After reading so much about the current economical crisis in the news and in great posts like this one (in french) from Franck about the original purpose of companies and their relation to the stock market, I finally decided to take this book (Vingt Propositions pour Réformer le Capitalisme) – that was gathering dust on my shelf since 2009 – with us on our trip to the Caribeans and read it cover to cover in a blink.
This book takes a very interesting approach of summarizing the state of the financial world, try to explain why it evolved this way and suggest 20 ideas that could solve as many weak points of the system. Written at the end of the first subprimes crisis in 2008, I found particularly interesting to read it now, 3 years later, as we are still stuggling with the aftermaths of this major crisis.
Beside learning tons about the stock market itself and discovering a world that makes way more sense than I ever thought (don’t misunderstand me, I still think – like Frank – that the stock market is answering the wrong question and endangering the system as a whole in the process but still), it gave me some confirmation on the fact that without ethics, nothing will change. Most of the ideas proposed make sense but would be very hard to put into place.
Some are almost impossible to put in place without a “world governing institution” like for instance the interdiction of trading insurances for products that you don’t own or (and this is one of their methaphores) “create new floors (insurances) on a building in order to make it safer when the base (the products insured) is still completely shaky (subprimes)”.
Another example could be the idea of creating a very stable market enforced with hard rules where the risk and the return on investment would be low to oppose to the wild-wild-rest. This sure sounds very nice, but that would be assuming that the investors would accept to forget about their double digit growth rates and understand the ethics behind such a preventive approach and not try to bend it as soon as the authorities would turn their back.
Another very interesting point of the book was to make parallels between the different bubbles we had and try to make out some patterns of the history. I was astonished to hear that the 1929 and the subprimes crises had very similar triggers: buying actions/houses with only very little (~10%) personal income and relying on the marketgrowth to cover for the rest. And bytheway, I wonder how this was not flagged as a Ponzi-like scheme from the begining…
I also really liked the construction of the book, going from very precise financial points to market dynamics, global organization and finally to ethics. The book has a very good lexicon to which you can refer every other page to get the meaning of those awkward financial terms.
All in all, this was a very interesting reading, so interesting that I noted a few points I need to investigate back home. I also would be very interested in hearing about the impressions of 2011 crisis by the same authors as some of their proposals were already partially implemented and some that they did not dare wish started to move as well (at EU level for instance). And least but not last, I might now be able to understand what my friend Joe is doing :] and what he means when he “computes the VaR of his energy package at maturity based on a risk-gaussian distribution in order to smurf his smurf in the smurf” (I know, this sentence does not make any sense).
Decisive point anyway, this is a french book so… nothing for my non-french-speaking readers :[
Hey, maybe you’d want to put a ‘c’ somewhere in my first name…
The idea of a stable market doesn’t seem new to me, I think Keynes spoke about things like that — or maybe just “new-keynesianists” like Bernard Maris or Joseph Stiglitz, I don’t remember exactly. It seems to make simple sense, really: I don’t understand how anybody would consider normal to have two-digits growth in every speculative market when global market growth is no more than 3-5 %; it seems obvious that this would be at the cost of heavy losses somewhere else.
Investors will, anyway, never want to hear about that, since they all think they are smarter than anyone and are confident they can do better choices and always be in the winner ones.
To me, it looks like the kind of things players do : they take a blackjack game, knowing this game gives a .5 % advantage to the house, but also knowing playing smart can give a player a 1 % advantage and thinking they actually will win in the end, other players paying for their benefits.
The difference, of course, is that investors have really good odds in everyday life, and big crashes only seldom happen — once in a decade or so. So they would be even more difficult to convince than hardcore players…
And I should read this book too, I guess. If I can find time…
@Franck: corrected, sorry about that.
The authors sure do not claim having found anything new, but merely gathering up and reformulating propositions that could solve this or that issue they identified. Of course, Keynes & Stiglitz’s ideas are in there, as well as J.C Trichet, A. Greenspan and a whole other bunch of economists.
About crashes, they imagine that we will start seeing bubbles bursting every two years now. Of course they will not always be as big as the subprime’s one, but they see the risk increasing faster and faster.