May 5, 2014
JDN 2456783 PDT 11:34.
A review of Extreme Money by Satyajit Das
I had high hopes for this book; I’ve read quite a few books about the Second Depression now, but this one promised to tie it all together into a coherent narrative about what is wrong with modern capitalism.
But the narrative it delivers is an unconvincing one, filled with cynicism and pessimism about how this is just the way things are and we will have to accept our fate. Das has a weird dissonance in his understanding of the relation between the real and financial economies; one moment he’ll say that the financial economy is all made up and means nothing, and the next he’ll say that because the financial economy failed we must all accept slower growth and reduced standard of living in the real economy. He says several times that we must "live within our means", apparently not grasping that we have the power to create money out of thin air if we so desire it. A lack of money should never be a problem. A lack of oil, or a lack of steel, or a lack of trees, or a lack of laborers, or a lack of physicists—those could be problems. But a lack of money is something the government can change with the strike of a pen. If they fail to do so it is not because there is some irredeemable flaw in capitalism; it is because our legislators are ignorant.
I guess it’s not entirely his fault; hardly anyone actually understands the true relationship between the real and financial economies—but if you’d like to be someone who does, I strongly suggest reading up on Modern Monetary Theory, starting here:
Das loves being snarky, and he’s quite good at it. Some of his lines are hilarious, like "self-regulation, which bears the same relation to regulation as self-importance does to importance" and his comparison of the SEC and DOJ to the Robin Williams sketch about "Stop! Or… I’ll should stop again!". But he lets the snark get the better of him, unwilling to take just about anything seriously, preferring to make fun of all possible views equally so that he can avoid ever being caught agreeing with someone who might be wrong. He makes fun of Keynesians and Austrians alike. He even mocks Nassim Nicholas Taleb, whose views as far as I can tell are indistinguishable from his own—both seem to think that the world is hopeless and completely unpredictable and we should all give up and die. (The fact that financial markets are fat-tailed isn’t a reason to give up on modeling financial markets; it’s a reason to model them with fat-tailed distributions, for goodness’ sake! "Not all animals are elephants, so we may as well give up on biology
Das makes odd literary and film references, some relevant but most not. He even references Transformers to say something about our creations rising up to destroy us, even though that’s not at all what Transformers was about and he’d have had a much better and more literary example with, ahem, Frankenstein.
Some of his explanations of how derivatives work are not bad, though his diagrams are not as helpful as he thinks they are and there are better places to look if you want to understand derivatives.
Even worse, he makes some really weird and embarrassing errors. His explanation of systemic versus diversifiable risk is utterly wrong, and coming from a man who spent years working in financial markets it suddenly becomes apparent why our financial system might not be working. He buys into the whole Monetarist (or should I borrow from Krugman and say "sado-monetarist"?) notion that printing money is inherently inflationary, regardless of what’s going on in demand; he actually speaks of "debasing the currency" as though that were a real problem for modern fiat systems.
Worst of all, he offers us no solutions. The entire book is an interminable rant about how horrible things are, and then at the end he gives us no policy suggestions and hardly even any hope that any of this could be repaired. He takes the view that Krugman warned us about, the notion that "we are all to blame" and the system is fundamentally broken and everything is hopeless. No, we are not all to blame. In fact, the blame can be set squarely on a surprisingly small number of shoulders (or did I need to remind you that HSBC laundered money for terrorists?). The system is not fundamentally broken, it is suffering from what Keynes called "magneto trouble" (today we’d say "alternator"): It won’t start, it won’t run, everything is clearly wrong! Oh, wait, replace that one part and everything is fine. That one part is our banking system. We need to fundamentally reform our banking system. But the rest of the real economy? Actually that’s all fine. The computers still run, the laborers still work, the physicists still think, the bridges still stand. The United States is in real terms the richest country in the history of the world; it’s high time our monetary system reflected that.