Book Review

Aftershock – The Next Economy and Americas Future, by Robert B. Reich

Robert Reich, former secretary of labor under Bill Clinton and professor of public policy at Berkeley University in California, is making a bold statement with Aftershock. In the book he lays down the gauntlet at the feet of austerity economics and Timothy Geithner, whose book I have previously reviewed. 

Called a communist by Fox News anchor Bill O´Reilly and presumably much worse things behind closed doors by his detractors, Reich tries to look at what caused the devastating financial crisis that shook the world after the fall of Lehman Brothers, and draws some very interesting historical parallels to support his theory. In case you don´t want to read a book written by someone of a Marxist disposition, it is wise to remember that Reich began his political career in the Ford administration, Gerald Ford being a Republican and most definitely not a closet pinko. 

Depending on how old you are, you may or may not remember the great depression of 1929. If not, you will have to trust Reich when he tells you that it was the worst economic calamity that the world had ever experienced. You will almost certainly know about President Francis D. Roosevelt´s New Deal, the stimulus package that helped end the depression and bring the US back to its feet. After the Depression and World War Two there was a period when America was, indisputably, the wealthiest and most powerful nation in the world. It was a time where the wages of most people rose steadily and there were relatively good prospects of social mobility.  Reich refers to these years, between the end of the war and the late nineteen seventies, as The Great Prosperity. Armed with data that shows how median wages have remained stagnant since the late nineteen seventies, Reich argues that America has forgotten the lessons of the new deal and the Great Prosperity.

To understand exactly what he means, we must turn to a fascinating character that the book dredges up from the dusty cobwebs of history. In order to make sure you don´t doze off when I give a brief history lesson, I promise there will be a humorous metaphor coming soon that you can look forward to while you grit your teeth and fend off drooping eyelids. 

Marriner Eccles was a leading industrialist in the period leading up to the Great Recession. When the stock markets crashed his business were sufficiently diverse and capitalized to survive, but Eccles´s world view and basic beliefs emerged from those tumultuous times fundamentally changed. He was forced to confront the uncomfortable realization that what he used to believe about the nature of the economy had been false. Presumably he alleviated his discomfort and anxiety by puffing on a large cigar and pouring himself a glass of brandy, until he was ready to emerge from the chrysalis of painful realization a changed man. Several years before celebrated economist John Maynard Keynes wrote his General Theory of Employment, Interest and Money, Eccles had already grasped some of the fundamental insights of what was to become known as Keynesianism. At the heart of the great recession, argued Eccles, was not the frivolous and sinful spending of the masses, but a fundamental problem in the American society where growing income inequality was the villain. With most of the income and fruits of American labor going to those at the top, ordinary people lost their ability to leverage aggregate demand and consume what was being produced. Like a great suction pump, the money went to those who already had more than enough of it, and as ordinary people had to go deeper and deeper into debt, the wealthy engaged in a frenzy of speculation that eventually led to the crash. When Eccles became head of the Federal Reserve, he helped Francis D. Roosevelt to launch the New Deal, a massive stimulus package where the government, paradoxically enough, had to go deeper into debt in order to stimulate the economy by increased public spending.

All of this is heady stuff, as I´m sure you will agree, but what does it mean to us? Reich argues that when Lehman Brothers fell and the world tethered on the brink of a dark and foreboding precipice, Obama and his team one learned only one of the two fundamental lessons of the New Deal. Just as Geithner argued in Stress Test, government must act decisively to put “money in the window”, to prevent panic in the global market and make sure that the banks can keep lending. The market and the financial system must, for lack of a better word, be flooded with money so that the wheels of the economy doesn´t stop turning and banks don´t turn into zombie banks. This has nothing to do with eating other people´s brains, it simply refers to banks that limp along on life support and are too weak to fulfill their core function of lending money. All of this works, as is shown by the record streak of private sector job growth that the current White House touts as often as possible, but Reich goes a step farther and tries to answer why the recovery has been so stale, and why so many are still going through tough times

