Sunday, January 4, 2009

Required Reading for the Jaded

There are two books I read least year that truly stand out when it comes to understanding the dynamics of what happened in 2008, and both were written prior to the meltdown:

You may recall that Alan Greenspan admitted there was a "flaw in the model that I perceived is the critical functioning structure that defines how the world works" and went on to say that he wrongly believed market participants would behave rationally. Dan Ariely (who first glimpsed these disconnects as a patient recovering from severe burns to most of his body) tackles the myth of rational behavior head-on, and includes an impressive array of research to demonstrate the realities of human behavior. When viewed through the lens of the credit crisis, it's even more powerful today then when it first came out:

This second recommendation was published in the spring of 2007 and recently released in paperback. It should put to rest the myth that financial insiders and regulators could not have seen these systematic failures coming. Richard Bookstaber first grasped the problem in the 1987 crash when the "portfolio insurance" he helped pioneer created the same kinds of imbalances and liquidity traps that plagued the 2008 markets as the credit crisis took on the same dynamics. The conclusion, "Built to Crash" is particularly chilling as I found it to be far more accurate that what more famous doomsayers like Peter Schiff (whose suggestions in Crash Proof have been dead wrong in the near term but will eventually pan out when inflation returns (I predict that's at least a year out and Gold may not move much until then)). I couldn't make it through Peter's book - if you've seen him on CNBC over the years you won't find much new there. But Richard Bookstaber (who also spent a long time at Salomon Brothers) in many ways has written the sequel to Michael Lewis' Liar's Poker (which is just as entertaining and between the two books captures the essence of the last 30 years of Wall Street):

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