A Portfolio on Sustainable Finance

 Carbon Capture in focus at PE firm CIP 

May 17, 2021 

The world is changing, and one private equity firm this year changed its name and strategy to reflect new market realities. 

In late April, JOG Capital took its 14-year track record and more than $1.3 billion in energy investments and overhauled its investment thesis. Renamed and rebranded as Carbon Infrastructure Partners (CIP), the founders are signaling a new focus and investment mandate: finding alpha in carbon capture. 

Cumulative investment in carbon capture and storage (CC&S) could hit $1 trillion by 2050, Bank of America concluded in a recent analysis. 

That would represent exponential growth from the present size of the industry (by one recent estimate, $1.75 billion). 

CC&S technology is seen as a big part of the puzzle of what our species can and must do to preserve a liveable environment for ourselves on this planet. The idea is that carbon can be removed from the atmosphere (“captured”), usually at a large point site, then sequestered (“stored”) in a way that will keep it out of the environment. This is also a sensible bottom-line activity for corporations if, for example, there is a carbon tax regime in place in its jurisdiction that incorporates offset credits. 

From JOG to CIP 

JOG decided, in the words of a statement, that “rapidly growing demand for high-quality voluntary carbon offset credits, combined with significant additional policy incentives, activates business models for carbon removal assets to directly remove CO2 from the atmosphere,” and that it will offer its investors a piece of that action. 

Craig Golinowski (CIP), president and managing partner of CIP, discussed CC&S with Alternatives Watch recently. Asked whether CC&S involves only storage, he answered that, to the contrary, “Carbon capture does sometimes involve utilization, as with concrete, plastics, or reactants.” 

Sometimes carbon (or, more specifically, CO2) is put to use in the very act of being stored/sequestered. In enhanced oil recovery, captured carbon dioxide is injected into an oil field, which helps render otherwise trapped crude accessible, and moves that much of the greenhouse gas away from the atmosphere at the same time. That, though, is a politically contentious use. Less contentious are the uses to which Golinowski made reference. For example, carbon dioxide injected into fresh concrete can undergo a mineralization process and become permanently embedded. 

Growth of the CC&S market has been affected adversely by the global pandemic. For example, many manufacturing facilities have been shut down due to the pandemic, which has halted work on downstream recapture. Cases and deaths continue to rise in some of the globe’s largest economies, including those of India and Brazil, and that continues to hamper the capital expenditures necessary to establish carbon capture facilities. Despite all that, as Golinowski said: “The market is growing by any of several measures. It has grown a lot in recent years by the announcement of projects. There is a smaller increase in terms of the number of operations underway but the operations have been scaling up.” 

Golinowski also offered some autobiography. “I came to it [this subject of carbon capture] by becoming aware of the number 40 billion. Our species is adding 40 billion tons of CO2 to the atmosphere every year. I heard this number at a conference at Stanford University and I thought that this was an incredibly difficult problem that we’re going to have to solve. CC&S is going to have to be a major part of it.” 

The number 40 billion is now a bit on the low side. In 2019, the number was 43.1 billion. There was a steep drop in emissions during the early months of the pandemic, but by the end of 2020 the month-to-month rate had recovered. At present, 2021 emissions are on track to near the 2019 figure. 

The United States alone emits close to 6 billion tons of CO2 annually. 

The CIP Team 

Golinowski runs CIP in partnership with Ryan Crawford. They have worked together for 14 years, managing $936 million in energy industry PE fund capital across 18 distinct platform investments. They both have experience structuring complex financial transactions as well as knowledge of ESG planning, execution, and monitoring. 

The team also includes Kel Johnston, managing director, and David Moyes, partner. Johnston is a professional geologist with experience both in Canada and in the United States (CIP is investing in CC&S in both countries). Moyes attended the Stanford Graduate School of Business and spent 11 years at Goldman Sachs, where he led technical analysis in support of the launch of a $500 million specialized secondaries vehicle. 

Both Sides of the Border 

CIP has offices in Palo Alto, California, Phoenix, Arizona, and Calgary, Alberta. Its portfolio is sensitive to the political/regulatory realities on both sides of the border. 

Golinowski says that as a rule, Canada’s prime minister Justin Trudeau has taken a somewhat different approach from that which appears to be favored by President Joseph Biden in the US. 

“Trudeau,” he says, “has been very intensely focused on emissions policy. While the US, under the new administration, is offering carrots for CC&S by paying to capture and store carbon, Canada is offering a stick for failure to get the net down.” 

A White House statement on April 22 specified that the Biden-Harris climate plans involve the government’s use of its procurement power to support early markets for carbon capture, as well as for new sources of hydrogen. The carrot is unsubtle: those industries are to be encouraged by buying that they produce. 

In Canada, on the other hand, here is the stick of tax policy. “Canada has a carbon tax at the federal level. In 2022, it will be C$50 a ton. That is scheduled to increase in 2030 to C$170. That should have considerable bite.” Final Note: A Test Case The world’s first commercial-scale CC&S operation opened at the Boundary Dam coal plant, in Saskatchewan, in 2014. That project has not performed up to the expectations of the optimists of that day, and its management has acknowledged “unforeseen operational challenges and design oversights.” Notwithstanding its shake-down problems, the Boundary Dam CC&S operation has captured four million tons of carbon pollution. Four million tons is not nothing. As noted in a recent story in Canada’s National Observer, this is the equivalent of a million passenger vehicles driving about for a year.

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Fulcrum raises climate transition alpha strategy 

May 11, 2021 

Fulcrum Asset Management, of London and New York, has launched a new Climate Change Fund, a diversified global equity fund that expects to hold between 150 and 200 stocks invested across 25 themes, aimed at having a positive impact on climate change mitigation (as defined by the Paris Agreement of December 2015) and at offering investors a diversified exposure to the global equity market. 

Article 2.1(a) of the Paris Agreement commits the participating nations to “holding the increase in the global average temperature to well below 2 0 C above pre-industrial levels.” In pursuit of that goal, 2.1(c) proposes that finance flows be rendered “consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.” The Luxembourg-domiciled Climate Change Fund was created very much in that spirit. It was launched as an SICAV-UCITS, that is, the analog to an open-ended mutual fund in the US. 

As of February 2021 CCF had assets under management of $122 million spread out among 162 positions. The largest of those positions represented 2.4% of the whole. Even the top ten represented just 17.6% of the whole. 

The underlying investment thesis is that the fact of climate change is gradually being priced into global equity markets, so that proactive investors have an opportunity to capture transition alpha. The top five themes are: rails, cloud services, agriculture, household, and digital factory. Regionally, more of the allocations are to North America or western Europe. 

