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ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism
ECONned examines the unquestioned role of economists as policy-makers, and how they helped create an unmitigated economic disaster.
Why are we in such a financial mess today? There are lots of proximate over-leverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.
Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.
In eConned, author Yves Smith
--why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery
--how economists have come to play a profoundly anti-democratic role in policy
--how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors
--how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers
--how financial deregulation enabled predatory behavior by Wall Street towards investors
--how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them
Why are we in such a financial mess today? There are lots of proximate over-leverage, global imbalances, bad financial technology that lead to widespread underestimation of risk. But these are all symptoms. Until we isolate and tackle fundamental causes, we will fail to extirpate the disease.
Here, Yves Smith looks at how economists in key policy positions put doctrine before hard evidence, ignoring the deteriorating conditions and rising dangers that eventually led them, and us, off the cliff and into financial meltdown. Intelligently written for the layman, Smith takes us on a terrifying investigation of the financial realm over the last twenty-five years of misrepresentations, naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability.
In eConned, author Yves Smith
--why the measures taken by the Obama Administration are mere palliatives and are unlikely to pave the way for a solid recovery
--how economists have come to play a profoundly anti-democratic role in policy
--how financial models and concepts that were discredited more than thirty years ago are still widely used by banks, regulators, and investors
--how management and employees of major financial firms looted them, enriching themselves and leaving the mess to taxpayers
--how financial deregulation enabled predatory behavior by Wall Street towards investors
--how economics has no theory of financial systems, yet economists fearlessly prescribe how to manage them
368 pages, Paperback
First published January 1, 2010
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2065 people want to read
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Displaying 1 - 30 of 44 reviews
February 10, 2011
What strange beast is this? This book's original subtitle ("how the myth of free markets wrecked our economy") got a last-minute change to this fluffery about "unenlightened self-interest" -- an obvious turnaround from what could have been a radical critique. She really does posit that free markets are a myth -- very persuasively -- but you have to wade out to page 154, after lots of finance-industry shop talk, to find it. Elsewhere I get alternately entranced and cross-eyed.
This reads like the strangest jumble of blog posts and lengthy essays, heavily edited and shuffled around and -- hell I detect actual disruptive deletions of text (particularly concerning Beloit Mandelbrot's financial theories), often signaled by this odd five-dot section break that looks like an ellipsis. Her themes and arguments seem to get transposed and reversed like three-card monte, jumping from the necessity of state regulation to the nutzoid math that came out of financial theorists to the shadow banking industry. All very righteous and true, but, hold on, I'm just a bit dizzy and bored...
Yves is a necessary countervailing force in her penetrating critique of neoclassical economics (as well as their successor quants using arcane mathematics to mind-meld with the market). But this book, I am very sorry to say, is the product of much obvious meddling, "collaboration", and possibly an unfair publishing deadline. Even at the end, when she unveils her list of righteous reforms, we get this among them: "Improving capital buffers of regulated institutions, without restricting leverage-on-leverage mechanisms, would be unproductive." Whatever that really means, the "would be unproductive" at the bullet point's end reeks of ridiculous editing. So it's often an incoherent snoozefest, and you gotta put your ear to the ground sometimes to hear when Yves is making one of her trademark seismic arguments.
This reads like the strangest jumble of blog posts and lengthy essays, heavily edited and shuffled around and -- hell I detect actual disruptive deletions of text (particularly concerning Beloit Mandelbrot's financial theories), often signaled by this odd five-dot section break that looks like an ellipsis. Her themes and arguments seem to get transposed and reversed like three-card monte, jumping from the necessity of state regulation to the nutzoid math that came out of financial theorists to the shadow banking industry. All very righteous and true, but, hold on, I'm just a bit dizzy and bored...
Yves is a necessary countervailing force in her penetrating critique of neoclassical economics (as well as their successor quants using arcane mathematics to mind-meld with the market). But this book, I am very sorry to say, is the product of much obvious meddling, "collaboration", and possibly an unfair publishing deadline. Even at the end, when she unveils her list of righteous reforms, we get this among them: "Improving capital buffers of regulated institutions, without restricting leverage-on-leverage mechanisms, would be unproductive." Whatever that really means, the "would be unproductive" at the bullet point's end reeks of ridiculous editing. So it's often an incoherent snoozefest, and you gotta put your ear to the ground sometimes to hear when Yves is making one of her trademark seismic arguments.
January 28, 2011
"ECONned" is a strangely-assembled book--- a kind of mulligatawney stew of essays put together into a single volume. Yves Smith's editors need to be soundly thwacked over this. It's not that the book is bad, or that it's poorly written. It's just that the pieces of the book don't really quite fit.
