Books

Devil Take the Hindmost A History of Financial Speculation

Edward Chancellor

Farrar, Straus & Giroux, New York, 1999, xiv + 386 pp., $25/Can$39.95 (cloth).

Edward Chancellor has written a detailed history of financial speculation and the excesses that surround it. In fact, much of what he describes is actually financial fraud, market manipulation, and material excess, rather than speculation. He vividly depicts episodes from the seventeenth century to the present, setting them in their contemporary social and political contexts. Portraits of key characters in the various episodes aptly illustrate the main themes. The portraits in Chancellor's accounts of early speculative booms are particularly entertaining. In comparison, the characters in later episodes, such as the development of the U.S. junk bond market and the collapse of the Long-Term Capital Management (LTCM) hedge fund, lack color and sometimes come off as caricatures.

Chancellor is highly critical of some financial practices and concepts, and not entirely without reason. Nonetheless, in some instances he goes too far, leaving the reader without a credible alternative. For example, he writes that "the discount method of valuation is the most speculative method of valuing stocks since it relies entirely on estimates of future earnings, which remain uncertain." Stocks are claims on future cash flows. It is unclear to me how one can value stocks without reference to what makes them valuable. If Chancellor has a better (less speculative?) alternative in mind, though, he doesn't share it with the reader. In similar fashion, he excoriates the modern theory of efficient markets, but offers no alternative. He does not mention the recent advances in behavioral finance, which would support his position.

In any case, Chancellor does not shy away from unorthodox views-from a hypothesis that the Japanese authorities have intentionally kept property prices high to encourage saving to the idea that high capital gains taxes may encourage speculation. Some readers may also take issue with his opinion that speculative capital flows to emerging markets have yielded no net benefits to those markets, or may disagree with his comparison of the private rescue of LTCM to "crony capitalism" in emerging markets. There are also a few signs that Chancellor hasn't always done his homework carefully. For example, he claims that hedge fund managers do not suffer losses, which must be news to the managers of LTCM; he misses the key role of weak market infrastructure in the 1987 stock market collapse; and he suggests that by entering currency swaps, Japanese companies "were actually paid to borrow the money to finance their speculations," but fails to make the connection to exchange rate risk.

Despite these shortcomings, I found the book entertaining and lively reading even when I disagreed with the author's interpretations. Chancellor provides a rich backdrop for today's financial events, establishing a foundation for the premise that modern-day cycles of euphoria and pessimism are as old as the markets themselves. I recommend the book to readers of financial history, although I encourage them to apply the modern financial practice of "due diligence"-weighing the facts and reaching an independent judgment-before buying Chancellor's conclusions.

Charles Kramer

Thomas L. Friedman

The Lexus and the Olive Tree

Farrar Straus Giroux, New York, 1999, xix + 394 pp., $27.50 (cloth).

The concept of globalization sprang suddenly upon the world. It is widely discussed and equally widely misunderstood. In Friedman's analysis, it is not a passing phenomenon that can be ignored or reversed, as some would have it, but rather the central principle of the post-cold war world. Using the vivid analogy of the Lexus and the olive tree, he illustrates the tensions that can be created between the new wave of globalism and the old social pressures that it confronts.

In 1992, while on assignment for the New York Times, Friedman visited the Lexus factory south of Tokyo and marveled at the robots that assembled the cars with minimal human supervision. Later, on the bullet train to Tokyo, he read about the Middle East conflict and the age-old feuds about who owned the rights to which particular patch of land and which olive trees. Olive trees are important, he writes; "they represent everything that roots us, anchors us, identifies us, and locates us in this world. . . . At worst, though, when taken to excess, an obsession with our olive trees leads us to forge identities, bonds, and communities based on the exclusion of others."

As Friedman explains, globalization involves the inexorable integration of markets, nation-states, and technologies to an unprecedented degree, enabling individuals...

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