Saturday 28 December 2013

My 5 Favorite Books of 2013

These are books I read in 2013, they weren't necessarily published in 2013. I have no idea how books 'should' be written, so my judgement is based on how engaging they were. I suspect that Isaacson is a very good biographer, but I suppose the content might be driving my interest. Either way. Here are my five favourite.

- China's Superbank: Debt, Oil and Influence - How China Development Bank is Rewriting the Rules of Finance (Henry Sanderson and Michael Forsythe)

This book ticked alot of the boxes that I've been interested in. Economic development, oil and energy markets, China, and finance. The key insight for me was seeing the logic behind using a different model to valuate assets at different development levels.

A new bridge in a developed Canadian city, that replaces a less efficient, but serviceable, older bridge does not impact the economy the same way that establishing a new bridge, in a poor Chinese city where one never existed before.

This book shows how the Chinese were able to leverage the recognition of this fact into it's lending practices through the government's pre-existing land ownership. The lower the initial level of capital stock, the greater likelihood a project will increase the productivity and/or value of surrounding capital stock.

Of course the diminishing marginal returns of this investment, contingent on the level that the capital stock has been built do, will result in greater incidence of uneconomic projects. China may be hitting that point now. But as they expand out to even less developed areas. These core lessons taken from China's amazing development might find useful applications while feeding China's growing economy.

This book tracks the CDB's expansion into developing markets. And I'm extrapolating the CDB model out to other entities. Goal one is to look after Chinese interests, as it should be. But the CDB, and China, seem to recognize, and are learning that to adapt to the country specific mood. Goal two needs to involve good 'soft' relations in their host country.

The failed US based Unocal bid in 2010, the Canadian political climate post Nexen in 2012, protests aimed at Chinese run businesses and Chinese funded infrastructure problems are issues that will continue going forward.

China's ability to navigate the social, political, and economic issues will be one of the most important stories to watch going forward. Understanding the CDB's past success and their approach both adds comfort and discomfort to my outlook of the future.

Anytime the current value of a project or collateral is derived from a projection of it's future value, added layers of complexity and uncertainty are involved. The CDB should be confidence, given it's performance in China.

However, factoring in the problems and issues arising from extending these practices outside of China compound those layers of complexity and uncertainty.

- Einstein: His Life and Universe (Walter Isaacson)

The basic take-away from this book was that Einstein was the man. It also gives me the opportunity to shoot down the whole "Einstein wasn't smart, and he turned out ok" meme that fills facebook posts by people who fail at something and want to make themselves feel better (I should say that it gives me the opportunity, but I rarely act on it... if you believe ignorance is bliss, and that ignorance has no impact on me, then I'm pretty indifferent to it).

Brilliance aside, it was his ability to wed complex theoretical concepts and ideas with simple thought experiments and elegant math that seems to have propelled both his key insights and his popular following. Good ideas may be all it takes to gain influence in the scientific community but Einstein's unique approach propelled him beyond that sphere.

Einstein was a brilliant man, he changed the world, he was one of the last 'rockstar' type of scientists to captivate the general population. Yet even he was a victim of holding onto his beliefs longer then the evidence should have allowed him (in his quest for a unified theory, and his failure to understand the implications of his own equations, and his failure to understand the importance of quantum mechanics).

It had a similarly humanizing effect as Butch Harmon's The Big Miss which gave us a look at the inner workings of Tiger Woods. All of his success is built on a whole bunch of talent and a whole bunch of hard work. Psychologically, knowing that Tiger was a basket case everytime he pulled his driver, just like me, only elevated my appreciation for his work. I end up slicing it across three fairways and sending that driver flying. Tiger battles it, works tirelessly, adopts strategy to minimize downside risk (avoiding the big miss), and dominates.

Similarly, Einstein's run of breakthroughs were built on a rigorous intellectual background. Without the tools to back up his more abstract insights with scientific rigor where does that leave Einstein?

After achieving rockstar status he could have slipped into an elder statesman role (perhaps even literally) and coasted into retirement.While no more epoch inducing breakthroughs were forth coming, he kept plugging away. A genius plugging away for the sake of his craft. I love it.

Interesting, informative, and engaging. I'll read anything written by Isaacson about anybody of relative interest.