Conversation with Aslakstrom 

In a recent conversation with Iselin Aslakstrom, Fulcrum’s director of responsible investment, and the recent recipient of a Master of Studies in Sustainability Leadership from Cambridge University, AlternativesWatch sought to understand the way positions are chosen. 

Ms Aslakstrom said that each entity under consideration as a possible portfolio company is assigned an “assigned temperature rise,” which serves as the “foundation of how the fund is put together.” This involves a Sector Projection, a determination of “how much a single sector [such as energy, financial, or health care] must decarbonize in order to meet the Paris Agreement.” The projection was then used as a baseline for assessing an individual company’s decarbonizing. 

Portfolio targets have been tightened, until recently the fund did adopt some positions with implied temperature increase of up to 2.5 degrees (Celsius), but 2.0 is the new ceiling, with a weighted average around 1.5 decrees. 

AW wondered how these calculations translated into alpha. This far it seems to do so. It had its inception on August 3, 2020 and got a 6.6% return that month. The return for global equities, as represented by MSCI ACWI, for the same month was 6.1%. The following month, September, was a negative one for both the CCF and the MSCI, but again the former came out ahead,by a wider margin. CCF fell -2.5%, but MSCI fell -3.2%. The pattern has continued. The two performance lines zig and zag together, but the CCF keeps building its lead. 

As to the how of that lead: Aslakstrom says: “There is obviously an element of skill on the part of the portfolio manager," in picking positions that perform, diversify, and contribute to the planetary goal of sustainability. In general, “we have been able to find companies that are well -positioned to enter a time of transition out of a carbon-based economy.” 

Collaborations and Investors 

In a statement last August when the fund opened, the CEO of Fulcrum Asset Management said, “We are delighted to respond to client demand for an ambitious and innovative climate change solution. We believe that we have a unique opportunity here to bring to the market something that could have a real effect on climate change mitigation while still providing diversified exposure to the global equity market.” 

The new fund is the product of at least two collaborations: one with Iceberg Data Lab and the other with Arvella Investments. Iceberg Data Lab is a Paris based provider of data and analytics (named after the idea that, as with icebergs so with data, the big and important stuff is hidden beneath the surface) with sustainability-transition expertise. Iceberg Datalab. The collaboration with Arvella, a wealth manager based in Paris and London, came about because Arvella had observed that most global benchmarks are on a 3-degree path. 

In the words of Benoit Mercereau, the CIO of Arvella, that manager is “pleased to have been ankle to work with Fulcrum to design a fund that is not only providing us with access to the global equity markets but doing so in a way that is in-line with a below 2 0 trajectory.” 

The fund generates “a lot of internal interest [at Fulcrum]” -- beyond that, it looks to institutional investors, “we’ve had a lot of conversations with pension funds and other institutional clients.”              

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Climate Change is underway, but is it priced in? 

April 5, 2021 

In a recent interview, PGIM’s head of thematic research expanded on some of the aspects of that company’s recent report on climate change. The report emphasized that climate change is a fact, not a hypothesis, and that since the associated risks are only imperfectly reflected in the price of assets, this fact creates investment opportunities. 

The research head Shehriyar Antia, spoke specifically of the value (and mispricing) of real assets: land, homes, water, and infrastructure, and the resulting opportunities. 

“Real estate offers opportunities for capital investment in climate resilience: investments that can harden properties in the face of extreme weather events,” he said. 

The hardening can be straightforward: a landlord or the lessor of a commercial property can simply elevate electrical wiring a foot off the ground. This can allow the properties to survive and continue functioning through weather events that would otherwise knock them out, and in the process preserve the steady stream of rental income. 

Unfortunately, such simple hardening measures don’t yet produce benefits for the property owner in the context of insurance. But that is likely to change in the years to come: perhaps gradually, perhaps in one big leap (a “Minsky moment.”) 

The phrase “Minsky moment” is named for Hyman Minsky (1919-1996), an economist who wrote in the Reagan era about how an accumulation of private debt can push an economy toward crisis, the build-up to the crisis will be gradual but its onset will seem sudden. Minsky’s thinking has been applied in recent years to our understanding of the events of 2007-09. Antia uses the term, not to suggest that there is going to be one single global Minsky moment on climate, but simply to outline some scenarios in which certain prices will shift drastically. 

Residential Mortgages 

With that thought in mind, consider residential mortgages. Real estate prices along the coasts, where storm surges, and even more broadly a global threat of higher ocean levels, threaten livability do seem to reflect the climate risks. But it doesn’t follow that the mortgages do. The report tells us that “[c]oastal states such as Florida, Virginia, and Maryland -- with some of the highest climate risk -- also have among the lowest average mortgage rates.” 

Do flood insurance premiums reflect the increased risk efficiently? No. The PGIM report says that outdated flood maps have helped keep the re-pricing inefficient. For example: the number of homes in the US that are now at risk from a 100-year flood are roughly twice what the maps suggest.” 

Although as noted government policies get credit for helping with the obsolescence of coal, they get the blame for the over-valuation of shoreline residential debt. Fannie Mae and Freddie Mac help preserve inefficiencies. Banks can offload their mortgage risk to these GSEs . That means that they don’t have to hang on to the 30 year mortgages they underwrite. This means in turn that the originating banks don’t have to account for flood risk in mortgage pricing or push for better maps. An inefficiency continues, and anyone in a position to look past short-term fluctuations can take an investing position on the side of the underlying realities. 

From such facts, PGIM infers that “climate change is a slow-burning issue with indiscernible impacts on a year-to-year basis but potential for exponential growth once tipping points are reached.” 

When the tipping point does come, even realty hardenings that seem modest now could pay off handsomely. 

Information and Intelligence 

Relatedly, Antia said, “A revolution is underway: a data revolution that, together with AI, creates real opportunities.” Typically, analysis of threats from, say, storm surges would proceed at the postal code level. But in this situation "all properties can get painted by the same brush," he said, and this undervalues some. The new tech can allow for analysis "block by block and even property by property." 

This brought us back to the issue of property and casualty insurance mentioned above. Many of the weaker players have exited in recent years. The fittest have survived, and as changes in the climate become more obvious, it stands to reason demand for their service will increase. Further, the fittest are those in the best position to make good use of Big Data. Chubb, Liberty Mutual, and other strong players will leverage innovations in risk-sharing and in high tech, which will allow for more effective weather modeling and will capture new opportunities. 

What the insurers can leverage, realty investors can likewise leverage. The PGIM report includes an “illustrative” dashboard of a sort that may become typical for the screens in such investors’ office. An investment manager could call up a property, say “11 Fillmore Street” and discover in a glance not only that 11 Fillmore, somewhere in the southwestern US, is an office building, and has produced a steady rental stream, but that it is not at risk from sea level rise or hurricane/typhons, that it is only somewhat at risk from heat stress, and that it is at high risk from earthquakes or water stress. 

