very day, makes them both feel the full extent of their obligations.
That is Laurence Sterne, from Tristram Shandy, chapter XII.
Sebastian Flyte rules
Re XII ‘there is a groupie for every male endeavour’
THIS IS SO MONEY. It is one of the great triumphs of modern
capitalism: let a thousand status hierarchies bloom! Unlike in hunter
gatherer days, there isn’t one status hierarchy to climb and that’s
that, there are endless hierarchies to climb, endless things to
specialise in. Roissy’s good buddy, the economist Tyler Cowen, has been
pushing this idea for a while now, and the effect this has on human
happiness and potential is mind-boggling. Guys can rise to the top of
whatever work/hobby hierarchies there are, or at least portray to women
that yes, he is in THE PROCESS of climbing to the top. There are
obvious caveats: females aren’t impressed by computer game related
status, even
though leading 30 guys from around the globe in World of Warcraft to
quickly and efficiently take down an enemy is actually an impressive
accomplishment – I think this will change in the future. But for
now, I’ll bet the college ultimate frisbee champ gets some pretty good
action.
Here is Sebastian’s blog.
The Liberal Hour
The authors are G. Calvin Mackenzie and Robert Weisbrot and the subtitle is Washington and the Politics of Change in the 1960s. Everyone interested in social change, or for that matter American political history, should read this book. It doesn’t unearth new material but it is a good summary of what is known. The jacket flap sums it up:
For a brief period in the 1960s, more progressive legislation was passed in Congress than in almost any other era in American history. Demands that had lingered for decades on the political agenda finally entered the realm of possibility. Reform has seldom come with such speed, such sweep, and such consequence. What drove this political sea change?…[the authors] argue that the primary force behind it was not the counterculture, but those in the traditional seats of power.
If you study the history portrayed in this book, you are more likely to believe that an Obama victory would not bring radical change to American economic policy. It’s hard to find the comparable "shock troops" in Washington right now.
Medieval cities: Europe vs. the Arabic world
Cities in the Arab world were on average much larger than those in
Europe, and the size of the “primate” city – the megapolis such as
Baghdad, Damascus, Cairo or Istanbul – was much bigger; a fact that is
indicative of a predatory state and low trade openness.
Europe, on the other hand, developed a very dense urban system, with
relatively small principle cities. Big cities in Europe were quite
often located near the sea, being able to optimally profit from
long-distance trade, whereas the largest cities in the Arab world were
almost all inland.The sociologist Max Weber introduced a distinction between ‘consumer
cities’ and ‘producer cities’. Using this classification, Arab cities
were – much more than their European counterparts – consumer cities.The classical consumer city is a centre of government and military
protection or occupation, which supplies services – administration,
protection – in return for taxes, land rent and non-market
transactions. Such cities are intimately linked to the state in which
they are embedded. The flowering of the state and the expansion of its
territory and population tend to produce urban growth, in particular
that of the capital city.In Europe cities are instead much closer to being producer cities.
The primary basis of the producer city is the production and exchange
of goods and commercial services with the city’s hinterland and other
cities. The links that such cities have with the state are typically
much weaker since the cities have their own economic bases. It is this
aspect that accounts for the fact that Arab cities suffered heavily
with the breakdown of the Abbasid Empire, while European cities
continued to flourish despite political turmoil.
Between 1000 and 1300 Europe acquired an urban system dominated by
typical producer cities, which prospered in spite of Europe’s political
fragmentation. In fact, this fragmentation was strongly enhanced by the
rise of independent communes – city-states, or cities with a large
degree of local authority – which form the core of the political system
of Europe’s urban belt stretching from Northern Italy to the Low
Countries. Indeed, we still find this pattern in the so-called ‘Hot
Banana’ – the industrial agglomeration that stretches from the southern
UK to the Netherlands, through Germany and down to northern Italy.
Here is the full article.
The history of America since 1980
Brad DeLong spells it out:
- The end of the Cold War
- Other winner-take-all factors that have, in combination with
education, pushed American income polarization back to Gilded Age
levels. - The failure of American taxpayers to support their state and local
governments in expanding funding for public education–and the impact
of reduced public education effort in sharpening the distinction
between rich and poor. - The computer revolution in productivity growth.
- The rise of China (and soon, we hope, India) as industrial powers.
- The extraordinary social liberalization of America–if you had told
any Republican in 1980 that 2008 would see (a) a Negro with an
Arabic-Swahili name beating a veteran fighter pilot in the presidential
polls and (b) gay marriage as the big cultural issue of the day, said
Republican would have blown several gaskets. And if you had said that
this would have been the result of an "Age of Reagan" said Republican
would have melted down completely.
I’m mostly on board (and read the broader post) but, in addition to mentioning Latinos, I’ll suggest two revisions. First, on #3 I doubt if the stagnation of American lower education is the result of insufficient dollars. It is notoriously difficult to find a convincing link between educational expenditures and educational quality and I don’t think that is econometric problems. On #6 I never saw most of the Reagan Republicans as especially prudish or socially conservative; that was just a lie told to one of the interest groups attending the party. Revolution in the Head — which is oddly enough a social history of the Beatles — is especially good on the connection between 1960s morals and the Reagan Revolution.