A bit strangely, n+1 released a book of a series of extremely lucid conversations with an Anonymous Hedge Fund Manager (HFM) written before, during, and after the 2008 economic crisis. As you might expect from anything bearing the n+1 imprint, Diary of a Very Bad Year is well-written and deep while being approachable. In fact, it reminded me most of David Lipsky’s recent DFW travelogue Although Of Course You End Up Becoming Yourself. Both books are dips into smart minds grappling with events small enough for them to effect but far too large for them to control.
What I thought was interesting was the way Anonymous HFM seemingly juggled three contradictory (or, at the very least, conflicting) perspectives on markets and what was swirling around him. The first perspective is the standard one taught in beginning macroeconomics (and maybe microeconomics?) The world is a place of rational agents and curves constantly shifting towards equilibria, except for that damn stickiness always getting in the way. As Anon HFM says on pages 173 and 174, after the worst of the crisis has passed:
We are going to see a major change in the savings behavior of the American people…That’s good in the long term, but these dynamics are always an issue. Adjusting to that new equilibrium is painful. I don’t think adjusting to that new, real equilibrium is going to be instantaneous…and we may wind up with another recession down the line before things are finally restored to equilibrium.
The focus on equilibrium — and in particular in the restoration of equilibrium after an unexplainable (within the paradigm) shock — is clearly evident.
The second perspective, which only appears briefly, is one of neuroeconomics. As Anon HFM says on pages 85 and 86:
It sounds so crazy, that a huge economy, I mean bricks, and mortar, and steel, works or doesn’t work because a few people have some deficit or excess of neurotransmitters in the brain. It sounds crazy! But that’s exactly what it is…there was a misallocation of resources, because people had too much of that neurotransmitter in their brain, that then caused them to have too little of it, and now all they want are risk-free assets, and that causes the machinery of finance to really shudder to a halt.
This is, I think, the only place in the book this perspective appears and I think it would have been interesting to have it extrapolated at length. The neuroeconomics stuff is possibly the future of the whole discipline, though I have my own doubts about the empirical basis of utility. To me, coming up with a reliable measure of utility seems to involve the construction of a structure that can simulate the brain, making it AI-hard. Then again, it’s not like regular-type economics has any problem being founded on computationally intractable ground.
The final perspective is Minskian — that the principal mover in financial interactions is the retention of present capital into the future, and that this impetus left unchecked and unregulated inevitably spirals into a giant Ponzi scheme. To me, this perspective provides the clearest glimpse into the truth of what happened. It is interesting that this is really the last explanation Anon HFM comes up with, at the very end of the book. Here he is in the “Farewell” section, on page 233:
[The] machine doesn’t work unless it’s expanding. In a sense it’s a bit of a Ponzi scheme. I mean, a lot of economics has the dynamic of a Ponzi scheme — it only really works when you’re expanding. Once it goes into reverse, then you get the experience that we had in 2008.
Just as a postscript, for such an intriguing trip the book ends on a sour note. Anon HFM moves from NYC to Austin to avoid paying state income tax, which just strikes me as silly and venal.