Her first section is a sharp critique of economic modelling and neoclassical economics as a theory...plus a critique of economics as a profession (she doesn't think it is...or maybe can ever be...a science). Jos. Stiglitz covered a bit of the same ground in "Freefall", and a great many of Smith's points are worth considering. The theoretical chapters, though, really do need to be hived off and expanded into a separate book. The critique of economics as a discipline doesn't fit altogether well with her discussion later in the book of the finance industry in the US over the last 30 years, and deserves space on its own.
Smith's discussion of What Went Wrong in the Year Eight is excellent, and manages to hew closely to an analysis of events that may not be as Savonarola-like as Matt Taibbi, but offers up clear and crisp description of how and why the Meltdown occurred. Again, though--- she tries to do too much. A history of the finance industry and a history of 2007-09 sit next to one another, but the book lacks the space to properly flesh out each story.
I liked this book--- but I'd have liked it more as three separate books.
Her first section is a sharp critique of economic modelling and neoclassical economics as a theory...plus a critique of economics as a profession (she doesn't think it is...or maybe can ever be...a science). Jos. Stiglitz covered a bit of the same ground in "Freefall", and a great many of Smith's points are worth considering. The theoretical chapters, though, really do need to be hived off and expanded into a separate book. The critique of economics as a discipline doesn't fit altogether well with her discussion later in the book of the finance industry in the US over the last 30 years, and deserves space on its own.
Smith's discussion of What Went Wrong in the Year Eight is excellent, and manages to hew closely to an analysis of events that may not be as Savonarola-like as Matt Taibbi, but offers up clear and crisp description of how and why the Meltdown occurred. Again, though--- she tries to do too much. A history of the finance industry and a history of 2007-09 sit next to one another, but the book lacks the space to properly flesh out each story.
I liked this book--- but I'd have liked it more as three separate books.
May 21, 2010
Everyone has a villain to blame for our current economic fiasco, but as far as I know, only Yves Smith points the finger at the most obvious target: the intellectual gurus of our material world, the economists. For decades, she says, they have been preoccupied with a misguided effort to create a “science of economics”, an enterprise that has led them to focus exclusively on measurable phenomena and a simplistic model of a “free market”.
She calls it a “Potemkin science” that falls apart when confronted with a society even slightly more complex than Robinson Crusoe on his island. Worse, it provides cover for financial interests seeking to accumulate political power. The result is our wildly unstable economy characterized by corruption, looting and fraud on a grand scale.
This book gets fairly deep in the weeds regarding such things "structured finance", "synthetic CDOs", neo-classical economics and its need for "ergodicity", so it's not for the casual reader. Smith is a Harvard MBA who has worked in the financial services industry for 25 years, so she brings some credibility to her charges.
She calls it a “Potemkin science” that falls apart when confronted with a society even slightly more complex than Robinson Crusoe on his island. Worse, it provides cover for financial interests seeking to accumulate political power. The result is our wildly unstable economy characterized by corruption, looting and fraud on a grand scale.
This book gets fairly deep in the weeds regarding such things "structured finance", "synthetic CDOs", neo-classical economics and its need for "ergodicity", so it's not for the casual reader. Smith is a Harvard MBA who has worked in the financial services industry for 25 years, so she brings some credibility to her charges.
June 21, 2010
This is quite possibly one of the best books I've ever read. I've been desperately seeking a clearly written, thorough critique of neo-classical economics - the foundation of our entire modern capitalist economy. This is it.
It's a fairly well-known fact that modern economics sells itself as a "hard science" with clear, logically proven conclusions based on firm premises. Modern economics has become nearly synonymous with theoretical mathematics (without acknowledgment the "theoretical" party) adding to the illusion(delusion) that Economics is a "hard science" and not a non-quantitative exercise in the study of human behavior.
This book meticulously details the fallacy of treating economics like a hard science. It points out that economic theory have few testable hypothesis, and reveals how the entire basis of our modern economy rests on some utterly absurd premises of behavior that can be found to exist literally nowhere in nature.
The book further reveals who our modern economic theory has benefited a privileged few in the extreme, who have a vested interest in perpetuating economic theories that don't work (for the majority) for their own purposes.
This is not a conspiracy theory book. It is a clear and concrete examination of the basic premises of modern economics. Any truthful investigation into these premises will be an investigation into the absurd. As a long time industry insider, Yves Smith is a very rare person indeed. She can write about economics, Wall Street and our American markets from the perspective of a trained participant, rather than an external polemicist. It makes her evidence and arguments all the more compelling.
"In this Book, I have sought to explain to the lay reader how the widespread adoption of largely unsupported (or in some cases, disproven but nevertheless widely used) economic theories produced the financial crisis that began in 2007. Nearly all of their flaws have been described by economists and most are well known within the discipline. Yet these problems have been dismissed as inconsequential or merely inconvenient.