For agricultural properties, likewise, sensors, GPS, and variable rate technology can enable the managers of land to adjust the supply of water, fertilizers, and pesticides to adjust for weather variability and its impact on soil, pest populations, and so forth. 

“And Not a Drop to Drink” 

The question for much of the PGIM paper then is: are markets factoring climate risks into the price of assets? If the answer is, “generally, yes,” then the next question is “are they doing so efficiently or inefficiently?” Inefficient pricing always spells someone’s investment, or at least someone’s trading, opportunity. 

In this connection, in our interview Antia spoke of water infrastructure as an investment. “Water filtration facilities or storage at the municipal level are underappreciated opportunities for a debt investor," he said. In global terms, “investors need to be on the ball” because “markets without a straightforward regulatory landscape or strong property rights” can be a trap here. Projects in the southwestern United States or in Australia, where those protections are present, are promising. 

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An alliance for decarbonization: Riverstone and Blackhorn 

February 21, 2022 

Riverstone Holdings LLC has acquired a minority interest and entered into a strategic partnership with Blackhorn Ventures. Each firm is prominent in the world of private fund support for decarbonizing and recycling technologies. 

Together, Riverstone and Blackhorn will work to deploy capital into high-growth opportunities across the investment cycle. Each is a thesis driven investment specialist. In both cases, the meta-thesis is that there are massive market commercialization opportunities in the use of science and engineering-based innovation toward a low-emissions world. The financial specifics of the deal have not been disclosed. 

Riverstone, a New York based private equity firm founded in 2000 by two former Goldman Sachs executives, David Leuschen and Pierre Lapayre, has raised $43 billion since inception. It focuses on opportunities within energy, power, and infrastructure, with a special interest in low-carbon investments. 

Blackhorn is a Denver based early-stage VC firm founded in 2017, with an AUM of approximately $200 million. It looks to advance resource efficiency and decarbonization. The two firms will share industry insights, relationships, and existing platforms. 

“We have already realized industrial platform benefits between our two franchises and see this investment in and partnership with Blackhorn as a significant differentiator for both of us going forward,” said Riverstone co-founder Lapayre in a statement. “We look forward to working closely with Phil, [Philip O’Connor], Melissa [Cheong], and the Blackhorn team to generate uniquely attractive investment opportunities that contribute to a healthier but profitable environmental solution.” 

Riverstone has invested more than $6 billion in the renewable infrastructure and decarbonization categories since it was established. Just since the outbreak of the pandemic, it has invested $3 billion on over one dozen transactions with companies across its priority decarbonization investment families and continues to expand its team and footprint. 

Philip O’Connor co-founded Blackhorn with Trevor Zimmerman and Jack Fuchs. Cheong is managing partner. In the statement, Cheong said, “All of us at Blackhorn have great appreciation for Riverstone’s long and successful history of advancing technologies targeting the hardest to decarbonize industrial sectors. While we target investments at different stages, our two organizations have complementary areas of expertise and are very much aligned in our broader market objectives

"Pragmatism Refreshed" ends: so does Lane Pryce

Final entry for this blog. From this day forward, I'll be blogging at Jamesian Philosophy Refreshed, and the URL will be http://jamesian58.blogspot.com/ So for now, let's say something about Mad Men, which has also of late been about endings!


Episode 12 will be dominated in the mind of most viewers by the death of a character who has been a mainstay of the show since the beginning of the third season, Lane Pryce, as played with uniform greatness, by Jared Harris.

This death, a suicide, happens as most of the office continues to float on a sense of elation about landing a big automotive account: Jaguar.

The writers bring these two facts: Lane’s despair and his co-workers’ elation, into several layers of collision. We see for example that the Jaguar of the time was mechanically a rather shoddy piece of work, and this in fact dooms Lane’s first effort to kill himself, by asphyxiation. He can’t get the ignition to work when he needs it to!      


When Lane does manage to kill himself, it is with a noose, in his office, and after typing out what should have been a suicide note but was in fact just a “boilerplate” letter of resignation.

Why not pills, Lane? The thing about pills is: they leave some room for doubt. The coroner may call it an accidental overdose rather than a suicide, which may make a difference to grieving relations and their insurers.  A noose, though, doesn’t leave any doubt. So does that mean that a real suicide note would have been, in methodical Lane’s eyes, redundant?

Also, the events leading up to the suicide are designed to leave Don feeling as guilty as possible. Don demanded that resignation, after discovering Lane’s embezzlement. He thought that Lane would and could recover from this and make a new life for himself back in England. Indeed, he said as much. “I’d had to start over a couple of times in my life. This is the worst part,” he assured Lane.

Well, no. Don is not Lane and neither of his start-overs seems analogous. Don learns how badly he had misjudged the matter with that chipper assurance only when he sees the body.

Likewise episode 13, the season finale, will likely be dominated in many minds by one scene – that in which Don encounters Lane’s widow, Rebecca. Indeed, the title of this episode is “The Phantom,” indicting I think that the writers meant for Lane to hang over the whole of it. Except of course there is another “phantom” involved. The titles always have multiple meanings. Don thinks he sees his dead brother.   

But let’s get back to Don and Rebecca. He gives her a check meant in effect to buy out Lane’s share of the partnership. She accepts it, but wants Don to know that however this may alleviate his own sense of guilt, it does nothing to make matters square between them. She blames the agency for giving her husband “ambition.” She appears to see him as always having been a frail reed, always best shielded from ambition and other potentially sharp things.

Also, it is in the course of this confrontation that Rebecca discloses she found the photo of a mystery woman in Lane’s wallet.  The photo brings us back to the start of the season.

I’ve wondered through this season why the writers would introduce that photo (and the trouble to which Lane went to keep it, and the single phone call he made to the woman it represents) without doing more with it than they have. I still wonder.  Will Rebecca start looking for her? Is that one respect in which Lane’s phantom will continue to hover next season?

Strong season over-all. The series' best since but not inclusive of its first.  

New Lions for the Chariot

Starting next week, this blog will have a new name and URL.

I believe I know why it has become so difficult to post on this blog in recent weeks. I've just been doing it too long.

My new blog will have the name, "Jamesian Philosophy Refreshed." That's a better name: it is the philosophy of William James I most admire, not "pragmatism" in the broader and narrower sense. Aspects of James' philosophy that don't come under that label do come within the scope of my admiration, and various pragmatists who had views at odds with James' -- less so.

I hope and expect to see you all on the other side.

 jamesian58.blogspot.com
I'll try to leave one final blog at this dysfunctional site, tomorrow.  I may need some lions to pull my chariot forward, though.

