Book Bits For Saturday: 12.10.2011

The Number That Killed Us: A Story of Modern Banking, Flawed Mathematics, and a Big Financial Crisis
By Pablo Triana
Excerpt via publisher, Wiley
In its very prominent role as market risk measure around trading floors and, especially, the tool behind the determination of bank regulatory capital requirements for trading positions, VaR [value at risk] decisively aided and abetted the massive buildup of high-stakes positions by investment banks. VaR said that those punts, together with many other trading plays, were negligibly risky thus excusing their accumulation (any skeptical voice inside the banks could be silenced by the very low loss estimates churned out from the glorified model) as well as making them permissibly affordable (as the model concluded that very little capital was needed to support those market plays). Without those unrealistically insignificant risk estimates, the securities that sank the banks and unleashed the crisis would most likely not have been accumulated in such a vicious fashion, as the gambles would not have been internally authorized and, most critically, would have been impossibly expensive capital-wise.

Six Myths that Hold Back America: And What America Can Learn from the Growth of China’s Economy
By Frank Newman
Q&A with author via Forbes
Q: What about the currency issue? The currency has strengthened over the last several years, yet our trade deficit with China keeps getting larger. Washington still seems to think that if China would only strengthen the renmimbi faster, the deficit will balance out.
A: They’re wrong. The U.S. has to get China to buy more stuff from us, but there’s a lot of bureaucratic problems involved in that, such as intellectual property rights, for example. It’s improving. Our exports to China are increasing.
Q: China isn’t going to listen to a word Washington says about its currency, right?
A: They are not going to do anything to ever look like they are succumbing to foreign pressure. Ever. Period. Consider this, why would China want to put the value of the renmimbi in the hands of the market when in their view — and this is not hard to understand — the market has mispriced assets consistently over the last several years. Is the market really that brilliant? Their record on pricing currency and derivatives is abysmal. Look where the mortgage backed derivatives crisis took us in 2008.
The Greatest Crash: How Contradictory Policies are Sinking the Global Economy
By David Kauders
Review via Learning From The Dogs
Back in the late 90s, when I was living in England, I attempted to bolster my self-employed income by investing and trading in equities. It was a frustrating game, game being the right word! One day I was lamenting this to a close friend and he gave me the name of David Kauders at Kauders Portfolio Management and suggested I might like to contact him. I followed my friend’s recommendation and met with David. What he outlined at that meeting all those years ago was mind-blowing, no other way of putting it. Essentially, David predicted a financial and economic crisis of huge proportions. He convinced me of the likelihood of that crisis and in November 2001 I became a fee-paying client. As the world now knows that prediction came to fruition… The book, released in paperback in England in October 2011, published by Sparkling Books, is subtitled ‘How contradictory policies are sinking the global economy‘. Frankly, that subtitle doesn’t do much for me. A clearer message that comes from the book is this: the economic world has reached a ‘systems limit’.
The Delusions of Economics: The Misguided Certainties of a Hazardous Science
By Gilbert Rist
Summary via publisher, Zed Books
In The Delusions of Economics, Gilbert Rist presents a radical critique of neoclassical economics from a social and historical perspective. Rather than enter into existing debates between different orthodoxies, Rist instead explores the circumstances that prevailed when economics was ‘invented’, and the resultant biases that helped forge the construction of economics as a ‘science’. In doing so, Rist demonstrates how these various presuppositions are either obsolete or just plain wrong, and that traditional economics is largely based on irrational convictions that are difficult to debunk due to their ‘religious’ nature. As a result, we are prevented from properly understanding the world around us and dealing with the financial, environmental, and climatic crises that lie ahead.
Acts of God and Man: Ruminations on Risk and Insurance
By Michael Powers
Summary via publisher, Columbia University Press
Much has been written about the ups and downs of financial markets, from the lure of prosperity to the despair of crises. Yet a more fundamental and pernicious source of uncertainty exists in today’s world: the traditional “insurance” risks of earthquakes, storms, terrorist attacks, and other disasters. Insightfully exploring these “acts of God and man,” Michael R. Powers guides readers through the methods available for identifying and measuring such risks, financing their consequences, and forecasting their future behavior within the limits of science. A distinctive characteristic of earthquakes, hurricanes, bombings, and other insurance risks is that they impact the values of stocks, bonds, commodities, and other market-based financial products, while remaining largely unaffected by or “aloof” from the behavior of markets. Quantifying such risks given limited data is difficult yet crucial for achieving the financing objectives of insurance.