"The most comment retort is that economics "works," that it provides sound policy prescriptions. This book will demonstrate that this defense is patently untrue. Sweeping changes, backed only by unsupported beliefs of the neo-classical loyalists, resulted in indifference to rising levels of indebtedness, greater and greater risk taking by financial intermediaries and consumers, and more and more frequent financial crisis, finally culminating in the global debacle."
It's a fairly well-known fact that modern economics sells itself as a "hard science" with clear, logically proven conclusions based on firm premises. Modern economics has become nearly synonymous with theoretical mathematics (without acknowledgment the "theoretical" party) adding to the illusion(delusion) that Economics is a "hard science" and not a non-quantitative exercise in the study of human behavior.
This book meticulously details the fallacy of treating economics like a hard science. It points out that economic theory have few testable hypothesis, and reveals how the entire basis of our modern economy rests on some utterly absurd premises of behavior that can be found to exist literally nowhere in nature.
The book further reveals who our modern economic theory has benefited a privileged few in the extreme, who have a vested interest in perpetuating economic theories that don't work (for the majority) for their own purposes.
This is not a conspiracy theory book. It is a clear and concrete examination of the basic premises of modern economics. Any truthful investigation into these premises will be an investigation into the absurd. As a long time industry insider, Yves Smith is a very rare person indeed. She can write about economics, Wall Street and our American markets from the perspective of a trained participant, rather than an external polemicist. It makes her evidence and arguments all the more compelling.
"In this Book, I have sought to explain to the lay reader how the widespread adoption of largely unsupported (or in some cases, disproven but nevertheless widely used) economic theories produced the financial crisis that began in 2007. Nearly all of their flaws have been described by economists and most are well known within the discipline. Yet these problems have been dismissed as inconsequential or merely inconvenient.
"The most comment retort is that economics "works," that it provides sound policy prescriptions. This book will demonstrate that this defense is patently untrue. Sweeping changes, backed only by unsupported beliefs of the neo-classical loyalists, resulted in indifference to rising levels of indebtedness, greater and greater risk taking by financial intermediaries and consumers, and more and more frequent financial crisis, finally culminating in the global debacle."
June 9, 2017
Not a page-turner. But in this era of BS, a highly useful reference for going back and remembering what happened and didn't happen in the global financial meltdown of 2008.
December 6, 2020
I have read Econned several times and definitely appreciate it and the work Smith put into it. There are countless books on the 2007/8 financial crisis but Econned does something different than give a blow by blow account-- she tries to identify how such a flawed public policy regime emerged that enabled the crisis in the first place. Hence, while most books on the subject are quick to vilify (somewhat correctly IMO) various sleazy banking practices and actors, Smith goes after the people that advocated for deregulating the banking sector-- mainstream economists.
Smith takes us on a tour through the field of economics, exploring how it developed and put forth various policy proposals over the years. This might be a little heavy for non-academics, but she tries to write for the lay audience. Mainstream (neoclassical) economists were quick to take credit for 'the great moderation' of the 90s and oughts, but took no real blame for the financial crisis. The hypocrisy is staggering and Smith drives it home with aplomb.
Smith takes us on a tour through the field of economics, exploring how it developed and put forth various policy proposals over the years. This might be a little heavy for non-academics, but she tries to write for the lay audience. Mainstream (neoclassical) economists were quick to take credit for 'the great moderation' of the 90s and oughts, but took no real blame for the financial crisis. The hypocrisy is staggering and Smith drives it home with aplomb.
January 4, 2012
Information contained in the book is important for everyone to hear. If someone hasn't heard it before, there are better books out there on the financial crisis, but in the end it does an adequate job laying out the facts. My issue with it is that the presentation felt occasionally unprofessional and shallow. It was going for a casual tone, but didn't really succeed. Which was a shame because I would have liked to recommend this book more.
February 5, 2013
The only reason I didn't give this book five stars was because there were parts of it that were over my head. Note that this is not the author's fault. She does an excellent job of trying to make some exceptionally complicated content accessible to a lay reader. I understood most of the economic philosophy and political arguments. What eluded me were the intricacies of how the toxic assets were structured. I got enough to get the gist of her argument, which made sense, but I'm left wondering if I had a better grip on the subject if I could have analysed her central point more effectively.
In any case, I'm not normally one to tell anyone they "should" read a book, but this is one book I think everyone with a stake in the American economy should read.
In any case, I'm not normally one to tell anyone they "should" read a book, but this is one book I think everyone with a stake in the American economy should read.
January 11, 2016
It makes the causes of the current state of the economy clear, and doesn't pull any punches when it comes to naming those responsobley (including us, the consumer credit junkies). Failed or unproven theories were used, and neoclassical economics proved to be a complete fallacy. Yet the geniuses who drove us off a cliff just got a brand new bus to drive us to the next disaster.