If the great financial calamity of 2008 was a boxer with a menacing scowl and bulging biceps, TARP and the much loathed Bailout was only the punch to the head in the head and body combo needed to knock out our imagined boxer. The devastating blow to the kidney never came and now the US, continuing our boxing metaphor, is leaning against the ropes, reeling from a dozen savage punches. Nothing was done, argues Reich, to address the vital issue of income inequality. Since so little of the economic gains go to the working people and the middle class, they lack the ability to consume and spend, which causes tepid growth and chronically high unemployment. Austerity economics is, reading between the lines, the bribed judge who keeps letting the boxer in the star spangled shorts get pummeled.

The connection between financial crises and income inequality is illustrated by a diagram that is both highly thought provoking and the proverbial cherry on top of Reich´s reasoning. If you study the share of income that goes to the wealthiest one percent of the population in the US between the early twentieth century and today, you find something ominous. The chart looks like a suspension bridge held up by two pylons, located at 1928 and 2007. Between them lies a sloping curve that reaches its lowest point in the late nineteen seventies and then begins to rise, in the vague shape of a slack steel cable hanging between the pylons. Just before the great depression of 1929 and just before the great recession of 2008, the top one percent took home more of the national income than they have done during any other time in history, nearly twenty-five percent.

There is also a connection, Reich explains, between where the money is concentrated and how power is distributed. Too much wealth amassed at the top has been proved to tilt the political system in favor of moneyed interests rather than those of the general population.

Reich gives concrete policy proposals that could alleviate this situation, but this is the least interesting part of the book. Reich is immeasurably more captivating when he focuses on his theory of how income inequality is to financial crises what a canary in the coalmine is to noxious fumes. An early warning sign, that is.

Despite a valiant attempt, Reich will probably not write the next Great American Novel, but the chapter with a short story about an imagined 2020 election is nevertheless fascinating. Inequality, he argues, gives rise to anger and populism, which stokes the fires of nefarious demagogues. This fuels a radical populist/isolationist-party to edge out the imagined establishment candidates (a Bush and a Clinton, obviously). It doesn´t have to go this far, argues Reich on a hopeful note, and reminds the reader of how great inequality, abject poverty and racism has been bested in the past. There is a way forward, as long as people are aware of the issues they face, he explains optimistically.

Aftershock is an interesting and thought-provoking read, especially with Stress Test still fresh in my memory. Even if you don´t happen to agree with Reich or his policy proposals (I wonder if Bill O`Reilly is reading?), his insights are worth considering and discussing, especially if you want a deeper understanding of US history and economics.

Book Review 

Desert God, by Wilbur Smith 

Born in Zambia in 1933, Wilbur Smith knows Africa like no other writer. His writing career has so far lasted an impressive 54-years. During this time he has written a prodigious amount of stories about love, friendship, war, and adventure with indefatigable gusto. His latest novel is a clear indication that there is still plenty of lead left in his pencil. On a personal side note, Smith´s debut, When the Lion Feeds, remains a timeless classic and one of my all-time favorites. 

Desert God is the latest installment in Smith´s series of ancient Egypt, and our hero is once more the intrepid eunuch Taita, servant and friend of the mighty Pharaoh Tamose. The soaring majesty of the previous paragraph notwithstanding, the timeline of the series is somewhat confusing and Desert God fits into the middle, between the events in The Seventh Scroll and Warlock. Luckily, new readers need not fear, since the story is written to be more or less a stand-alone.  