Not the O.K. Corral

My recent reading includes THE LAST GUNFIGHT by Jeff Guinn.

This is a 2011 publication, from Simon & Schuster, about the showdown popularly known as the Gunfight at the OK Corral. More broadly the book is about Tombstone AZ and its surroundings in its heyday as a mining town.

And a mining town is what it was. Its brief golden age began with a major strike in 1878 of so-called “horn silver”  in the San Pedro Valley. The location of the strike was too far away from Tucson for that town to serve as a home base for the wave of prospectors who inevitably followed the first strike. So Tombstone grew up -- impression one gets from this book is that it almost immediately sprouted up out of the Arizona Territory desert floor!  and fulfilled just that function.

At its height it was important enough that when a San Francisco based acting troupe did a tour of the southwest, bringing a performance of the hot new comic opera “HMS Pinafore” to the unwashed – Tombstone was inevitably one of its stops.

But nowadays we only remember Tombstone for the confrontation on October 26, 1881, when seven men faced off, four to three, separated by only six feet of air, and fired about thirty shots at one another over the course of about as many seconds. It would have been four against four except that Ike Clanton, who had been very busy for hours provoking this confrontation, actually fled the scene just as guns were being drawn, or perhaps even five to four had not another of their companions likewise made himself scarce.

Ike Clanton’s brother and two of his friends were killed in that exchange. Among the party opposing, Doc Holliday and two of the Earps were seriously injured. Only Wyatt Earp walked away unscathed.

The fight was not literally at the OK Corral, although it is known as the “Gunfight at the OK Corral” because that became the title of a movie in 1957, which was still the golden age for westerns.  John Sturges’ movie made no pretense of historical accuracy.

Nonetheless, the connection between this confrontation (a block away) and that particular corral is not entirely accidental.  At one point in the crowded timeline leading to those terrible 30 seconds, the Clantons and their allies postured in that corral, in what Guinn calls “the worst tradition of overweening male pride” they were there “boasting loudly about what they would do if the Earps were foolish enough to bother them any further.”

There are a lot of reasons to recommend this book. I won’t recite them now, though. I’ll simply say that it inspires thought not only about what happened, but about how we know what happened, about the epistemological troubles in sorting through the conflicting accounts.

Classic Johnny Carson

Two jokes from Junes long gone.

On June 14, 1985, Johnny asked the Tonight Show audience whether they had ever been to a barbecue in Beverly Hills? It's a little different from a barbecue elsewhere. "What your chauffeur does, he drives the hamburger patties over to a tanning salon."

On June 8, 1989, Johnny helpfully pointed out that the Census Bureau had taken to using combo forms for city names to describe metropolitan areas. Thus, there was the area between Chicago and Pittsburgh, known as Chipitts. "I'm not making all this up. Now, if you live exactly midway between Burbank, Gardena, Dublin, Cheeseborough, Smolensk, and Freiburg, Germany, you are in Burger-Double-Cheese-Small-Fries."

And here is a photo of Johnny in Carnac regalia, just for the heck of it.

Schopenhauer on Music

"For music everywhere expresses only the quintessence of life and of the events taking place in it, never these themselves, and so distinctions within these do not always influence it. Precisely this universality, exclusive as it is to music, together with the most exact precision gives music its high value as the panacea for all our suffering. Thus if music ties itself too closely to words or tries to model itself on events, it is tryingf to speak a language that is not its own. Nobody has avoided this error as completely as Rossini; which is why his music speaks its own language so clearly and purely that it has no need of words at all and retains its full effect when performed in instruments alone." That sounds rather equivocal praise for Rossini, who composed for opera, i.e. specifically for words and a stage set, not the concert halls Schopenhauer seems to have in mind here.

In Defense of GwBC: Conclusion

I am confident I have accomplished all I meant to accomplish with this series of posts, stimulated as they were by Gravelle's critique of my book, GwBC. In conclusion, I will speak to the notion, widespread today, and present in Gravelle's review, that a moderate and non-accelerating level of inflation is a good thing, in that it is predictable on the one hand and it accomodates the growing demand for money that comes with a growing population and economy on the other. This notion is presumably why Gravelle instructed me that only an "accelerating" rate of inflation should be considered "easy money."

This underlying idea is a fallacy. Price level unpredictability is one of the kinds of harm that inflation can do, but not the whole of it by any means. Yes, if every price and every wage reliably increases at, say, 2 percent a year every year: buyers, sellers, lenders, investors and so forth can all quickly become accustomed to this, draft contracts that presume it, etc. The predictability would be a positive thing, and the debasement of the currency would be merely a matter of form, not something that ought to bug anyone. That is what many economists (and Gravelle) seem to presume actually happens in real-world inflation when they write as if a “non-accelerating” rate is benign.

But in the real world, the average price levels measured by consumer prices indexes and so forth are just that, averages. If we know that the CPI has increased 2% over the last year we have no reason to believe that every good – even every good and service explicitly included in the CPI – even any respectably large number of those goods for that matter -- has increased by that benign-seeming amount. Nor do we know that there is some narrow range of possibility around 2% where most price changes comfortably reside. You can of course quickly get in over your head trying to wade a stream with an “average” depth of only half a foot.

A related point: new money infused into the economy doesn’t come into it all at once. It isn’t as if helicopters have dropped it evenly over the whole landscape, or as if we could all wake up one random morning with more money in our bank accounts than we had thought we had the day before.

No … money enters the economy because the Federal Reserve buys assets. If you’re one of the lucky few who get to sell assets to the Fed then, poof!, the new money suddenly appears in your bank account first. The new money in time radiates outward from the first recipients to those with whom they do business, and so forth, out to ‘the economy at large’ if we may. But the process is a sloppy one, and it does in the nature of things create winners and well as losers. It redistributes real wealth and creates perverse incentives, even if it is kept at a slow and non-accelerating rate over time.

A related fallacy is the notion that inflation is a good thing because a growing economy needs a growing money supply. Why? In a free market the prices will automatically adjust should the economy grow more rapidly than the money supply. Suppose the money supply is linked to gold, and privately held gold supplies are freely convertible into paper notes. If the supply of gold falls beneath demand, gold becomes more valuable. This means that gold in jewelry is converted into monetary use, and gold coins that had been hoarded, stashed away in a safe, are brought out and put back into circulation. Also, promising gold mining operations become more valuable and people line up to invest in mining technologies.

In the meantime, since gold is becoming more valuable, in such an economy, prices of all non-monetary goods are falling. We’ve just conjured up a deflationary scenario. A lot of energy has gone into persuading people that deflation is necessarily disastrous, but there is no evidence it needs to be.