January 2, 2015
It took a long time to work through all the chapters in the book, but it was well worth it. The end chapter about the currert financial crisis uses all the acronyms introduced earlier and finally explains what the whole thing was about. Well worth the time - this may be the most important book I've read in years.
March 3, 2016
This was a very good critique of neoclassical economics and the combination of stupidity and corruption that led to the Great Recession. This was one of the more complicated and technical, advanced kind of critiques I have seen and wouldn't recommend it as a first for anyone seeking to understand what happened.
May 12, 2010
This is far and away the best book I've read about the current financial crisis. Yves Smith does a great job explaining the hows and whys of financial risk-taking.
May 7, 2020
Overall a really good book on the problems with the finance industry and all the factors leading to the financial crisis of 07-08 in the United States.
It starts with a history of neoclassical economics, the shortcomings of neoclassical models, issues with assumptions, financial economics and understated risk/incorrect assumption in financial models. Really emphasizes that correlation is not permanent in the market, most models typically understate risk and the myth that the free market regulates itself. Shows that economics is much more complicated than the equations that the system is based off of and it is much closer to a soft science than a hard science. Shows how often incorrect mathematics and statistical modeling wowed the industry
Goes over in detail the metaphor of a drunk guy looking for his keys under the street light. The keys are not under the street light but it’s the only place where it’s light so that’s where he looks. Similarly, we do not have anywhere close to an adequate amount of data to build sufficient economic models, so we use the data we have, looking for the keys only where we can see regardless of if they are there or not.
Goes into detail on how the “free market” ideas were laundered through the university of Chicago through an aggressive conservative propaganda scheme (including the exporting of the ideas from the university of Chicago the Chile in the Pinochet era)
Gets into looting, the mass understatements of risk, highly leveraged undercapitalized investment firms who did not have the capital to back up their positions, runs on banks, and the various steps of deregulation in finance law that led us there.
Also discusses extensively CDO and CDS and the vast and completely unregulated shadow banking system. Gets into how financial institutions are “too big to fail” meaning they can take unnecessary risk and ultimately be bailed out by the government. Individualized profits and socialized risks.
Ultimately the book is very dense and hard to read. The book jumps around a lot and at times reads like a bunch of vaguely related blog posts. A lot of financial instruments are adequately explained however are very complicated and can require multiple reads.
It starts with a history of neoclassical economics, the shortcomings of neoclassical models, issues with assumptions, financial economics and understated risk/incorrect assumption in financial models. Really emphasizes that correlation is not permanent in the market, most models typically understate risk and the myth that the free market regulates itself. Shows that economics is much more complicated than the equations that the system is based off of and it is much closer to a soft science than a hard science. Shows how often incorrect mathematics and statistical modeling wowed the industry
Goes over in detail the metaphor of a drunk guy looking for his keys under the street light. The keys are not under the street light but it’s the only place where it’s light so that’s where he looks. Similarly, we do not have anywhere close to an adequate amount of data to build sufficient economic models, so we use the data we have, looking for the keys only where we can see regardless of if they are there or not.
Goes into detail on how the “free market” ideas were laundered through the university of Chicago through an aggressive conservative propaganda scheme (including the exporting of the ideas from the university of Chicago the Chile in the Pinochet era)
Gets into looting, the mass understatements of risk, highly leveraged undercapitalized investment firms who did not have the capital to back up their positions, runs on banks, and the various steps of deregulation in finance law that led us there.
Also discusses extensively CDO and CDS and the vast and completely unregulated shadow banking system. Gets into how financial institutions are “too big to fail” meaning they can take unnecessary risk and ultimately be bailed out by the government. Individualized profits and socialized risks.
Ultimately the book is very dense and hard to read. The book jumps around a lot and at times reads like a bunch of vaguely related blog posts. A lot of financial instruments are adequately explained however are very complicated and can require multiple reads.
July 22, 2019
As someone who has studied at prestigious bastions of the economics profession like the London School of Economics, I grew up learning many of the myths that are destructively ripped apart in this book. It takes a perspective far to rare in today's day and age and is critical of economists, how they educate students, how they refuse to integrate with the other social sciences or accept that human's don't conform well to mathematical models. On a fundamental basis this book is about misrepresentations and naive interpretations of economic conditions, rationalizations of bad outcomes, and rejection of clear signs of growing instability within the system.
I appreciated this book immensely for kick-starting my re-education.
I appreciated this book immensely for kick-starting my re-education.
October 31, 2018
I've followed Ms. Smith's Naked Capitalism blog for a while, but only recently bumbled into the fact that she wrote a book about the 2008 crash. I've picked up a decent amount of economics and some finance in my usual ADD ("Ooo, shiny") autodidactical style, but I really didn't understand as much as I thought that I did, especially about the complex "investment" instruments that were at the heart of the crisis. This excellent book lays everything out in a clear and lucid style. I think it should be mandatory reading.
