John Steele Gordon:

Fueled by easy credit, the real-estate market had been rising swiftly for some years. Members of Congress were determined to assure the continuation of that easy credit. Suddenly, the party came to a devastating halt. Defaults multiplied, banks began to fail. Soon the economic troubles spread beyond real estate. Depression stalked the land.

The year was 1836.

The nexus of excess speculation, political mischief, and financial disaster—the same tangle that led to our present economic crisis—has been long and deep. Its nature has changed over the years as Americans have endeavored, with varying success, to learn from the mistakes of the past. But it has always been there, and the commonalities from era to era are stark and stunning. Given the recurrence of these themes over the course of three centuries, there is every reason to believe that similar calamities will beset the system as long as human nature and human action play a role in the workings of markets.

Recently, and from 2004:

If at first you don't succeed, at least learn from your mistakes.

Speculators, Politicians, and Financial Disasters

Malcolm Gladwell:

Can underprivileged outsiders have an advantage?

The Uses of Adversity

Ben Casnocha:

If you want to find a smart person who has time to be your friend, try to find a bad self-promoter.

Consider, as well, this bit of Hamming, from the archive:

Another trait, it took me a while to notice. I noticed the following facts about people who work with the door open or the door closed. I notice that if you have the door to your office closed, you get more work done today and tomorrow, and you are more productive than most. But 10 years later somehow you don't know quite know what problems are worth working on; all the hard work you do is sort of tangential in importance. He who works with the door open gets all kinds of interruptions, but he also occasionally gets clues as to what the world is and what might be important. Now I cannot prove the cause and effect sequence because you might say, ``The closed door is symbolic of a closed mind.'' I don't know. But I can say there is a pretty good correlation between those who work with the doors open and those who ultimately do important things, although people who work with doors closed often work harder. Somehow they seem to work on slightly the wrong thing - not much, but enough that they miss fame.

To Find Good, Underrated People, De-Emphasize Popular Filters

A new Harvard/Princeton working paper:

The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools. As a result of the prioritization scheme used in structuring claims, many of the manufactured tranches are far safer than the average asset in the underlying pool. We examine how the process of securitization allowed trillions of dollars of risky assets to be transformed into securities that were widely considered to be safe, and argue that two key features of the structured finance machinery fueled its spectacular growth. At the core of the recent financial market crisis has been the discovery that these securities are actually far riskier than originally advertised.

The Economics of Structured Finance

Robert Wade:

As stock markets plunge and governments scramble to bail out the finance sector, Robert Wade argues that we are exiting the neoliberal paradigm that has held sway since the 1980s. Causes and repercussions of the crisis, and errors of the model that brought it to fruition.

What would Peter Drucker do?

Managers have to learn to ask every few years of every process, every product, every procedure, every policy: "If we did not do this already, would we go into it now knowing what we now know?" If the answer is no, the organization has to ask, "So what do we do now?" And it has to do something, and not say, "Let's make another study."

Financial Regime Change?

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

Andrew Lahde bows out in style

A new book.

"Martin Wolf is the world's preeminent financial journalist. This book should be read by anyone who cares about the future of the international system, which, given recent events, is anyone who cares about the global economy or their economic future."

-- Lawrence H. Summers, former U.S. Secretary of the Treasury

Wolf was recently on Charlie Rose.

Consider:

“There are many books I could have written that are better than the ones I actually wrote. My best book would have been 'Managing Ignorance', and I’m very sorry I didn’t write it.”

-- Peter Drucker

Fixing Global Finance

Stripped of their superpowers, Wall Street’s wounded action heroes have been reduced to working for the government—or not at all.

The meritocracy wasn’t supposed to work this way.

See also, Paul Graham:

When times get bad, hackers go to grad school.

From a recent NYT:

"Everyone I know is studying for the LSATs right now."

The Autumn of the I-Banker

If the financial debacles of the past decade—the enormous bubbles, the credit collapse and its trillion-dollar consequences—have taught us anything about the American economy, it is that capitalists have done a remarkably poor job of safeguarding the future of capitalism. Our system became so dominated by finance, insurance, and real estate, and by the complex derivative securities these industries engendered, that the most eminent financiers (and their unsleeping computers) were unable to protect us from economic shocks. For a number of years, farsighted commentators—including in this magazine—warned of the looming credit collapse, and yet the masters of our economy took no action until the crisis was already upon us. Now we must not only repair our tenuous financial system but shore it up to withstand two great, gathering storms: dwindling energy supplies and accelerating climate change. To this end, Harper’s Magazine asked a group of leading economic thinkers to offer sweeping but concrete proposals for the rescue of capitalism, and capitalists, from doom.

How to Save Capitalism

We show that four widely-held beliefs about the financial crisis of 2008 are false.

...

The financial press and policymakers have made four claims about the nature of the crisis:

1. Bank lending to non-financial corporations and individuals has declined sharply.

2. Interbank lending is essentially nonexistent.

3. Commercial paper issuance by non-financial corporations has declined sharply and rates have risen to unprecedented levels.

4. Banks play a large role in channeling funds from savers to borrowers.

Here we examine these claims using data from the Federal Reserve Board. At least based on data up until October 8, 2008, we argue that all four claims are false.

Myths about the Financial Crisis of 2008