Stocking stuffers

LOOKING for some last-minute stocking stuffers? We at Free exchange have a few suggestions for books on economics and finance that are both readable and informative:

Lords of Finance by Liaquat Ahamed

This magisterial history of the interwar financial system is required reading for anyone who wants to understand the euro crisis, or central banking more generally. Mr Ahamed brilliantly describes the key issues of war reparations, currency manipulation, and the bubbles of the 1920s. He also recreates the people and debates of the time with vivid descriptions, even if they only appear for a few paragraphs. As is so often the case, decisions were determined by personality clashes as much as theoretical discourse. Many of the questions remain relevant to today’s world. Should central bankers care about bubbles? What causes hyperinflation? How should creditors treat nations with enormous sovereign debts? Can an international monetary system survive if some countries cheat? What are the consequences of an overvalued exchange rate? What is the best response to a banking crisis?

The Volatility Machine by Michael Pettis

Mr Pettis is best known for his writings on China and the euro area. But before he moved to Beijing he was a sovereign credit analyst who specialised in Latin American debt. This book was written in the early 2000s and brings to bear Mr Pettis’s considerable historical knowledge of financial crises as well as his own experience from the 1980s and 1990s. His thesis is that the booms and busts of small economies can be explained by changes in the liquidity of large economies, rather than changes in local conditions. There is also a fascinating appendix that describes bonds as packages of options. While it may strike some readers as excessively theoretical, Mr Pettis uses this framework to reach some intriguing conclusions about the best (and worst) ways to restructure bad debts. Even though it was written more than ten years ago, the book is very helpful for understanding the origins of the euro crisis, as well as what policy fixes are most likely to prove successful.

Manias, Panics, and Crashes 4th edition (or 6th edition) by Charles Kindleberger (and Robert Aliber).

One of the reasons so many people were unprepared for the recent crisis was that they were insufficiently familiar with the history of previous booms and busts. Fortunately for us, Charles Kindleberger spent his life trying to understand why crises have occurred so often. Unusually for an economist, he also wrote in clear, accessible prose. His masterpiece has been updated five times since the first edition was published in 1978. The fifth and sixth editions were written after Mr Kindleberger’s death in 2003. There is much to recommend the sixth edition, which was extensively rewritten to accommodate the events of the past few years. Putting the 2000s credit boom and accompanying surge in real estate prices into historical context is certainly valuable. But the older versions are, in some ways, more impressive precisely because they were not written in the aftermath of the worst crisis since the Depression. Either volume is sure to be appreciated by economics enthusiasts.

Liar’s Poker by Michael Lewis

Michael Lewis’s first book describes his time at Salomon Brothers during the firm’s heyday. Despite being set in the 1980s, a close reading of Liar’s Poker is still one of the best ways to learn about the culture of the trading floor (and Ivy League campus recruiting, for that matter). Greg Smith’s claim that Goldman Sachs views many of its clients as “muppets” seems relatively tame compared to some of the things in this entertaining memoir, such as when Mr Lewis sells bonds to an unsophisticated client at a price he believes to be far above fair value. Investors who remembered that episode may have been more cautious about buying securitised products in the 2000s. As it happens, Liar’s Poker includes an excellent history on the origins of the mortgage-backed security, which was invented by legendary Salomon bond trader Lewis Ranieri.

This is a reasonably short list, so readers should feel free to submit additional book ideas in the comments. What would you recommend?