July 19, 2023
I still remember vividly when the financial crisis was playing out, and watched quite closed how the administrations (and congress) handled the situation. Even then I was very disappointed with what happened. Although I thought the Obama administration did an OK job at that time, some issues still bugged me a lot, this book (along with some others) made me rethink those issues. What can I say, I had high hope that the crisis would be a pivotal point of turning away from the free market ideology (market fundamentalism), unfortunately that just didn't happen.
July 21, 2017
I was interested in reading about "how unenlightened self interest undermined democracy and corrupted capitalism", however instead I got a book only someone with a degree in Economics could understand. There were terms and other things referenced that I didn't understand, so I had to stop reading the book after a few chapters, it was really hard to get through. Maybe I'll try reading it again in a few years.
I would recommend it to people who know a lot about economics.
I would recommend it to people who know a lot about economics.
December 24, 2020
This book written in 2010 has two comments that really stuck in my mind.
On page 102: Societies where social bonds have broken down and many individuals are isolated are in fact much more subject to totalitarianism and manipulation by propaganda.
And on page 296: History shows that making a mockery of democratic processes, if not halted soon enough, leads to bad outcomes, such as violence, authoritarianism, and the rise of demagogues.
On page 102: Societies where social bonds have broken down and many individuals are isolated are in fact much more subject to totalitarianism and manipulation by propaganda.
And on page 296: History shows that making a mockery of democratic processes, if not halted soon enough, leads to bad outcomes, such as violence, authoritarianism, and the rise of demagogues.
November 23, 2024
This book was challenging for me, but I learned a lot, especially about the theoretic foundations of modern finance in free market economics, as well as the convoluted details of derivative markets and how they led to the last financial crisis (as well as others).
I especially appreciated the authors prose and ability to illustrate complex ideas with examples. She used many words I didn't know (and not just the finance jargon).
I especially appreciated the authors prose and ability to illustrate complex ideas with examples. She used many words I didn't know (and not just the finance jargon).
September 18, 2019
Good contextual overview of the development of the modern financial economy. Glib style and excessive, unnecessary detail in later chapters.
November 8, 2011
I first encountered Yves Smith by way of her blog, Naked Capitalism, where she skilfully dissects the economic events of the day. With the help of that blog I worked my way through the economic collapse so it was a cinch that this book would appeal to me.
Smith is a clear writer, very matter-of-fact which is a good thing on such a dense topic as economics. She makes the case (made in great detail by Australian academic Steve Keen in his Debunking Economics) that the assumptions upon which modern economic theory is based are unwarranted by the behavior of human beings. For example, each individual is definitely NOT a rational actor who chooses the maximum value from the choices presented. The classic charts from Paul Samuelson's economics text that so many students have used are wild simplifications that, while not showing actual market behavior, lend themselves to mathematical modeling. The market is not one in which complete information is available to all as the models would have us believe.
Rather than face the daunting complexity of real economic behavior, economists have taken to the wonderfully flexible models and run with them. Of course we all know the saying "garbage in - garbage out" and Smith tells us clearly that if you can't show the validity of your premises, you can't show the value of anything derived from them, no matter how precise a handle they appear to provide.
Running wild with the math, all kinds of things had come to be accepted wisdom, for example claiming to provide some single figure that can indicate risk over a wide range of investments. With computers to do the number crunching, investment experts have let the horde of investors into a forest from which there is no escape and within which we have all been burned in the forest fire that has blazed up in the last 4 years.
Smith's warning is that we must fundamentally alter our approach to the economy. The idea of "free markets" has allowed the looters to run amok...the derivative market over which there is no regulation attracted the thieves for that very reason where they were free to wheel and deal without restraint as Alan Greenspan provided cover with low interest rates. It was all a game of passing the hot potatoes so that when the bust arrived, one would not be holding one. But it got so frenzied with so many hot potatoes that nobody could escape unburned.
Leverage aka gearing aka credit was the true bubble. It was not those eager to own homes who drove the mortgage frenzy, but the investment houses that were rabid to find a basis on which to build teetering mortgage based derivatives on mountains of credit. This was responsible for banks signing up terrible credit risks without so much as a glance at the traditional markers of creditworthiness. There was a mania for supposedly low risk investments with high returns. As Smith says, if it seems to good to be true, it is.
In this book you will find every acronym associated with the collapse defined. You'll meet all the players - the hedge funds, the investment banks, the commercial banks, the Fed, the CFTC, the SEC and so forth...all of them simply defined. I only found myself lost in a short section about international exchange rates and trade balances.
Smith is a bit too fond of the "drunk under the streetlight" analogy, using it five times by my count, but otherwise she carries the reader through a jungle and brings that reader out with a good idea of the dangerous beasts that were encountered within and why they act the way they do.