The plot begins with war and turmoil. Following an invasion by a warlike tribe known as the Hyksos, the people of Egypt have been forced out of their homeland and now live in their new kingdom on the upper banks of the river Nile. With the war against the savage Hyksos having reached a bloody stalemate, it falls to Taita to devise a cunning scheme to save his beloved Egypt and restore Pharaoh Tamose to his rightful kingdom. The future of Egypt hangs in the balance and Taita´s plan to save it hinges on an alliance with the insidious Minoan kingdom of Crete. Their baleful ruler who, besides a penchant for human sacrifice, has the largest fleet in the Mediterranean. As if all this wasn´t enough, Taita is also in charge of two lovely royal princesses, Bekatha and Tehuti, who needs to be kept as far away as possible from all the young males of Egypt until they can secure the vital alliance with Crete through marriage. 

Before that can happen, Taita and his princesses, accompanied by a band of loyal followers, must embark on a long and dangerous journey. A journey that will take them across the deserts of Arabia, to the fabled city of Babylon and finally across the stormy waters of the Mediterranean. To brave the many dangers of their expedition, Taita and his friends must summon up all their courage and resolve. At the same time Taita´s cunning is stretched to breaking point trying to prevent the princesses from becoming too friendly with a pair of strapping young army officers serving with the expedition 

As usual when reading one of Smith´s novels, the reader is treated to a lavishly captivating story, and you find yourself breezing through the pages seemingly without any conscious effort. There are very few other writers in the world capable of writing adventure stories with the same effortless ease as Wilbur Smith, a skill he has obviously honed to perfection throughout his long career. 

Amid all my praise however, there is the occasional small fly in the ointment. Taita, the protagonist of the story, must be the single most talented human being of all time. Besides possessing a preternaturally sharp intellect he can switch roles effortlessly from playing the lute and singing to his princesses to developing staggering engineering projects to riding his war chariot while turning a hairy Hyksosian into a pincushion with his compound bow. Protagonists should be made to feel human to be relatable, we are often told, and Taita´s only conceivable weakness is the fact that he is a eunuch. Even this is turned to his advantage, since it gives him a most lovely singing voice when he plays the lute (I haven´t heard it myself but I trust the writer on this). 

In the end I capitulate completely before Smith´s latest novel. His writing career has been an astoundingly varied one, despite the fact that all his books have taken place on the same continent. No one can make the wild wastes of Africa come alive with the same colorful splendor, and no one can write an adventure story that is more eminently readable. Desert God undoubtedly deserves a place on your bookshelf.     

                

Book Review 

Stress Test: Reflections on Financial Crises, by Timothy F. Geithner

Stress Test is an autobiography about Timothy Geithner a valuable guide to understanding how to tackle future financial crises. Personally I was drawn to this book because I wanted to gain a deeper and more fundamental understanding about what happened during the worst financial crisis since the Great Depression.

This book is overly technical at times (which is where I did dose of a bit, if I have to be brutally honest with you) and occasionally a bit long winded. It is nevertheless of interest to layman and economist alike. Although, as I will explain later, I think Geithner leaves a few important parts out. One could also argue that it´s problematic for the author to write impartially about an event that he himself helped shape. This book then, should not be read as the be all and end all when it comes to the Great Recession. Instead it is fascinating enough for what it is, a firsthand account of economic crisis management and a sneak peek into the corridors of power when said corridors were in danger of being overrun by a pitchfork wielding mob.

The reader who isn´t interested in learning about how a young boy grows into a man and then becomes president of the New York Federal Reserve, can skip the first few hundred pages. I would however, urge you not to. For a man who was, at the time, blamed for being a Wall Street insider appointed exclusively to bail out the big banks and financial institutions, Geithner is surprisingly likeable and has in fact never worked for Wall Street. I believe him when he says that he entered public service out of a desire to do good things and I also think that a lot of the criticism levelled at him was because he was an easy scapegoat.

