Thursday, October 30, 2008

Book Review: Walter Wriston's Bits, Bytes, and

"The Internet has changed everything", xv. "To get 'it' means more than just having a personal computer on your desk or going to conferences with PowerPoint presentations. It is a mind-set", xvi. "Just as the landed gentry gave way to the industrialists as the Industrial Revolution gained momentum, so today the industrialists have been replaced by the master of intellectual capital", xvii. "The law of unintended consequences was at work with the the passage of the Sarbanes-Oxley bill in 2002. ... The overregulation that surely will result is partly the fault of business itself because practices that are often overlooked in boom times may, in lean times, appear to be egregious excesses that should never have been allowed to happen", 1. " "With the passage of time, the regulators produce a plethora of regulations that have the force of law, and an administrative judge--often from the same regulatory body--becomes prosecutor, judge and jury. Inevitably, the regulator substitutes his or her judgment for that of the market, and the system becomes backward-looking at a time when worldwide competition requires forward-looking innovation to survive. In the banking sector, for years the regulators held below market the interest rate that banks could pay to consumers", 2. "[I]f regulations continue to point in that direction [greater liability], it will become difficult, if not impossible, to get anyone of substance to serve on a board of directors", 3. "In the United States, thousands of manufacturing jobs that were once a mainstay of our society are never going to come back, nor will we ever see the American farms employing the approximately 20 million people who worked on them as the beginning of the twentieth century", 8.
"Over the years, wealth--and the perception of what constitutes it--has changed dramatically", 14. "What is wealth? How is it generated, used and saved?", 15. "Since only about 2 percent of a microchip is material cost, material resources are no longer very important as sources of wealth. ... The new economic powerhouses are masters not of huge material resources but of ideas and technology", 17. "The shift to the new economy has given new prominence to what John Maynard Keynes called the 'symbol' economy as opposed to the 'real' economy", 21. "Wealth is being created not by making and selling things, although this is still a large part of the economy, but by taking, trading, and managing risk in the financial sector. ... The idea of breaking down every risk into smaller and smaller parts was given the name 'particle finance,' and modern technology is giving us the means to do so", my emphasis, 23.
"It is almost a truism that although history is made up of facts, facts do not make history. Facts, no matter how prolix, do not arrange themselves into useful knowledge", 28. "For example, when natural resources were the dominant factor of production, the conquest and control of territory seemed a reliable way to enhance national power", 37. Today, infomation technology permit just-in-time inventory with direct shipments from supplier to store in response to signals created by the cash registers at the store's checkout counter", 38. "The economy ... has created what I call the Information Standard, which is far more draconian that the old gold standard and operates more swiftly", 40. "There is still no substitute for courage and leadership", 55.
"It is fair to say that no economy has ever behaved in a totally predictable manner; otherwise, the pundits would not be wrong so often", 57. "Until very recently, governments retained substantial power to manipulate the value of their currencies", 58. "Today, the value of any currency is determined by the price that the market will pay for it in exchange for some other currency", 59.
"People all over the globe see and hear how others live and work, and no one has to tell them that command and control economics do not work", 69. "There are large public-policy issues raised by the new technology that touch upon a sovereign nation's monopoly on the issuance and control of money", 80-81. The gold-silver standard and ratio between them, was an "inflexible system [that] led to panics and instability", 81. "There is very little, if any evidence that government has managed our currency values as well as did the commercial banks in the pre-Federal Reserve days", 81-82. "How can we control counterfeiting in cyberspace? What will happen if the issuer of the [debit] card goes broke?", 82. "Banks have always been good at assessing risk because the management of risk is what the banking business is all about", my emphasis, 88.
"American Enterprise Institute scholar Nicholas Eberstadt writes: 'Where unshakable traditional beliefs or passing superstitions played official roles in the past, we now witness overconfidence based on a false precision. ... Where antique despots surrendered to the temptations of numerology, the modern statesman proudly succumbs to the allure of "quantophrenia"--an idolatry of numbers no less unreasoning, and no less poorly suited for promoting the commonweal, than its precursor'," 92-93. "On another front, everyone from Main Street to Wall Street watched the inflation numbers. ... [The Boskin Commission] reported that the CPI overstated the change in the cost of living by about 1.1 percentage points per year. ... For example, instead of falling by 13 percent, real hourly wages actually rose by 13 percent from 1973 to 1995", 96. "Banks, which like to have collateral for their loans, are increasingly faced with the dilemma of what constitutes good collateral", 102.
"There is clearly a massive disconnect between corporate accounting and the value the market puts on a corporation's stock", 109. "To survive and prosper in the new economy, companies must now compete for the men and women with brains", 111.
"The Black-Scholes model, such as it is, is designed for short-term, tradable options and rests on a series of assumptions, some about the unknowable future, which must be imputed into the model", 114.
"With the plaintiffs' bar pouring money into the coffers of Congress and with the pressure to pass laws, the concept of a limited liability corporation, which has fueled the expansion of our economy, is in jeopardy", 119.
"The hunt for scapegoats heats up at the end of every financial cycle when markets start to decline and paper profits disappear", 121. "The basic problem is simple: Do the men and women who manage companies around the world have the necessary integrity?", 122. "The first lines of defense are honest law enforcement officers and effective auditors", 123.

