Speech: Richard Koo - Japan's Recession & Lessons for Today

The Holy Grail of Macroeconomics: Lessons from Japans Great Recession by Richard Koo

Richard Koo's "Holy Grail" is definitely on my wish list and I will definitely get to it before the end of this year (2010). He has a fascinating proposal that the 15 year recession in Japan was in effect was a "balance sheet recession" whereby asset prices and property prices dropped dramatically giving companies more liabilities than assets on their balance sheet. However, he argues the cash flow of these companies were still good so even though they were effectively bankrupt, they were still able to pay down their debts and it took them 10 years to pay off their debts. He argues (at least in the speech below) that this was the responsible thing to do. The speech below I believe covers a lot of the issues in the book very briefly. He comes accross as very sensible and rational economist and someone worth listening too for, at the very least, very engaging perspectives on Japan and also for the lesson we can learn for today.

I have embedded two speeches. The first is 10 minutes long and covers the essential ideas. The second one is a little more detailes in putting these issues in a global context.

You can buy from Amazon @ The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession

New Purchase: Asian to Global Crisis - Sheng

From Asian to Global Financial Crisis by Andrew Sheng

I just picked up a copy of this book today at PageOne in Taipei 101. Am looking to try to understand the current financial crisis we currently find ourselves in. The book looks like a pretty detailed account by a central banker in HK who was in the middle of the Asian financial crisis way back in 1997. I remember when I first came to Taiwan to teach English at the end of 19998 many teachers had fled Korea due to the currency collapse at that time. It seems so long ago though now and seems to have been swept aside in terms of people memories as to what caused it and where it came from. I decided to buy the book as it seems to link the gap between the crisis then and the crisis now and will hopefully help to explain how the crisis developed and grew. Sadly though this is on the back of a long list of books I am currently catching up on (and some of them are pretty lengthy). Hopefully I can get to this one in a month or so. I am looking forward to it. Should be a good read.

You can read the first chapter on at the Amazon.com prodcut page linked below.

Buy from Amazon @ From Asian to Global Financial Crisis: An Asian Regulator's View of Unfettered Finance in the 1990s and 2000s

Lords of Finance - Ahamed

The Lords of Finance by Liaquat Ahamed - 5/5

The Lords of Finance tracks the history of the world’s four most influential bankers during the inter-war period from 1918 to 1939. The book gives a good introduction to each banker, explores their background, how they rose to their position and attempts to identify the motivations for their policies and decisions. Each central banker no doubt made serious misjudgments at the time and it was these misjudgments (which mostly revolved around the gold standard and the flow of gold between nations) that led to the great depression. Ahamed is careful to explain how the gold standard operated; the reasons and credit policies that influenced the flow of gold into and out of each country, why the possession of gold was so critical to each country and how this affected currency strength and the greater economy. The easily understood explanations of the complexities of global finance, macroeconomics and the insights into the mystical world of central banking are indeed the greatest strengths of this book. The other amazing revelations in The Lords of Finance are how the arrogance and egos of a small group of men precipitated one of the greatest financial catastrophes of all time that had severe and lasting consequences.

Ahamed starts by introducing each of the four main protagonists: Montagu Norman, Benjamin Strong, Hjalmar Schacht and Émile Moreau. Each chapter is a colorful introduction to the lives of each man: their ambition, their personality, their background, their emotional makeup, their frailties and the significant events in their lives that influenced their decision making processes throughout their careers. Throughout these chapters (and indeed throughout the book) Ahamed introduces many supporting characters (e.g. Maynard Keynes) and at each point is careful to provide color and purpose to each person’s life enabling the reader to connect with each character no matter how big or insignificant and makes the world of finance seem a little more human.

The book moves on to look at the catastrophe of the reparations demanded by the allies after the fall of Germany, the idiotic egos and the ignorance that demanded Germany pay exorbitant reparations after World War 1. The collapse of the German economy and the hyperinflation that nearly bankrupted the country and how this affected Europe and the people of Germany at the time and how countries such as England and the US were unable to assist Germany because the central banker at the time, while being a well intentioned man, was clearly not sufficiently educated. Ahamed also looks at the economic conditions in America during the roaring 20s and the stagnation of the UK economy at the same time. Ahamed is careful to outline how each country returned to the gold standard in their own time and how this decision led to France becoming the premier economy in Europe. He then traces how returning to the gold standard at pre-war rates continued to deflate and depress the UK economy. Ahamed also outlines how the flow of gold into the US led to easy credit and how the rapid bubble that grew in the US stock market and how the New York fed and the US Treasury were at odds with each other as to how to control the bubble. The book then documents the sudden collapse of the stock market in New York, the collapse of banks in Europe and the global implications of the depression in the 1930s and how the only way countries could come out of it was to come back off the gold standard. Of course, Ahamed is also careful to note how the collapsing economy in Germany led to the rise of Hitler in Germany and of course, the consequences of Hitler’s rise are known to all.

Ahamed spends much of the book detailing the reasons why the bankers all wanted to return to the gold standard. According to him this was almost a theological necessity for them. They didn’t have any other way of thinking about money. Money needed to have a base from which it could derive its own value and not be assigned value by fiat. For the bankers this was the only alternative. Of course Ahamed is quick to note Keynes’ criticism of the UKs return to gold and throughout the book lauds Keynes for his insights and in the way Keynes always seemed to get things right on issues like reparations and the gold standard.