My final thought in this connection is the eminently pragmatic one, that we shall all have to do a lot of new thinking, in matters economic and financial, in order to get ourselves out of the mess in which through the old thinking, still the mainstream thinking, we have gotten ourselves.

In Defense of Gambling with Borrowed Chips, Part V

My book, Gambling with Borrowed Chips, calls for the abolition of legal tender laws.

For a sense of what that means, dear (American) reader, please take a dollar out of your wallet. Above and to the left of George Washington’s head, you’ll see in small print the words, “The Note is legal tender for all debts, public and private.”

Once upon a time, not too long ago, the words in that spot offered the prospect of redemption of the dollar bill in specie, gold or silver.

Between the one sort of engraved bill and the other, the notion of a “legal tender” stipulated by law has replaced the idea of redemption by a backed currency. The system of fiat money, then, is one in which legal tender laws require people to accept unbacked paper that they might not otherwise take, arbitrarily forcing a medium of exchange upon the populace. For those who like the particulars of codification: the “legal tender” status of these bits of paper is secured at 31 USC §5103.

Those of us who speak of repealing legal tender laws, are, then, in effect proposing a return to commodity backed money. We speak this way not for the delight of talking in codes, but simply as a way of focusing on the difficulty: not so much what the government isn’t doing, but what it is doing (installing its paper by fiat as the Ur-money).    

I don’t really feel like a “gold bug.” I do believe there are lots of ways of hardening a money supply, as I mentioned in yesterday’s entry. Still, for the remainder of our discussion (and we near its end), I will accept the shorthand account of what I am proposing here. I am advocating a gold standard as a geology-backed medium of exchange.

When Gravelle writes: “In fact, most economics textbooks, for good reason, devote no more than a page or two to explaining the gold standard and how the U.S. and other countries’ economies moved away from commodity money to fiat money….” she merely confirms my own pessimistic assessment of the textbook publishing industry.

She then adds her own definition of “fiat money” in a parenthetical comment. She calls it “money backed by the promises of the government.” Sorry but, no. This is not what it is! The promise of the government to do …? Fiat money is backed only by the demands of the government, as expressed 31 USC §5103. There is no “promise” involved. That word suggests the long-discontinued redemptions.

But then say: for purposes of discussion, let us make this about gold.

Gravelle writes: “Faille seems to believe that the gold standard was restored after World War II, but that standard only applied to international transactions and even then only in a limited fashion.”

She suggests here that I am confused about the nature of the Bretton Woods monetary system. In fact, I explain explicitly that “U.S. citizens were not allowed to convert their dollars into gold” during the Bretton Woods period. I also say, though, that through the Bretton Woods accords the U.S. “committed itself to tying the value of its dollar to the price of gold.” Both assertions are true. Yes, the tie in question was not what it had been before 1933, or before the creation of the Federal Reserve twenty years before that, but all that establishes is that there is more than one way to harden the money supply, even more than one way to alloy it with gold.   

Indeed, in December 2011 (too late, alas, for mention in Gambling with Borrowed Chips) the Bank of England issued a white paper, its “Financial Stability Paper No. 13,” that reviews the global financial crisis from a monetary perspective and that confirms many of my book’s points.

The authors of this paper – Oliver Bush, Katie Farrant, and Michelle Wright –list three objectives for an international monetary and financial system: internal balance, allocative efficiency, and financial stability. They conclude that the system now in place “has performed poorly against each of its three objectives, at least compared with the Bretton Woods System.”

The key fact about gold is that its supply is limited by the nature of the planet we’re on, and that adding new gold supplies to the world system will always require investment, risk, and expenditure. Such additions cannot be accomplished by fiat. This is why Robert Zoellick, former president of the World Bank, said recently, “The system should … consider employing gold as an international reference point of market expectations about inflation, deflation, and future currency values.”  Indeed it should.

The problem, finally, is that the "business cycle" is not really a circle. The turns don't leave us where they found us. The business cycle is in many respects a downward spiral. So long as we grease up the money making machinery each timne around to save us from each bust, we preserve old inefficiencies and create new ones. In the best of times they are hidden, in the worst of times they are obvious. We should take advantage of that obviousness to address them head on.

That is my point, and I am happy -- or at least content -- to have gone outside of the mainstream to make it.

There is just one final point I need to make, and this arises from Gravelle's casual observation in her review that the only worrisome symptom of "easy money" would be "accelerating inflation while at full employment." I passed that remark by rather lightly in an earlier entry in this series. Tomorrow I hope to come back to it. It gives us a bang-up close.

In Defense of Gambling with Borrowed Chips, Part IV

We now get to the core of our dispute. (“At last!“ you cry.) Lament not, for we have passed through some essential preliminaries.

What is core is that Gravelle takes issue with my recommendation that the U.S. abolish its central bank, the Federal Reserve.

She says (quite accurately) that the Federal Reserve existed for 20 years before the abandonment of the gold standard in 1933. The Fed was founded by an Act signed into law by President Woodrow Wilson on December 23, 1913.

I can’t agree with her about the “why” of that decision, though. She writes that the Fed was “needed in part to deal with the rigidity of the gold standard itself, which provided insufficient money, particularly around harvest time.”

No, the Fed wasn’t needed. It came into existence as a simple matter of coalition management. What was needed, politically, was the passage and enactment of something that could be called a “banking reform bill.” There were a lot of reasons for this, most of them terrible, the best of them only slightly muddled. But the vacuity of the Federal Reserve Act as any sort of genuine reform may be seen by the four distinct currents of thought that contributed to it.

There were some important voices at the time who wanted a private and centralized banking system. They found their champion in Nelson Aldrich. There were others who wanted a system that would be private but decentralized -- this was the guiding idea of Carter Glass, chairman of the House Banking Committee when Wilson entered the White House. There was another group who demanded a system both public and decentralized -- that would describe William Jennings Bryan, for example, who was Wilson’s Secretary of State, and whose interest in monetary/banking issues was a critical source of his own appeal to his own following. Finally, there was a faction that wanted a system both public and centralized, in effect an adjunct to the U.S. Treasury. Among these was William Gibbs McAdoo, who was Wilson’s Secretary of the Treasury.

[You can find an account of all of this in the biography, Woodrow Wilson (2010), by John Milton Cooper Jr., which I reviewed for The Federal Lawyer that spring. See especially pp. 219 et seq. of that book. ]

Along the two axes involved (private/public on one side, central/decentralized on the other), there were then four possibilities and for various mutually inconsistent reasons all four factions were unhappy about the banking system, all four wanted a change. Some change was almost certain to come about, and that change (when nominally led by a Wilson, a man with no firm settled convictions of his own on the subject, but a strong desire to please everyone, or at least everyone with a suitably progressive pedigree) was bound to be a jerry-rigged mess.