The numbers above are page references. Walter Wriston (WW), 1919-2005, wrote Bits, Bytes, And Balance Sheets, 2007, piecemeal. It is a collection of his speeches and articles by Kathryn Wriston, his widow, after WW's death. As for regulators suppressing interest rates to consumers, that was done to aid banks. I don't recollect banks complaining about it until money market funds were created. Do we see Vikram Pandit, current Citigroup CEO, screaming interest rates are too low and that bank account holders are being "euthanized" after taxes and inflation? I have heard many times, how difficult it is to get competant people to serve on BODs. Really? I'll chair Citigroup's current audit committee. I'm sure Citigroup's senior management, accountants and KPMG will dislike the questions I'll ask, but I'm ready. I disagree, manufacturing, mining and agriculture are where it's at as American living standards decline. I agree, we will never see 20 milllion people back on US farms.
I agree, if in 1910 you would have told people fiat dollars were wealth as well as Euros, krona, etc., people would have laughed. Excellent question: what is wealth? That 2% of a microchip's value is material cost strikes me as no more relevant than what percent is the material "cost" of a barrel of oil. Oil's cost of material means what? The cost of: drilling mud, dry holes, tool pusher labor, what? I agree, the "symbol" economy will collapse under higher US inflation rates, when the world's central banks stop supporting the dollar. This get a "res ipsa loquitur". Imagine, WW was Citigroup's chairman. I'm surprised he never nominated any of his financial engineers for a Nobel Prize. In Physics!
So? Aren't natural resources a "dominant factor of production" today? As long as you have no transportation bottlenecks. More "draconian"? More "swiftly", to do what? "No substitute"? How about cunning, guile and obfuscation?
I agree, it's tough to predict the future. So? Until? Then why does China have $1.9 trillion in foreign exchange reserves? Yes, the Fed has done worse than the the market.
I agree, they don't work. Does anyone recollect WW advocating repeal of the Federal Reserve Act? Maybe the world is overdue to accept von Hayek's 1976 suggestion: we need free choice in currencies. Maybe we don't need any government to "control money". Is WW serious? It was unsound fractional-reserve banking practices that led to "panics and instability". Not gold and silver. Why punish counterfeiting, is the Fed afraid of competiton? Seriously, I have long believed that such counterfeiting would be concealed lest people lose faith in the "system". "Stuff and nonsense", said Alice. The business of banking is having bank depositors absorb risk and not get compensated for it. Banking under fiat money is a scam. Banks "good at assessing risk"? As The Mogambo Guru would say, "Hahahahaha"! If politicians did not protect them, most banks would collapse.
Amen, see my 12 December 2007 post mentioning Oskar Morgenstern. I agree with John Williams of shadowstats, about the Boskin Commission. It was another scam. I didn't know banks like to hold collateral. That's so 19th century.
I agree. So? I would never have guessed brains are useful.
I agree with WW, Black-Scholes (BS) is not that useful. Further, the 1973 Nobel Prize to Wassily Leontief and 1997 to Merton and Scholes as the two worst awards of its type. That said, I think options have a cost, which should be reflected in earnings per share. If BS is the best we have, use it.
The reestablishment of personal liability for bankers managing institutions which hold federally insured deposits is long overdue. I agree with Jefferson, corporations are dangerous. They can be used to redistribute wealth. And are. That's a fair slice of private-equity and LBO shops returns, i.e., "cutting off the left tail" and leaving it to other creditors. WW advocates adopting International Accounting Standards, 120. I don't and just see than as tools for manipulation. I wonder if WW, wherever he is, feels the plaintiffs' bar has done as much damage to the US taxpayer as say the managements of: Goldman Sachs, Freddie, Fannie, Bear, etc., etc.?
So? Integrity is a problem, but I see the integrity of the regulators as a bigger problem. Does Citigroup really want an "honest", KPMG, SEC and SDNY US Attorney's office?

Save your time and $25. Read something else. Whenever I think of WW, I think of something he said, "Countries don't go bust". They sure do. Imagine, WW was the chairman of Citigroup. Think about that!


Anonymous said...

Mr. Skeptical...

I think you should be Chairman of Citi...

Then I'd buy their shares...

Independent Accountant said...

Thanks for the vote of confidence.