The take-away from Econned is Smith's warning that we must not put band-aids on a system that is fundamentally flawed. The Big Bail Out is a band-aid. Since the inmates (Geithner, Bernanke, Paulson, anyone who has ever worked for Goldman, etc.) are in charge of the asylum there is every reason to believe that nothing significant will be done to protect us.
A careful restructuring of our economic system complete with restraints on credit and oversight of derivatives that will (not incidentally) increase the cost of credit is necessary. Without this, the same manipulators will resume their hi-jinx and we will be headed for an even worse collapse to come. Want an example of a manipulator? I give you Ken Lewis who, as CEO of Bank of America bought the terrible boat anchors Countrywide and Merrill Lynch even as BoA was staggering. These purchases did nothing beneficial for BoA but did establish Lewis as the head of the biggest bank in the USA. Of course he is gone now loaded down with wealth and untouched by all the damage he did. Of such egomania is disaster to be expected and Wall Street is packed with such egos.
Yves Smith would support the OWS movement.
I read today a comment from Vikram Pandit, CEO of Citibank, telling an interviewer how important it is to sell off parts of Citibank that it doesn't need to simply be a bank. It must no longer try to be a financial supermarket. More of this attitude is needed and reading Econned will tell you why.
Smith is a clear writer, very matter-of-fact which is a good thing on such a dense topic as economics. She makes the case (made in great detail by Australian academic Steve Keen in his Debunking Economics) that the assumptions upon which modern economic theory is based are unwarranted by the behavior of human beings. For example, each individual is definitely NOT a rational actor who chooses the maximum value from the choices presented. The classic charts from Paul Samuelson's economics text that so many students have used are wild simplifications that, while not showing actual market behavior, lend themselves to mathematical modeling. The market is not one in which complete information is available to all as the models would have us believe.
Rather than face the daunting complexity of real economic behavior, economists have taken to the wonderfully flexible models and run with them. Of course we all know the saying "garbage in - garbage out" and Smith tells us clearly that if you can't show the validity of your premises, you can't show the value of anything derived from them, no matter how precise a handle they appear to provide.
Running wild with the math, all kinds of things had come to be accepted wisdom, for example claiming to provide some single figure that can indicate risk over a wide range of investments. With computers to do the number crunching, investment experts have let the horde of investors into a forest from which there is no escape and within which we have all been burned in the forest fire that has blazed up in the last 4 years.
Smith's warning is that we must fundamentally alter our approach to the economy. The idea of "free markets" has allowed the looters to run amok...the derivative market over which there is no regulation attracted the thieves for that very reason where they were free to wheel and deal without restraint as Alan Greenspan provided cover with low interest rates. It was all a game of passing the hot potatoes so that when the bust arrived, one would not be holding one. But it got so frenzied with so many hot potatoes that nobody could escape unburned.
Leverage aka gearing aka credit was the true bubble. It was not those eager to own homes who drove the mortgage frenzy, but the investment houses that were rabid to find a basis on which to build teetering mortgage based derivatives on mountains of credit. This was responsible for banks signing up terrible credit risks without so much as a glance at the traditional markers of creditworthiness. There was a mania for supposedly low risk investments with high returns. As Smith says, if it seems to good to be true, it is.
In this book you will find every acronym associated with the collapse defined. You'll meet all the players - the hedge funds, the investment banks, the commercial banks, the Fed, the CFTC, the SEC and so forth...all of them simply defined. I only found myself lost in a short section about international exchange rates and trade balances.
Smith is a bit too fond of the "drunk under the streetlight" analogy, using it five times by my count, but otherwise she carries the reader through a jungle and brings that reader out with a good idea of the dangerous beasts that were encountered within and why they act the way they do.
The take-away from Econned is Smith's warning that we must not put band-aids on a system that is fundamentally flawed. The Big Bail Out is a band-aid. Since the inmates (Geithner, Bernanke, Paulson, anyone who has ever worked for Goldman, etc.) are in charge of the asylum there is every reason to believe that nothing significant will be done to protect us.
A careful restructuring of our economic system complete with restraints on credit and oversight of derivatives that will (not incidentally) increase the cost of credit is necessary. Without this, the same manipulators will resume their hi-jinx and we will be headed for an even worse collapse to come. Want an example of a manipulator? I give you Ken Lewis who, as CEO of Bank of America bought the terrible boat anchors Countrywide and Merrill Lynch even as BoA was staggering. These purchases did nothing beneficial for BoA but did establish Lewis as the head of the biggest bank in the USA. Of course he is gone now loaded down with wealth and untouched by all the damage he did. Of such egomania is disaster to be expected and Wall Street is packed with such egos.
Yves Smith would support the OWS movement.
I read today a comment from Vikram Pandit, CEO of Citibank, telling an interviewer how important it is to sell off parts of Citibank that it doesn't need to simply be a bank. It must no longer try to be a financial supermarket. More of this attitude is needed and reading Econned will tell you why.