We have inherited that mess, and I for one am certain that it does us all much more harm than good.
It was merely a mess for the first twenty years of its existence. After 1933, it became something much worse than a mess. The Fed became a nexus of power in its own right, and the center of machinations against the soundness of the dollar. There are always such machinations -- and there are always constituencies for them. What has proven disastrous is that they have had this great institutional leverage.

Their leverage was somewhat diluted by the Bretton Woods accord of 1944, which brought a precious metal back into the system. That brings us to the relation of hard metals and gold in particular to the value of money, which is the fourth and final point I must contest with Ms Gravelle.

Before I do, though, allow me to say this: gold is not logically necessary for the existence of a sound currency. There are other ways of achieving that goal. For example, as I write, the Republic of Greece stilll has a sound currency. That currency is known as the euro, and it is sound because its quantity is outside of the control of any politicians or central bankers within Greece. Thus, the soundness of the currency (which is as it happens not backed by gold) is forcing the Greek political system to make difficult decisions -- decisions that ought to be made but that all participants there would plainly much rather avoid.

It  is possible that Greek politicians may in fact avoid those decisions by abandoning their sound currency, and re-creating the drachma, which they can then manipulate at will. If they succumb to that temptation, though, they will I am sure rue the day.

With that understood, allow me to agree: yes, the abolition of fiat currency means, in the U.S. context and as a practical matter, the re-introduction of some role for gold. This is the one of my policy prescriptions that I haven’t yet discussed, and I will come to it tomorrow.

In Defense of Gambling with Borrowed Chips, Part III

Still working, as I was yesterday, from the recommendations in my final chapter: I proposed that "we must learn to let the failures fail." As a closely related point, I also said that  this would involve a reform of corporate bankruptcy law. This is worth some emphasis, so I'll quote myself here:

"Well-functioning bankruptcy courts perform the vital role of allowing the assets of a failed enterprise to find new owners -- owners who will be in a better position to find their highest-return use. Unfortunately, the courts at present do not accomplish that function effectively, and this contributes sadly to the too-big-to-fail mentality."

Gravelle takes issue with me here, saying if I understand her that some institutions really are too big to fail, and that government (in association with its central bank) needs the authority to rescue them as necessary if doing otherwise "means disaster for the broader economy, as well it might."

Yet her meaning requires some cross-examination. Does she really mean that some institutions have to be rescued outside of the context of bankruptcy courts, because the latter aren't doing their jobs? Is a bankruptcy filing the sort of "failure" that sometimes cannot be allowed?

 

Certainly in the 1970s there was a widespread opinion that Chrysler was too big to fail. It was too big for its fate to depend upon our existing corporate bankruptcy system. Thus, in 1979, the U.S. Congress passed a loan guarantee act, which President Carter signed into law in January 1980.

Obviously, that act did not cure what ailed the US auto industry. Both Chrysler and Gemeral Motors would have to pass through the bankruptcy system nearly thirty years later, after a generation's worth of stop-gaps, hems, and haws. Would it not have been better done, when it could have been done more quickly, in 1979-80?

Bankruptcy is an important concept here because it is through bankruptcy filings and reorganizations that common-law jurisdictions re-jigger ongoing enterprises in ways that sacrifice the value of the old equity to the owners of debt. Through that process the significance of equity as the residual bearer of risk is acknowledged, and in fact (unless the process ends in liquidation) a new group of claimants become the bearer of that residual risk, the risk of the next failure.

The role of government bail-outs outside of bankruptcy is all too often to short-circuit this healthy process, diluting our core sense of what equity is, of what ownership means in the corporate context.

And ... why? To save the assets involved, so they'll continue to be of productive use? The assets of a Chrysler (or a Lehman) don't disappear when it goes into bankruptcy. Ownership may pass, over time, to the next round of owners of equity. Or (if it is feared that some of the assets are blocks of ice on a summer day -- liable to disappear entirely unless someone inherits them immediately) ownership may pass much more quickly to new owners through an auction arranged by a bankruptcy trustee.

This, after all, is what happened to the more valuable, and 'melting,' assets of Lehman. The British bank Barclays had been unable or unwilling to come to Lehman's rescue in any alternative-to-bankruptcy arrangement, but it did buy up the choice assets almost immedisately after Lehman's actual filing. Whatever was the productive capacity of those assets: that was not lost by virtue of the bankruptcy filing.

Gravelle (following Bernanke's lead in this) says that it is too simplistic to dedicate ourselves to the proposition that failures should be allowed to fail. Her solution, and his, are "regulatory changes" that will limit the moral hazards associated with bail-outs.

At their very best, if we agree to be wildly optimistic in our assessment of the ongoing or likely regulatory changes, what they'll be able to do is give us something akin to a finctioning bankruptcy system -- a way of letting the failures fail, having the equity owners take their loss, and finding someone else to carry on with the valuable assets of the failed enterprise.  Yet that very best is, as it happens, what I proposed. If the "regulatory changes" are not to work through the reforming the bankruptcy system and facilitating its operation, they'll only be (at best) a pale duplicating of a bankruptcy system elsewhere.

And really ... why duplicate? Why not fix up the original?

Or maybe it isn't about productive use of assets. Maybe, (some of you are thinking this now, surely) the real reason the Treasury and central bank need the flexibility for bailing out 2B2Fail firms is to "avert panic." But consider that for a second ... as a matter of mass psychology, do bailouts real calm the waters?



The events of 2007-08 would seem to indicate that they do not. After all, in the spring of 2008, the authorities effectively bailed out the counterparties of Bear Stearns by arranging a shotgun marriage between Bear and JPMorgan. That doesn't seem to have had any very soothing consequences. It merely stimulated traders to look for "who's next." They settled on Lehman. So a bailout at one site generally shifts panic to another.

I have not yet encountered any point of view that would make sense out of the 2B2Fail mentality. Indeed, I'm delighted to read where Gravelle complains that "a gold standard ... does not allow flexibility to manage the economy." I'm not an unequivocal advocate of a gold standard, but that contention is surely a big point in its favor for those of us who don't believe an economy should really be "managed." With a gold standard (or any other hard money system)  central bankers cannot conjure money up out of thin air, so bail-outs are much trickier to arrange. That would suggest that there will be fewer of them, and that in many more cases failures will be allowed to fail.
----------

Still and all, I have not yet gotten to the core of my quarrel with Gravelle, and hers with me. I'm enjoying this so much that, frankly, I've been spinning it out. I do believe that money must be 'hardened' -- and I think that this may involve the repeal of existing U.S. legal tender laws and will surely have to involve the abolition of the Federal Reserve. Both of these ideas leave Gravelle aghast.

We will discuss some final points next week: Thursday and Friday.  See you there!

