Perry Mehrling

Disclaimer: As noted in this review, the author was, for a short period of time, one of my professors.

I signed up for another Coursera class -- this one on finance and banking, topics I know absolutely nothing about. The professor of the course was Perry Mehrling, and he suggested his book might make good supplemental reading. While it might make more sense after the class ends, it's not really written as an introductory text.

The first half or so of the book follows his course fairly well. He builds upon an apparently seminal work in the field, Walter Bagehot's Lombard Street. There's a decent (if very brief) history of the Federal Reserve. Mehrling is most comfortable explaining things in terms of balance sheets (a great quotation from his online class: "In my world, everything's a balance sheet."), and so a few are thrown in as illustrations. This tends to be the easier part of the book, although it does have some read-this-three-times sentences (for example, "In all the excitement, no one seems to have noticed that the monetary Walrasianism of Tobin amounts to nothing less than an apotheosis of the shiftability view of the nature of liquidity.")

Ultimately, Merhling's thesis is that the Federal Reserve, formerly a "lender of last resort," has now -- after the housing/banking crisis that began in 2007 -- become a "dealer of last resort." Because these terms are still new to me, I'm not entirely sure I understand the distinction. In making his argument, he relies on a lot of economists that I just haven't heard of, so I don't feel right in assessing the validity of his thesis. Perhaps after the class ends, I'll have a better understanding of what he really means.

(Note: Due to other constraints, I'm "auditing" the class, so I will not be getting a grade, or a final statement of accomplishment.)

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LT Haiku:

A banking crisis
Explained by balance sheets but
Hard for novices.… (mais)

Revolutions spring from unlikely sources.

Fischer Black was an unlikely revolutionary. He thought like no one else. While teaching, his colleagues attacked problems with formulas and models. Fischer Black did not. He opted to explore them from as many different angles as he could conceive. Once solved, he generated a formula. Solving problems this way, Black found he avoided formula-dictated thinking ruts.

His teaching style was bizarre. He got bored teaching regurgitated knowledge. In his view regular lectures were a waste of time. He developed an engaging teaching style by asking 50 open-ended questions. Combined with his insistence that students learn the language of finance, this interaction gave air to brilliant minds. Black cherry-picked great ideas. His students loved the vibrant seminars.

Fischer Black became famous for what he cared less about: the Black-Scholes option model. Options were just a passing interest. He cared more about Capital Asset Pricing Model (CAPM) developed by Jack Traynor. He sought to apply it to economics.

He failed to leave a legacy in traditional economics. Fischer Black had degrees in physics and mathematics but no formal training in economics. In academia, he became recognized as forward-thinking in finance, but out of his depth in economics.

Robert Rubin, then the managing partner of Goldman Sachs, said it best when he sold his partners on the idea of hiring the academic Black.

“We will learn from Fischer,” he is quoted by the author as saying, “and he will learn from us.”

Fischer was egoless. He took rebuttals in stride. Open to change, he was an unapologetic believer in free markets. His unorthodox style sparked a revolution in the business of finance. His innovative thinking drove finance to the forefront of the science of economics.

Perry Mehrling has written a brilliant biography about a brilliant man.

Posted by the Pointed Pundit
July 15, 2007
2:12:18 PM… (mais)