February 18, 2025
First things first, I enjoyed reading this book. Be aware this is a left wing criticism of banking from a non-economist, do not treat this as an unbiased analysis of the great financial crisis. She is strongest when talking within her wheelhouse of the financial services industry. Her hypothesis that executives are overlying relying on simple measures of risk because they are easy to interpret and understand was quite fascinating.
However when she gets into a nitty gritty teardown of fundamental Econ I got completely lost, despite my background in economics. Appendix 1 is the most egregious example where she does a very poor criticism of a basic economics model. She cites Steve Keen in this analysis, who is an establishment economics hater. I think she is knowledgable about finance but lacks some economics theory.
Overall a thought provoking read. But I would not recommend to someone without an economics background because the books necessitates critical pushback from the reader.
However when she gets into a nitty gritty teardown of fundamental Econ I got completely lost, despite my background in economics. Appendix 1 is the most egregious example where she does a very poor criticism of a basic economics model. She cites Steve Keen in this analysis, who is an establishment economics hater. I think she is knowledgable about finance but lacks some economics theory.
Overall a thought provoking read. But I would not recommend to someone without an economics background because the books necessitates critical pushback from the reader.
January 26, 2012
If you're interested in getting a decent high-level understanding of the financial instruments created by the financial sector in the past decade or two, and in the changes in the incentive structures at banks and other financial sector players, this book is highly recommended. It will provide you with accessible explanations of the various instruments they thought up, as well as how those relate to each other (though slightly less detailed when it comes to the exact reasons why the instruments created worked the way they did). Reading it should give you a good feel for how much all of this activity still had to do with things going on society (hint: both fairly little, and very much). Let me briefly mention two points I think worth noting.
An important sub-theme of the book is the question what role current macroeconomic theory played in the crisis. As such, the second and third chapters are devoted to discussing what role the currently dominant economics paradigm -- neoclassical economics -- played in all of this. One thing that's important to realize is that neoclassical economists tend to make all kinds of extremely unrealistic assumptions in order to make it easier for them to "model" economic activity; without these assumptions, they cannot model anything -- and this bothers them even though their models do not really refer to anything in reality.
Yet even though basically none of the assumptions made is in any way applicable to real life, so-called DSGE models are widely used by regulators and governments to determine how their economies are doing, and whether they are still stable. (Peculiarly, DSGE models ignore the financial sector's existence entirely, making them blind to the mere suggestion that the financial sector could create macroeconomic instability.) This leads those regulators, as well as economists more broadly, to uncritically accept even those ideas that are blatantly false, such as the idea that all market participants have access to all information, and that, therefore, large-scale frauds are impossible to perpetrate -- because this implies that it is impossible for wannabe-frauds to lie to a large number of people without being called out or found out immediately.
Another section I found particularly interesting was the account of the historical changes that occurred from the 1970s onward, and how this changed the way banks behaved, and how they treated their clients. For instance, one major change was that banks stopped investing in relationships with their corporate clients, and instead started focusing ever more on maximizing the gain from individual transactions. These changes were caused in part by certain regulatory changes that made it easier for corporate clients to ask for quotes from multiple dealers. Paradoxically, because every bank had so much competition, they felt less of a need not to screw their clients, as they figured there was a large chance they would be going to a competitor next time anyway. (Not exactly what efficient market theory teaches you, though it should probably be noted that most of these deals are fairly opaque to non-specialists -- meaning most people in the world -- so that it would be difficult to tell how badly you are being screwed.)
An important sub-theme of the book is the question what role current macroeconomic theory played in the crisis. As such, the second and third chapters are devoted to discussing what role the currently dominant economics paradigm -- neoclassical economics -- played in all of this. One thing that's important to realize is that neoclassical economists tend to make all kinds of extremely unrealistic assumptions in order to make it easier for them to "model" economic activity; without these assumptions, they cannot model anything -- and this bothers them even though their models do not really refer to anything in reality.
Yet even though basically none of the assumptions made is in any way applicable to real life, so-called DSGE models are widely used by regulators and governments to determine how their economies are doing, and whether they are still stable. (Peculiarly, DSGE models ignore the financial sector's existence entirely, making them blind to the mere suggestion that the financial sector could create macroeconomic instability.) This leads those regulators, as well as economists more broadly, to uncritically accept even those ideas that are blatantly false, such as the idea that all market participants have access to all information, and that, therefore, large-scale frauds are impossible to perpetrate -- because this implies that it is impossible for wannabe-frauds to lie to a large number of people without being called out or found out immediately.