In Defense of Gambling with Borrowed Chips, Part II

My recommendations, in Gambling with Borrowed Chips, are as follows:

1)      That  the U.S. government must repeal its legal tender laws, allowing Americans to find our own money.

2)      That there ought to be a simple and complete abolition of the Federal Reserve System

3)      That we must learn to let failures fail, without Greenspan or Bernanke “puts” and, finally,

4)      That “we need as a people to accept an important cultural change – we need to learn greater respect for the profession of accounting and for its independence.”

That’s the list as I presented it in my conclusion and as Gravelle considers it. In this blog, I propose to reverse the order. Starting with number 4 then, my reviewer plainly thinks this the runt of the litter. She isn’t “sure what Faille specifically proposes” in this line, so she won’t comment on it.

Well, perhaps in the PowerPoint sense I don’t “specifically propose” anything. It is hard to reduce a critical cultural shift to a list of specific proposals. It isn’t a matter for departmental white papers.  It is a matter of focus.

But I’ll dwell on this point today because recent newspaper accounts of JPMorgan and its billions of dollars lost on portfolio hedges tell a story that may assist with the needed cultural shift if anything can. These losses have stiffened the resolve of advocates of the “Volcker rule,” and of a stern construal thereof, and have at the same time confused those who have been trying to rejigger that rule to allow some flexibility, so this incident may end up having a lot to do with the future of investment banking in the US.  

JPM’s CEO, James Dimon, has said that "affiliated but asymmetric accounting" may have contributed.

Does this bore you, dear reader?  Are you saying, “oh, no, a discussion of accounting.” I suggest you resist the impulse to say that. That is all I “specifically propose” in such matters.

The problem in this case may have been that (a) derivatives on credit default swaps are marked to market – their value is constantly re-adjusted under existing accounting principles, but (b) the value of a bank’s outstanding loans are not marked to market – they are carried at original value, and adverse market condition are acknowledged through the creation of a reserve. If derivatives are used to hedge risks inherent in the loan portfolio then, as the “Heard on the Street” column in the Wall Street Journal has recently noted, the derivative can distort apparent earnings, and distort the bank’s own managerial processes.

I would certainly hope that bankers will correct this asymmetry by marking loans to market, and that the professional (private sector) bodies that maintain accounting standards will press toward this end. Prospects for that are not good at the moment, for reasons that were foreshadowed by the discussion in chapter eight of my book.  The leaders of the standards-setting bodies have been spineless and various politicians have introduced demagogy into accountancy issues over the years, cowing the spineless into indecision when the bases for sensible decisions were fairly clear.

If the politicians were to stand back, the accounting profession would hash out its own issues. And if the public were informed, if there was a general cultural acceptance of the importance of independent integral accounting standards, the leaders of that profession might exhibit the necessary backbone. Then we wouldn’t need a Volcker rule to do their work for them.

In Defense of Gambling with Borrowed Chips, Part I

I’ll pick up where I left off last week in a discussion of Gravelle’s review of my book, Gambling with Borrowed Chips.

She writes as if my analyses are unclear, i.e. she isn’t sure what Faille “really intends.” Yet she does seem to get the interpretation right in what follows, and I take that as evidence for the proposition that I was tolerably clear after all.

She says that my analysis is “that the commonly cited causes of the crisis – speculation combined with leveraging, deregulation, and other problems – are not, in fact, its causes.”

Right so far: and those aren’t even, in themselves, “problems” either!

She continues that Faille “apparently views the cause as the expansionary monetary policies of the Board of Governors of the Federal Reserve System, a claim that he appears to make based on the low interest rates set by the Fed. (In other parts of the book, he also seems to blame the Fed for shoring up the economy when asset prices were falling during the Greenspan years.)”

Yes, I make both of those points, and I “really intend” them both. Let us pause on them in that order. My book makes the point that entering the new century, the Fed Funds rate (a rate target not under direct Fed control, but a measure of its self-defined success) was at 6.5 percent. Greenspan pressed to lower the target in several steps starting in January, so that in early September, before the 9/11 attacks, the rate was 3.5 percent.

Of course, after those attacks the Fed sought to forestall panic by lowering the rate further, to 1.25. If you only have a hammer (or only think you have a hammer) all problems look like nails.

Gravelle thinks it odd, though; that I should consider these repeated lowerings to be at all inflationary. She says that “accelerating inflation while at full employment, rather than low interest rates, should be the sign of easy money.” Huh? What, after all, is an interest rate? It is the rate at which one party allows another to use a certain sum of money over a specified period. Any lowering of interest rates indicates, ceteris paribus, that money has gotten easier to get: in other words, it is precisely a sign of “easy money.” Easy relative to what? Well, relative to the condition before that lowering of the interest rates, for a start. Relative to a healthy economic condition? That’s the 64 thousand/million/billion dollar question.

She cites Bernanke as an authority for the proposition that monetary policy was not "closely related to the principal trigger -- the housing finance crisis." My own concern isn't simply how was the trigger pulled, but rather how did we end up pointing a loaded gun at our collective heads in the first place? And since I regard Bernanke as part of the problem, not part of the solution, I hope she understands that I look elsewhere for counsel.

I look for instance, to Jurgen Stark, a central banker in good standing himself, specifically a member of the executive board of the European Central Bank, who delivered a paper to a meeting in Hong Kong in April 2011, in which he acknowledged and discussed with some candor the role of central banking in the financial crisis. He said that during the 1990s, a period of "great moderation," when monetary policy seemed to be working in just the way the textbooks said it should, trouble was actually brewing. Central bankers acquired the false "impression that the monetary policy battles of yesteryear had been won once and for all." Hubris, if you will.

My own view is that it will prove much easier to live without central bankers than it ever will to train central bankers who will be free of hubris.   

What about Gravelle’s quizzical parenthesis? The Fed “shored up the economy” on certain occasions during the Greenspan years. What, she seems to want to ask me, could possibly be wrong with that? Actually, in response to the peso crisis, the east Asian troubles, the Long Term Capital Management meltdown, what the Fed actually shored up was the values of certain assets, not the “economy” as such. There is a difference between treating symptoms and treating the underlying disease processes.

When the Fed invoked what came to be known as the “Greenspan put” repeatedly in the 1990s, in effect it gave the US economy a few pills each time of Mother's Little Helper. This “shored up” wakefulness and attentiveness, but that didn’t make it a good thing. If you keep yourself awake artificially, the come-down, when it does arrive (and in the nature of things it will) must be that much more dramatic. In the literal instance, such as come-down from stimulants is known as … a crash. Intriguing term, no?          
Let's look to Jurgen Stark's speech again. He said that the central bank activism of the 1990s could have encouraged "and did encourage, in my view -- markets' tendency to opt for risky strategies, over-exposures and exuberance."  Yes, too much "shoring up" did that. The more perceptive of the central bankers see that themselves, these days.

