#7: Goodwin gets most of it right (Andrew Krump)

I enjoyed the format of Economix and I admire his attempt to make economics approachable to everyone. He makes compelling links between politics and economics and rightly points out that we cannot understand history without considering both. As an intervention, I think it's power comes from retelling history from an economic lens. This forces the reader to come to terms with the large effect that economics has has on history.

As a finance major, I began to take issue with some of Goodwin's claims in the later part of the book. I found much of what he wrote prior to the 1980s to be a fairly detached view of history that fit my world view well. It's not a coincidence that the parts of the book I took issue deal with our modern system of financial capitalism. While I agree that the financial industry should be more heavily regulated, I also think his anti-finance narratives in the last few chapters are overly simplistic.

Goodwin does do a good job of clarifying a widely held misconception: real wealth is measured by owning useful things. Money, and later financial assets, are just a way to help facilitate this process. Goodwin explains the mechanics of bond valuation pretty well (pp.263-265), but he doesn't say anything about what makes a stock worth what it is. Any business school course in finance will tell you that a stock (or any other security) is worth the cash flows it is expected to generate in the future (dividends or share buybacks for stocks) discounted back to today at a risk-adjusted interest rate. There are obviously huge sums of money to be made by more accurately pricing stocks so mutual funds, hedge funds, and pension funds spend considerable time estimating how the company will perform in the future and how risky the resulting dividends are. The value of a stock is essentially a best guess of the future profitability of a company. Therefore, when managers try to increase a stock price, they have to communicate a believable plan that shows a more promising future than the one already reflected in the price. To me, it seems like Goodwin treats "raising a stock price" as the result of waiving some magical wand. Short term thinking can't go on forever, and investors eventually come to their senses (watch the "Drug Short" episode of Dirty Money on Netflix to see how this has played out with Valeant Pharmaceuticals).

Goodwin frequently paints Wall Street as greedy and only focused on maximizing share prices. At least in theory, the corporate raiders, mergers, layoffs, and subprime mortgage lending activities that Goodwin demonizes were believed by a critical mass of investors (who try to determine prices as a career) to be reasonable at the time. Furthermore, many of these failures have been addressed by market forces (and sometimes legislation) after they occurred. Today, corporate raiding is substantially less popular than in the 1980s because many companies have created "poison pills" that make corporate raiding cost prohibitive or impossible. And is it possible that the banks didn't lend out the money they were given under TARP because they recognized they had too much debt before the 2008-2009 financial crisis? Absolutely.

The problem with putting the blame on the financial industry is twofold. 1) Finance is the way our society estimates and distributes risk and reward. This allows companies to raise money for real investments (factories, jobs, etc.) and understand and hedge their costs. It also allows individuals new options for saving their money. If you're willing to accept more risk, you can expect to earn more investing in stocks and bonds than in a savings account. It opens the possibility of a society where we can all own a slice of the wealth. 2) Blaming the financial industry negates the need for personal responsibility and the role of other parties. Wall Street is certainly not blameless in the 2008-2009 housing crisis. But just because someone is willing to write me a toxic mortgage, does that mean I should accept it? Don't I have a responsibility to try to understand what I'm agreeing to? Casting a villain is much easier than coming to terms with the fact that responsibility for the crash is shared between Wall Street, lenders, politicians, regulators, and consumers. Clearly the government has a role to play in setting the rules of the game. But to Goodwin's point, if we're going to be electing the people that set up the rules, shouldn't we try to understand these complicated issues holistically?