Ahamed’s book is highly relevant in today’s world. Reading through some of the events that led up to the great depression is like reading a newspaper on the credit crunch that crushed the world in 2007 & 2008 and that led to the collapse of Lehman Brothers and Bear Sterns. Ahamed admits that the release of his book during the latest financial crisis was serendipitous. It’s a wonderful read, highly recommended and extremely relevant in today’s world. The best way to sum up the work of the four bankers described in the book and what they achieved would be to quote Montagu Normans diary from the book: “As I look back, it now seems that, with all the thought and work and good intentions, which we provided, we achieved absolutely nothing…nothing that I did, and very little that old Ben did internationally produced any good effect – or indeed any effect alt all except that we collected money from a lot of poor devils and gave it over to the four winds.”

Buy from Amazon @ Lords of Finance: 1929, The Great Depression, and the Bankers who Broke the World

Rogue Trader - Leeson

Rogue Trader by Nick Leeson - 4 out of 5

Rogue Trader is a well written, fast paced, intimate first hand apologetic of Nicky Leeson's dealings on the Simex trading floor in Singapore and how he managed to run up huge losses to the tune of £600 million without anyone noticing and breaking one of England's oldest merchant banks. In a world where Jerome Kerviel loses EUR4.9 billion on unauthorized trades of EUR49 billion for Société Générale , Bernie Madoff runs a US$50 billion Ponzi scheme, where Lehman Brothers no longer exists and AIG is bailed out by the US government for US$180 billion, the "small" affair of losing £600 million in unapproved futures trades and options gambling doesn't seem so terrible, but it was enough to break one of the oldest merchant banks in the UK and create one of the hugest scandals in banking history at the time. Since Leeson broke Barings, many other financial catastrophes and corporate scandals (Long Term Capital Management, Enron, the dot com bubble and sub-prime mortgages to name a few) have come and gone and some remain with us today. Perhaps these events make Rogue Trader even more relevant today than ever.

It seems ironic that in this account of his misdeeds Mr. Leeson comes across as being incredibly honest about his fraud and his crimes. He doesn't shy away from the things he did and admits that he, and he alone is to blame for the catastrophe that befell Barings. He offers excuses (loyalty to the team, covering up their mistakes etc.) but ultimately the book is clear: once the initial deficit in the famed 88888 error account was cleared, greed to generate large profits on a risky futures spread led to the spiraling effect that eventually accrued severe losses for Barings and finally led to their downfall.

Mr. Leeson's account is also clear about the failings in the system and clear on what could have been done to prevent the losses he had accrued over the time he was doing it. I suppose it is easy in retrospect to question why someone would so easily transfer the tens of millions of pounds on a daily basis to cover margin calls, when the capital base of the bank was only a couple of hundred million. It is also hard to believe how it was possible for him to cover his tracks with lies about unauthorized over the counter deals without those deals being properly audited and investigated. Certainly the blame for the high-risk trading falls squarely on Mr. Leeson's shoulders. He doesn't shy away from it and doesn't hide from it, but there were clearly severe structural faults within the bank and no effective risk-management methodologies employed to ensure honesty in the traders and especially to grant oversight to Mr. Leeson. The greatest weakness in the system was Mr. Leeson being granted the right to manage the trading floor and the back office where trades where reconciled. He even admitted this was open to being corrupted and auditors even noted this was a structural weakness, but they never did close the hole. These structural flaws were noted in the book and as per Mr. Leeson, when reports were released by the Singaporean government, many of these flaws were exposed and blame spread across the board for failure to take note of what was going on.

Rogue Trader also has its tender moments. There is no doubt that Mr. Leeson was deeply in love with his wife at the time and there is no doubt that when they were on the run in Malaysia and Brunei there seemed to be genuine affection and love. Mr. Leeson speaks very highly of Lisa and even though they have since divorced, Rogue Trader shows the affection and passion he had for her and she had for him. Some of the moments they shared were truly touching and should not be second guessed. His portrayal of their relationship was an honest one and never, throughout the book is there a bad word said about Lisa (not that I can remember anyway). He truly loved her and she was in my mind amazing to stand by him through the initial troubles and trials he had to endure.

Rogue Trader is therefore a very personal, very real and very honest account of what happened and what caused the bank to crash. Some parts are amusing, others tragic. It is still a fantastic read 15 years after the fact. Since this book was published, Mr. Leeson has served his time in a Singaporean prison, survived colon cancer, remarried, has written a second book and is now the CEO of a football club. In Rogue Trader Mr. Leeson portrays himself as someone who was haunted by his shadows and who was relieved when they were exposed so he could once again walk in the light. Others who failed to provide proper oversight, could not. Some of those protagonists have reignited their careers (e.g. Peter Norris who was the head of Barings Investment Division is now chairman of the Virgin Group) but many did not. Mr. Leeson, as he says in public talks, will always be remembered as the man who broke Barings Bank, but he has moved on with his life and I for one am glad for him.