- The Alchemists: Three Central Bankers and a World on Fire (Neil Irwin)

I almost wish a book like this was required reading to pass grade 12 (or to vote?!?). Monetary policy might be one of the least understood economic field and Ben Bernanke might be one of the most under appreciated people of my lifetime.

This book contrasts the styles, intellectual/academic background, and results of three key figures. Trichet at the ECB, Kind at the Bank of England, and Bernanke at the US Federal Reserve.

A read on history would probably be that the ECB was the least successful, the BOE got off to a slow start but is turning their ship around, and the Fed has performed best.

We lucked into Bernanke. I saw 'we' because the world lucked into him. The policy path of the US certainly seems optimal through the crash to me, Dec. 2007's smaller then expected rate cut, interest on reserves, and the consistently tight money (as evidenced by the plunge in NGDP) through the recession. However the counter-factual history with any other likely Bush nominee doesn't reveal an obvious better outcome.

What this book does well is outline the politics of these institutions. My guess, based on his previous work, is that Bernanke would have taken a much more accomodative approach. But decisions weren't up to Bernanke. They were up to the FED board. Bernanke had to steer them in the direction he saw fit. A lot of politicking for an academic.

While Trichet and King are central figures of this book, to me they were a cautionary tale. What if

At the end of the day good monetary policy doesn't solve underlying economic problems; it minimizes the destructiveness of them. It reduces the liklihood of cyclical issues becoming structural. Bernanke has done more then any other central banker towards this end. He has also battled the public sentiment and political foes every step of the way.

I think this book is a cautionary tale for monetary policy. Discretionary policy is fine when you have someone that will exercise that discretionary appropriately. But what if Bernanke acted on the inflation worries of the right? What if he let the big banks fail as suggested by the left? What if he anchored the USD to a commodity as suggested by... well, whatever Ron Paul is.

Point is, the US has an independent central bank with the stated dual (but admittedly vague) mandate:
"The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."
But with unemployment climbing, inflation below the accepted 2% target, and moderate long-term interest rates anchored by depressed expected economic performance, Bernanke had to battle tooth and nail to first avoid enacting contractionary policy, and then to implement more accommodative policy.

Put Trichet, and his failure to grasp the monetary complexities of action and inaction, in charge of the FED and we probably don't get the creativity and scale of behind the scenes operations that Bernanke oversaw. If we put King at the helm, with his failure to offset austerity with monetary easing and brash confrontational approach, and we'd likely have seen deeper trough and much more tepid recovery.

This book helped form my belief in the efficacy of a more explicit monetary policy. Removing discretion from politics where we can is typically a positive thing. The key is to find the right variable and install the right mechanisms to make adjustments.To me that variable is nominal gross domestic product (NGDP). The FED chairman should take it's cues from NGDP performance and adjust policy to maintain a specific target rate. But that's another post for another day.

The Alchemists should be required reading for anyone looking to form an opinion on central banking and monetary policy. Irwin does a great job of providing both personal, political, and economic context to decisions.

- The Better Angels of Our Nature: Why Violence Has Declined (Steven Pinker)

Great example of "everything's amazing and nobody's happy". It seems to almost be human nature, that we romanticize the past and are extremely pessimistic about the present. We're surrounded by it, frequent bomb blasts in Iraq, Syria, Mali, Somalia, the list goes on. People throw up there hands and talk about how things are falling apart, there are too many people, WWIII is a matter of time (many peakoilers push this notion).

What Pinker asks is this: what is the baseline of violence that we're judging today against?

Starting with archeological evidence showing extremely high violent death rates in pre societal times, Pinker identifies six main peace inducing transitions:

- Pacification: the move from hunting/gathering and horticultural societies to agricultural civilizations with centralized government.

- The Civilizing Process: roughly the middle ages to the 20th century, at the core, this era often replaced death with disfigurement and/or torture. Progress of sorts.

- The Humanitarian Revolution: starting around the 18th century this process began the removal of what we might refer to as cruel and unusual punishment. Think death by hind quarter, or being burned at the stake.

- The Long Peace: Basically the post world war era, this takes into account the rather bizzare (by historical standards) the true lack of war amongst the great powers.