So yes, for both of the sets of reasons that puzzle Gravelle, I find that Greenspan and his associates at the Fed culpable, in over-reacting both to the crises of the 1990s and to the rather mild recession of 2000-2001, of giving us an over-hyped economy through the Bush years, one that had to end in something much like the way it did in fact end.

I realize that is a view with which many “mainstream” economists will differ. Everybody who thinks for themselves ends up non-mainstream in something though; and I am happy to be non-mainstream in this.    

Gravelle doesn’t really argue with my analysis in any very sustained way. She notes that she finds contrary arguments “compelling,” but she then quickly sets the matter aside and moves on to something that bugs her more, that does get her sustained attention, my “prescriptions.” That's where we really seem to be crossing swords. Wait for it, though, fencing fans.

Microcredit

There has been of late a fascinating outbreak of discussion of microfinance at Marginal Revolution.

The first time I wrote of microcredit in this blog, in December 2010, I noted that Muhammad Yunus was generally considered its father, Grameen Bank was the DNA, and Bangladesh was the cradle.

I reported in that and a following entry on a controversy over a particular transfer of funds from Grameen Bank to Grameen Kalyan, a sister organization.

Half a year later I returned to the subject and referenced efforts to extend the basic model to the US.

A lot of newsy water has passed under the bridge since then. The significance of the discussion at Marginal Revolution, though, is that it takes our attention away from Yunis, away even from the 20^th and 21^st centuries, and asks us to think of microfinance/microcredit with a much longer life.  Jonathan Swift gently rocked its cradle in 18^th century Ireland.

That discussion will in turn direct you to this book.

Happy reading.

For Sylvia Jane III

Yet if free will in the sense under discussion  is bound up with the notion of the autonomous individual soul we ought to consider the argument of Averroes (Ibn Rushd).

The Moors of the 12th century had access to the writings of Aristotle -- the Christian world didn't rediscover Aristotle until they started winning back large parts of Spain, and ended up in the possession of some of the (formerly Moorish) libraries.

Anyway, Averroes wrote a learned commentary on the works of Aristotle, and the part of his commentary that most concerns us right now involves the idea of the human soul. Simplifying the matter considerably, one may say that Averroes --
invoking Aristotle's authority -- believed that there is only one true immortal human intellect, or soul. Our individual selves, our personalities, come about because this one common soul is mixed with a lot of different individual bodies.

Perhaps our bodies are so many stained-glass windows in a Church. The underlying mind, the “active intellect,” is the same –the light of the sun outside the Church. But the streams of light are differentiated as the various “passive intellects” once they have passed through the material of the windows.

If anything like this is so, where will we locate our notions of freedom? In the passive or in the active intellect? Or perhaps in the stained glass itself?

For Sylvia Jane II

Continuing the consideration of free will, and of Sam Harris’ recent book on the subject, from last week.  

As I indicated there, I’m not persuaded that Libet’s experiments have the broad significance sometimes attributed to them. Accordingly, I find unpersuasive Harris’ reliance on those experiments in his discussin of the factual question.

Beyond that, there is the value question. Harris wants us to abandon the idea of free will because it is part of the further idea of an autonomous self, and he wants us to give up that. The idea of a separate self is (as Buddhism teaches) the cause of all suffering and the abandonment of that illusion is enlightenment.

I recognize this idea as part of a noble philosophical heritage. For myself, though, I’m sticking with … my Self. The idea of the self, as a locus of responsibility and originality, has given us the politics of rights, of social mobility, the struggle for companionate over arranged marriage, and much else. How much “else” quickly becomes a matter of attribution and interpretation, but it seems likely for example that the idea of the lonely creative genius which was so much a part of romanticism was itself a factor in creating some of the works of art with which we associate the period.

Selfhood, whatever else we may say of it, is not only about suffering. And it is my humble prejudice that we should keep selfhood (and such notions of freedom as are intermingled with that) until we have better reasons for abandoning it than anything yet presented.

I'll have a final comment on this line of thought tomorrow.

A Critique of Gambling with Borrowed Chips

In The Federal Lawyer, the monthly FBA publication, Jane Gravelle of the Congressional Research Service has written a critique of my recent book on the financial crisis of 2007-08, Gambling with Borrowed Chips.

Here is a link to the book.

Here is a link to the review section of The Federal Lawyer for June. Gravelle’s review begins at p. 3 of that pdf.  If you are reading this after that link has lapsed, try here instead.

As you will see at either site, Gravelle had some kind words about my book as “readable and entertaining.” She enjoyed the historical material, and appreciated my explanations of “a lot of concepts and practices.” So if my book is ever re-issued with a dust jacket, we may be able with judicious editing to mine this review for blurbs.

She spends most of her review arguing with my book though: arguing in particular that my analysis of the cause of the crisis, and my prescriptions for avoiding its like in the future, are thoroughly misguided. Thus, she has my gratitude for giving me a wonderful excuse for discussing that analysis and those prescriptions further, and I will take advantage of the same in a series of posts you’ll be able to read right here next week.

For now, though, I’ll limit myself to an observation about the kind of book this is. Gravelle writes, “Gambling with Borrowed Chips is not a scholarly work, in that it has no references or footnotes.”  

   

 

Yes, it is true that I did not use the usual scholarly apparatus of footnotes and bibliography. This isn’t because I am unfamiliar or disrespectful of that apparatus. I have employed it in earlier books, and may well employ it again if I give this particular argument the fuller work-up I believe it deserves. Still … this book was but a précis for some later complete scholarly study, and a précis that might indeed attract readers who are put off my small-print notes and lengthy lists of references.

The text itself does contain references to the works on which I depend, more-or-less explicit or allusive, it is true. Barney Frank’s great whistling-past-the-graveyard quotation, "There’s no immediate crisis,” may be found in The Washington Post for September 7, 2008, for example, as my book clearly indicates.

As to scholarly works, in my chapter “Sound Money” I allude to the work of economic-historian Robert Higgs on the unusual length of the Great Depression and the economic consequences of the Second World War. I also cite no less of an authority than Ludwig von Mises on the aftermath of the Bretton Woods monetary conference.

My own credentials are not those of an academic economist (or economic historian).  They are those of a reporter whose beat it has been for many years now to cover the world of finance, first at HedgeWorld (2000 to 2008) and more recently at The Hedge Fund Law Report and as the proprietor of Enfield Editorial Service. I believe this has been as valuable a perch whence to observe and learn as any other I could have occupied through the key period.  

That will do for the kind of book, and the kind of author, involved. Next week, we shall get to the substantive issues between Gravelle and your humble servant.