One of my gripes with the book is the chapter titled “Leaning against the wind”. In it Geithner recalls the early noughties, when he fought for increased regulation and oversight of the burgeoning financial industry. This was a time when the markets were booming, the banks were gorging on cheap credit and no one was even slightly worried about a downturn. Geithner was concerned about the banks not managing their risks prudently enough and not having enough capital to weather tough times. He laments the lack of effective tools at his and his colleagues’ disposal as well as the general unwillingness of people to stop dancing as long as the band kept playing. I don´t doubt Geithner´s integrity but I can´t shake of the feeling that the chapter is mainly a way for him to wash his own hands of guilt. If the crisis had struck a few years after he left office I don´t think he would have put quite as much energy into telling us of his valiant rearguard actions.

The part about the fall of Lehman brothers and the global panic that ensued is just as awful as we all remember it being at the time. Unless you are a really young reader, that is. The fall of Lehman brothers and the subsequent crisis is depicted in all its shocking, cataclysmic, depressing and deeply disturbing glory. Page after page after page of bleak reading about jobs being lost, homeowners being foreclosed and companies going bankrupt. It was against this dismal backdrop that Geithner, with some reluctance, became the seventy fifth secretary of the treasury. The ship he inherited from former Goldman Sachs CEO Henry Paulson was rapidly sinking and in an acute shortage of lifeboats. Just like the violin band that played to keep the people on the Titanic calm, Geithner emphasized the importance of the banks having “money in the window”, to prevent popular panic and bank runs en masse. Drawing on experience from previous crises, among them the Mexican one of 1994, Geithner recognized banks fundamental function as the circulatory system of the economy and the importance of keeping them afloat. Although Geithner himself sees the CEOs of the big banks and financial institutions as partially responsible for the crash, he abhors the kind of vigilante justice that many people felt the situation called for. Bailing out the banks with taxpayer money was a necessary evil and letting Wall Street die a painful death would have greatly harmed Main Street, according to Geithner. This, I believe, is what he sees as a great injustice, that people wanted to apply Old Testament justice to the big banks without seeing events from a systemic perspective. I somewhat sympathize with this view, even though I fully understand many people’s anger and indignation, especially those who became victims of the crisis through no fault of their own. The TARP program and the subsequent bailouts will remain a hotly contested topic for some time, I believe. What I don´t buy, however, is Geithner’s rather strong dislike for Massachusetts Senator Elizabeth Warren, who helped found the Consumer Financial Protection Bureau. This was one of the few good things that came out of the crisis, yet Geithner seems to regard Warren as a populist pouring gasoline on the bonfire of the public’s fury.

After the TARP program and after the banks had been bailed out the long fight for reform of big banks and financial institutions began. This part of the book is both maddening and slightly depressing at the same time. Reading between the lines one could argue that the bailout was a bit too effective and that the willingness to undertake ambitious reform disappeared once the worst of the crisis was over. Geithner tells of how the Obama administration fought against those who opposed reform, mainly republicans in congress and the financial sector. The ensuing gridlock wreaked havoc on an already shaky domestic recovery. The Dodd-Frank legislation that came out of all the tough negotiations was essentially a watered down compromise that left no one happy, least of all Geithner and progressive firebrand Elizabeth Warren.

The magic bullet to stop the crisis was the so called stress test, which Geithner and his staff devised to restore confidence in the market and analyze which banks were in danger and needed help. The plan was to develop worst case scenarios for banks and financial institutions, such as a drastic fall in GDP or a large rise in interest rates. These would determine if they had sufficiently large reserves of capital to weather the storm.

Throughout the book I sympathize with Geithner. He is no wolf of Wall Street with a pinstripe suit and a gold watch, but rather a humble and honest man who believes in public service and doesn´t love his country to the detriment of the rest of the world. The chapter about Greece and Europe were, being a European myself, especially painful. Ultimately his book is fascinating and well worth a read since it offers insight into one of the most dramatic periods of the twenty first century as well as financial crises in general. One thing that still bothers me however, is that I don´t think Geithner covered all the fundamental causes of the crisis, which is why I also recommend you to read Aftershock by Robert Reich. Expect a review of that book shortly.