- The New Peace: The decline of inter-state war, and the recognition that they won't be tolerate at the global level has bred an increase in civil wars. As evidenced in the Middle East and Africa these wars can last for long periods of time and cause a great deal of hardship. However, relative to the inter-state wars they are much less deadly. Reducing the negative impacts of these conflicts is huge. The proliferation of technology should help. My wish would be for countries like the US to actually cede the international final say to the UN (which Obama has moved towards after the Bush, screw the UN we 'feel' like they've got WMD, attack on Iraq).

- The Rights Revolution: This tracks the emergence of opposition to basically any form of wanton  violence or coercion. This goes hand in hand with The New Peace, and is where a large portion of the world is at.

The core of this book is a dispassionate look at the numbers. It asks us to question our notions of an idyllic past and forces us to recognize how much progress we've achieved as a species. Pinker offers up commerce, democracy, and cosmopolitanism as the drivers of an emergence of rationally and objectivity to human affairs. I largely agree.

My most fundamental assumption is that all human beings are by nature equal. From their I assume that they experience consciousness in a similar manner (chopping someones hand off hurts, watching a loved one die is sad, etc., etc.). From there things get more subjective. Thus, if there is one thing we definitively need to strive for, it's less human suffering (in the most literal sense: slavery, torture, etc.) and unnatural death. I'd call this an effectively objective goal.

Thus, the more we can push the notion that we are all equal at birth, the more we will push our species down the path of non-violence. Caste based societies, Sunni/Shia, Hutu/Tutsi, Israeli/Palestinian, Japanese/Chinese, Black/White, Republican/Democrats, etc. etc. etc. the more we can encourage the level discourse to remain on 'what we do' rather then 'who we are' the better.

We've come so far from being born into monarchies gave you control over people, and race based scientific theories elevated some and pushed down others, where now interracial marriages are not frowned upon (for the most part), and multi-cultural cities have dispelled any notion that human beings aren't basically the same.

This is the progress that Pinker helps illuminate and we should stop to appreciate every once in awhile.

- Goliath: Life and Loathing in Greater Israel (Max Blumenthal)

The reason that I initially picked up this book was because of the many negative reviews that I read. Reviews all focused on the negative mood or angle, or failing to portray the positive aspects of Israeli society; not the factual items put forth. That intrigued me.

I've always taken a somewhat negative view of how the Israel question was framed. My beliefs simply rest on the assumptions that: a) laws should treat people based on what they do, not under what circumstances they were born, b) Israel should be a state for Israelis not just for Jewish people, and c) Apartheid is apartheid regardless of the past history of a people.

Thus I never really understood why a one state, Israel, a state for the Israeli people where the law treated every Israeli the same, wasn't an option discussed. It always seemed blatantly racist (or culturalist or whatever) to say Israel a state for the Jewish people. And I never really understood (and perhaps still don't understand) why this isn't injected into every conversation on the situation.

This book certainly does not paint the Israeli political and legal systems in a very good light. It also focuses predominately on what appear to be fairly extreme political, legal, and moral positions of Israelis and less on those opposing them (to be fair, the solidarity movement is discussed).

What I found shocking was that what I'd identified as fairly extreme positions were held by highest of offices in Israel. They are incorporated into the legal system. They are enforced by the education system. When I first started reading the book I was going back and forth to the internet because it seemed bizarre that elected officials had said these things. And laws passed had actually enshrined such blatantly racist demographically motivated laws.

But it all seemed to check out. And again, the critics weren't really arguing with the facts, just the author's interpretations.

Is Blumenthal fair to the subject matter he explored? I don't know. Interpretations are necessarily subjective. The more objective insights of this book, pertaining to the ghettoization and segregation in Israel based on race and demographics are objective. It really is shocking to me (perhaps I am relatively sheltered from the current affairs over there?)

Here's a video shot by Blumenthal and his partner. Is it a fair representation of how all Israelis feel about asylum seekers in Isreal? Of course not. But it does exist. Even if the discourse was centered on the protection of borders and that immigration laws (assuming they aren't discriminatory) need to be enforced equally, that would be a good place to start the conversation. But the level of discourse is such that it doesn't even attempt to hide the main concern, demographics (by definition racism).

Anytime justification for any action or opinion is based on 'what people are' rather then 'what they've done' should be troubling. This book re-affirmed this notion to me.

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