Another section I found particularly interesting was the account of the historical changes that occurred from the 1970s onward, and how this changed the way banks behaved, and how they treated their clients. For instance, one major change was that banks stopped investing in relationships with their corporate clients, and instead started focusing ever more on maximizing the gain from individual transactions. These changes were caused in part by certain regulatory changes that made it easier for corporate clients to ask for quotes from multiple dealers. Paradoxically, because every bank had so much competition, they felt less of a need not to screw their clients, as they figured there was a large chance they would be going to a competitor next time anyway. (Not exactly what efficient market theory teaches you, though it should probably be noted that most of these deals are fairly opaque to non-specialists -- meaning most people in the world -- so that it would be difficult to tell how badly you are being screwed.)
January 22, 2017
This is an amazing book. It is a very well written book and, mainly, a very important one. The reason why I gave it a five stars score is proportional with the relevance and the proportional seriousness the author put in it. It is easy, when we read economy books, to be presented with a biased view of reality as well as an underlying agenda. This book is well documented, unbiased and very analytical. It is not an easy read to make. I'm not an economics expert an as such I had some hard time to understand some of the more intricate schemes used in modern finance. Nevertheless with some patience and a little bit of research you can understand what is written here. This is a very deep analysis on all the hidden mechanisms and trickery used on the financial markets that, inevitably, ended in the collapse of several major financial players. The importance of this book derives from the fact that with the understanding of the way things go in the financial world we stay aware of the risks we are exposed and the consequences we may need to face in the future. Also it give us the political awareness that we need to have to respond in the best way with the democratic tools we got at our disposal.
June 17, 2016
Thank goodness I am finally finished reading this book! The jacket description describes ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism as "intelligently written for the layman". If you are not an Economics major, be warned! This is not true. Or it is, as long as you're prepared to learn the entire history of Economic theory before you finally get to Smith's thesis.
This book contains an interesting argument, about a very dry topic, written in a very dry way. I would describe ECONned as the epitome of slog. So if you're planning on diving in, steel yourself well.
This book contains an interesting argument, about a very dry topic, written in a very dry way. I would describe ECONned as the epitome of slog. So if you're planning on diving in, steel yourself well.
December 26, 2010
I have to stop reading books on economics for a while. Books like this, which is well written and forcefully makes many valuable points, are starting to leave me too angry for words. No wonder the american educational system is steadily falling behind other countries at an increasing pace! It produces people who actually accept the neo-classical economic hogwash that this book (like so many others) exposes as poorly reasoned nonsense.
I'll stick to arguing with my MIT economist neighbor. At least we can have a beer afterward.
I'll stick to arguing with my MIT economist neighbor. At least we can have a beer afterward.
January 20, 2011
Yves Smith is a management consultant and an economics blogger, who was interviewed on Russia Today alongside such American dissidents as Alex Jones and Lyndon LaRouche. She believes that the recent world financial crisis has utterly discredited the discipline of economics, the neoclassical paradigm of which provided shoddy models of risk and reward, the money managers' reliance of which caused the crisis. I am unconvinced: as far as I know, a great deal of economics, from the research of Nobel Prize winners to freshman textbooks, is outside the neoclassical paradigm.
February 11, 2011
While there is a lot of finance-speak in here and it should not be read lightly by the completely uninitiated, Smith lays out a persuasive case for tighter regulation on the financial industry as a whole. The author of the Naked Capitalism blog dives into subtle implications of credit default swaps, debt obligations and incentives and I did find my mind drifting from time to time. My favorite part is that rather than simply point to problems like many authors do, she proposes solutions that can be implemented provided that those in charge can find a spine.
June 27, 2011
This was my first book club pick that I hadn't read previously. I wanted something on the recent financial collapse, and I think this one worked out pretty well.
The book itself was pretty slow-going (we actually postponed our meeting because no one had finished it, and I was the only one who managed to finish it by meeting date.) Nonetheless I think it offers some pretty valuable information about what happened, the failures of economic theory, and the currently state of financial regulation.
Am not optimistic about the future, but I'm glad I read it.
The book itself was pretty slow-going (we actually postponed our meeting because no one had finished it, and I was the only one who managed to finish it by meeting date.) Nonetheless I think it offers some pretty valuable information about what happened, the failures of economic theory, and the currently state of financial regulation.
Am not optimistic about the future, but I'm glad I read it.
October 24, 2011
Yves Smith takes a different look at the financial crisis. Instead of emphasizing the specifics (although she does discuss them) which she sees as symptoms, she attempts to undercut to what she considers is the root cause: a lousy economic paradigm (particularly the neo-classical economic paradigm.)
At times her critique is, perhaps, uncharitable, but I think she raises some valid criticisms and makes some excellent overall points. Without a paradigm shift, we will see more of the same though the particular vehicles through which the next roundup will be may be different.
At times her critique is, perhaps, uncharitable, but I think she raises some valid criticisms and makes some excellent overall points. Without a paradigm shift, we will see more of the same though the particular vehicles through which the next roundup will be may be different.
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