Here’s the second installment of my bids for the best economic and finance books for 2011 (you can find Part I here). Yes, it’s subjective and there are other worthy titles that go unmentioned. Space may be unlimited on the web, but time is still finite. On that note, here’s one that got away: Pandora’s Risk: Uncertainty at the Core of Finance, by Kent Osband. This one should have been tapped for Book Bits when it was published this past summer. Better late than never. In any case, Osband takes the market bull by the horns and brings us on an enlightening quantitative journey through the crucial business of thinking about and managing risk in the money game. An instant classic that’s at once provocative, thought-provoking, and practical (pay special attention to his innovative take on measuring price volatility in chapter 11). Meanwhile, here are some of the more memorable names that actually made it to these digital pages during the past 12 months of Book Bits:
● Models.Behaving.Badly: Why Confusing Illusion with Reality Can Lead to Disaster, on Wall Street and in Life
By Emanuel Derman
Review via Bloomberg
Disturbed, disillusioned and ashamed: Those aren’t emotions you expect a Wall Street quant to express when asked why taxpayers were obliged to bail out wealthy bankers. Unless, of course, the quant is Emanuel Derman, a particle physicist and former head of quantitative finance at Goldman Sachs Group Inc. “I am ashamed at the hypocrisies of the system,” Derman writes in “Models.Behaving.Badly,” an erudite yet pleasantly readable exploration of why financial models failed during the U.S. mortgage meltdown and why modelers must learn to use them more wisely. “We were told not to expect reward without risk, gain without the possibility of loss,” he says in disgust. “Now we have been forced to accept crony capitalism, private profits and socialized losses, and corporate welfare.” Unlike many quants, Derman says he wasn’t surprised that models failed in 2007, as events predicted to happen “once in 10,000 years happened every day for three days,” as one strategist at Lehman Brothers Holdings Inc. put it. The breakdown, Derman argues, flows from a misunderstanding of the difference between models and theories.
● The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground
By Francois Trahan and Katherine Krantz
Summary via publisher, Wiley
The recent credit crisis in the United States ushered in a new era of uncertainty. Like other bubbles, it was born out of an extended period of easy money that fueled prosperity and engendered speculation, but it was not the same as a euphoric run up and crash of technology stocks; it was an assault on two pillars holding up middle-class America: homes and credit. The remaining two pillars—employment income and investments—were collateral damage. People can no longer count on ample access to credit, increasing home values, and abundant job opportunities to propel them into a better lifestyle. In The Era of Uncertainty: Global Investment Strategies for Inflation, Deflation, and the Middle Ground, François Trahan, Vice Chairman and Chief Investment Strategist of Wolfe Trahan & Co, and Katherine Krantz, Managing Director and Founding Partner of Miracle Mile Advisors, LLC, present a new framework for investing in a dynamic, macro-driven world. The book addresses the creation and aftermath of bubbles from a top-down perspective and shows how applying the macro framework can help investors profit from the interwoven inflationary and deflationary scenarios likely to evolve in the next several years. It also examines the role of macro analysis in the markets: how top-down forces influence the direction of financial markets; how including macro analysis in research improves the odds of investment profits; and the potential pitfalls of ignoring macro trends in the investment process.
● Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System
By Barry Eichengreen
Summary via publisher, Oxford University Press
For more than half a century, the U.S. dollar has been not just America’s currency but the world’s. It is used globally by importers, exporters, investors, governments and central banks alike… This dependence on dollars, by banks, corporations and governments around the world, is a source of strength for the United States. It is, as a critic of U.S. policies once put it, America’s “exorbitant privilege.” However, recent events have raised concerns that this soon may be a privilege lost. Among these have been the effects of the financial crisis and the Great Recession: high unemployment, record federal deficits, and financial distress. In addition there is the rise of challengers like the euro and China’s renminbi. Some say that the dollar may soon cease to be the world’s standard currency–which would depress American living standards and weaken the country’s international influence.
In Exorbitant Privilege, one of our foremost economists, Barry Eichengreen, traces the rise of the dollar to international prominence over the course of the 20th century. He shows how the greenback dominated internationally in the second half of the century for the same reasons–and in the same way–that the United States dominated the global economy. But now, with the rise of China, India, Brazil and other emerging economies, America no longer towers over the global economy. It follows, Eichengreen argues, that the dollar will not be as dominant. But this does not mean that the coming changes will necessarily be sudden and dire–or that the dollar is doomed to lose its international status.
● Economics Evolving: A History of Economic Thought
By Agnar Sandmo
Review via The Enlightened Economist
I’ve just finished reading Economics Evolving: A history of economic thought by Agnar Sandmo, and commend it to every economist and student of economics. It’s a clear and fair account of the contribution to the subject by the key figures in its intellectual history, with a focus on Adam Smith and his immediate predecessors to the 1970s. The book would make an ideal text for a history of thought module in a degree course, but is also an accessible general read for an economist seeking some perspective on the state of economics today. I particularly appreciated not being able to tell the author’s own opinions; the book simply gives a straightforward account of both sides of the various controversies… Anyway, Economics Evolving is a highly commended book, which completely defied my initial impression that it was going to be worthy but dull. Heilbronner’s The Worldly Philosophers is still a terrific introductory read but is nothing like as substantial as this book, which is the best overview I’ve come across of the history of thought in economics.
● The Coming Jobs War
By Jim Clifton
Review via MoneyWeb
Clifton asserts that job creation will surpass all other issues to dominate politics. He likens the challenges to the second world war while further asserting that the war has already begun… It seems likely that “job creation” is destined to become the leader among business publication categories adding to the pressure on politicians everywhere. Few companies have Gallup’s experience in discerning data. The book points out that the world has 7 billion people with 5 billion being of working age. Of those, 3 billion desire full-time formal employment while globally there are only 1.2 billion jobs that meet his criteria, “pay check from an employer and steady work that averages 30-plus hours per week”.