Sadly, Panic: The Betrayal Of Capitalism By Wall Street And Washington does not appear to be in print any longer. Luckily, I found a good used copy on Amazon and will cherish its now-secret message all the more.
As I read through this book several months ago, instead of summarizing my thoughts I just want to record a few key ideas and quotes for later reference.
In any modern state the government will always be the banks’ biggest client and therefore will always make most of the rules, even if it pretends not to.
The ideologues of modern finance offered to make any fool rich if only he renounced the first obligation of the capitalist, the burden of judgment.
This process of confronting uncertainty and successfully resolving it usually by dint of hard work, diligent analysis, and sound judgment is the only source of what many economists have called “entrepreneurial profit” or sometimes “true profit”.
Underpinning the ideology of modern finance is the notion that the insight, judgment and even diligence of the entrepreneur are irrelevant for investing in public securities markets. These markets, we are told, are special, too powerful and too perfect to allow any entrepreneur’s judgment to matter.
If the ideology of modern finance had a motto, it might be “thinking doesn’t work.”
Capitalism demands free markets because it needs free minds.
The bureaucrat of capital dreams of a world in which failure is impossible.
Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men.
“New Risks in Old Bottles”
The great mission of modern investment theory is to replace all idiosyncratic risk with systemic risk.
The primary skill for finance, under this theory, becomes diversification, which becomes an advanced statistical methodology for making sure a relatively small number of securities accurately represents a much larger class of securities.
If I know nothing, my need for diversification is infinite.
All investment is reduced to insurance.
Ignorance is the father of panic.
“The Misinformation Economy”
One way to think about panic is as a general, nonspecific response to a poorly understood particular and specific problem.
“To build a perfect model of the universe would require all the matter and energy in the universe, because the only perfect model, the only model that shed no information and made no compromises in order to achieve its object, would be the universe itself.”
The mortgage meltdown can be understood as an instance of model failure.
information is differentiation; information is what comes as a surprise against the background of knowledge already possessed.
If uncertainty and risk are nearly synonyms. then information and risk are nearly opposites.
It is not particularly unusual for all thirty stocks in the Dow to go up and down at the same time; that rarely happened when market participants were interested in the value of individual companies.
“The Reign of Risk”
Modern portfolio theory was a late bloom of the great eighteenth and nineteenth century impulse to explain human society by mechanical or “scientific” principles as regular as those of classical physics.
If economics were about entrepreneurship, it would not look like physics. It would look a little like philosophy. Mostly it would look like literature. [The Lion’s note: if you ascribe to the Austrian school, it does!]
To treat investment as a quantitative exercise relying on the efficiency of markets and advanced mathematics to eliminate the hazards of human judgment. [the ambition of investors under Modern Portfolio Theory]
MPT created a field for which PhDs could be granted and journal articles published. Before MPT, investment theory had been mere reflection upon experience, a wisdom literature dominated by amateurs like Benjamin Graham.
[MPT…] can be deeply attractive to those trying to support capitalist lifestyles with only bureaucratic talents.
The most important question any investor can ask: For what are investors paid? MPT’s answer: For accepting risk.
risk is not the foundation of profit but its most dreaded enemy.
The modern theory conceptually severed financial markets from the rest of the economy. [My note, ” Macro is to Micro as Financial is to Real”]
“The Romance of Risk”
Men and societies become richer precisely as they employ insight, skill and experience, effort and discipline to reduce risk.
Investors are paid for being right, not for the possibility of being wrong.
In life, men who make one good judgment tend to make more good judgments; men who make one bad judgment tend to make more bad ones.
the most important but the most difficult-to-identify ability in business management (or investment) is the ability to judge other men’s ability to judge. [meta-judgment]
“Zoom, Zoom, Zoom”
What modern capital markets do very well is raise large amounts of capital from a broad base of investors who are persuaded to give their money to perfect strangers with precious little idea of what those fortunate recipients are going to do with it. [And, I’d add, little control or legal right to have any say in such decisions; “crowd-sourcing”]
different markets make different trade-offs between liquidity and price discovery one one hand and confidence about value on the other.
Public equity investors demand liquidity in large part because they are unsure about value.
Humor is surprise
It is reasonable to call markets better or worse depending on how much surprise they can absorb before convulsing in dramatic disequilibrium
Lacking a more substantial basis on which to make decisions, financial markets set prices to an astonishing extent by watching– prices!
The most dramatic resolution of this conflict is to eliminate most of the shareholders altogether by taking public companies private
public companies have no owners
Companies, like most assets, do better with strong owners than weak owners.
When New Dealers tried to set up a banking system immune to panic, their top priority was to remove Mom-and-Pop from their role as bank police.
Here is the quickest way to determine whether you are operating in an honest capitalist system or a corrupt imitation thereof: check the bankruptcy rates.
“Things are somewhat amiss when a country’s finance minister plays bond salesman for a supposedly privately owned company.”
By this time the government had: (a) intimated that deficits in the financial sector were so large and widespread that “anyone could be next” (b) terrified private investors from making investments that might preserve the solvency of deteriorating institutions (c) assumed unprecedented responsibility for investment banks outside the Federal Reserve system and then abandoned that responsibility and (d) made clear that its policy would change on an ad hoc basis. [on the US federal government’s initial response to the financial panic of 2008]
To assume that the buying and selling of shares amounts to managing the firm is the most extreme form of efficient market worship.
“Capitalism Without Capitalists”
The term for someone who rests his economic fate on unknowable future events is not “owner” or even “investor,” but “speculator.”
the government, the biggest player and the weakest owner of all. [criticizing the present ownership of major banks]
Another great review of this book was posted by “CP” at CreditBubbleStocks.com.
And after reading this book, I was inspired to purchase Frank Knight’s Risk, Uncertainty and Profit for my library for further study.