In a note to file under the “Playing for Time” theme, the Curious Capitalist notes:

First American CoreLogic has taken a look at the effect of the government’s efforts to drive down mortgage interest rates, which, among other things, makes for easier refinancing. According to the loan analytics company, in the first half of 2009, refinancing homeowners set themselves up to save some $11.5 billion over the next five years. The typical person who refinanced was able to drop his monthly payment by $120 a month, a reduction of 10.5%… The value of mortgage originations hit $664 billion in the second quarter, and 69% of that was refinancing (by contrast, 37% of origination activity was made up of refis in the last quarter of 2o08). Fair or not, the government’s plan at least worked.

Reconcile this with one of the headlines on the site of Connecticut’s new candidate for U.S. Senate, Peter Schiff, which reads, “What America has succeeded in creating is not an economy impervious to shocks, but merely one which enables their consequences to be postponed to a later date.” I’ve spoken briefly with Peter before, and I’ve read his books, but I’m by no means in complete agreement with his views - yet in this instance, what he says is a perfect application to what the banking system is doing with the blessing of our government. Their strategy? Between the PPIP and mortgages, let’s sell as many options as we can now, book a benefit, and hope the adverse scenario that results in our option position(s) taking losses doesn’t occur.

I’ve wondered before whether or not we can carry trade the U.S. consumer back to health by attempting to force Treasury rates and other borrowing rates to converge; I’m not sure, but we’re certainly giving it the old college try.

If the typical person refinancing can save an extra $120/month, where does the money come from? It’s money that mortgage lenders aren’t making anymore in a lower interest rate environment. Now, the yield curve is steep, and short rates are near zero, so the relative change in rates is still helping banks. But at the same time, we’re more heavily leveraging banks to low rates; net interest margins might be getting fat at present, but they will compress and then some when rates inevitably rise. Zero, as James Grant has said, is the wrong rate for any economy, but more and more, I’m leaning toward believing that short rates stay extraordinarily low because of the idea that the economy depends on it - even when reality is that it aids speculators much more than the economy as a whole.

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Mike Price sends: In the second part of the books series, I’ll go over my favorite history and intermediate economics books.

To find the first part, which focused on beginner economics and investing books go here.

Intermediate Economics Books

An Austrian Perspective on the History of Economic Thought (2 Vol. Set)
Murray Rothbard was the dean of the Austrian School of Economics in the second half of the twentieth century. He wrote books on economics , early American history , libertarian political philosophy , the federal reserve , fractional reserve banking and the ethics of liberty .

He was the center of the libertarian movement in the 70’s and 80’s (He was a founding member of the Cato Institute, the Mises Institute, the LP and probably any other libertarian think tank or organization you can think of). He essentially created the anarcho-capitalist philosophy and was critical to its expansion in the Austrian School.

This book is Rothbard’s history of Economic Thought. He starts with the Greeks and Lao Tsu and shows how economic history evolved from the Spanish Scholastics, to the first ‘real economist’ (Richard Cantillon), where it fell back a step with Adam Smith, then got better with the French-classical school (including JB Say), was perverted through Marx and finally where the laissez faire tradition started with Frederic Bastiat.

The book is a two volume set comprising over 1,000 pages total. In it Rothbard goes over the economists above and all others. He writes about their economic theories and their lives, showing how they were influenced.

I consider this book the best introduction to the many economists and their theories, unfortunately Rothbard died before he could get into the Marginalist Revolution and the huge onslaught of economics that followed.

PJ O’Rourke On The Wealth of Nations
I find the actual book by Adam Smith virtually unreadable (and for those who can read it, unnecessary as there are so many economists who have said it clearer and better), but this book by P.J. O’Rourke has the essence of the book and allows readers to understand the same theories while laughing and not creating migraines without compare.

The Price of Everything
This was the first book I read on the Hayekian spontaneous order theory. Basically, in a free market prices are the feedback mechanism which create order, sort of spontaneously since there is no one in charge. For example, if there was a hurricane those who needed to build a new house would bid the materials away from someone who had a lesser need for the materials. Without a market there is no way to calculate who is most needing of the materials.

Roberts goes over this in much greater detail in a novel setting. In the story the local grocery store doubles prices after an earth quake, and an economics professor must convince a student activist that this is not the end of the world.

Atlas Shrugged
I read Atlas Shrugged and The Fountainhead in the summer after my senior year of high school. I had planned on only reading The Fountainhead, and it took me basically the whole summer to struggle through it.

Then with a couple days before school started I decided to read a chapter of Atlas Shrugged, and ended up not putting it down for the next two days and finishing the 1,200 page novel with a whole new perspective. Thankfully the arrogance and selfishness subsided, but the main economic theories remained.

In the book Rand follows two different parties - the good businessmen and the government leaders. She shows how government meddling has a bad affect on the economy. In fact one of the characters of the book is so tired of government meddling that he convinces every great business leader or likewise minded person to quit and move into the mountains of Colorado where a kind of paradise is made and everyone trades with gold.

The non-stop sexual references and “selfishness-is-the-only-way,” are annoying, but the book is the best I’ve read at showing all the incentives in an economy and how people are affected by them.

The Failure of the New Economics
I took a macro-economics class last year at college. In the class we basically went over all the Keynesian models, and talked about the Monetarist models for a week and that was it. Thankfully I had this book to use to refute the stupidity I was learning in the class.

Keynes’ General Theory came out in the mid-thirties, just in time for the government to use it to justify more and more government spending. Unfortunately the book is an unreadable blob which seemingly contradicts itself every other sentence.

Thankfully, Henry Hazlitt wrote this chapter-by-chapter (and sometimes line-by-line) refutation of the General Theory. Hazlitt destroys Keynes, and for those who like that kind of thing uses pretty funny writing to do it.

The Austrian Theory of the Trade Cycle and Other Essays
This book contains essays by Ludwig von Mises, Murray Rothbard and F.A. Hayek (probably the three foremost macroeconomist of all time) and has a forward and afterword by Roger Garrison, who is probably the foremost macroeconomist today. Note: none of these labels are accepted by the mainstream economists, who probably haven’t heard of any Austrians except for Hayek.

The essays go over the Austrian Theory of the Business Cycle (wherein a surplus of fake money unnaturally reduces the interest rate and discoordinates investment with consumption, causing malinvetsment and an eventual, but necessary, recession or depression to realign investment with consumption).

Meltdown
Thomas Woods is a historian, and a great one at that, but late last year he took up the task of being the first one to explain the current crisis, and do it from the Austrian point of view.

In this amazing book (the first ever that focused on the ABCT and ended up on the New York Times best seller list), Woods goes over how Greenspan reduced the interest rate to a negative rate and then legislation pushed all the easy money into the housing industry. He also goes over why bailouts won’t work and a recession is the necessary cleaning of malinvestment.

Plus, he backs it up with a history of the priors panics, depressions and recession in the US.

Antitrust: The Case for Repeal
This book is a more focused one.

In it the author, Dominick Armentano, shows how the history of anti-trust is that of lesser competitors trying to find a way to compete without being more efficient or better satisfying their consumers than their better competitors. Armentano also uses monopoly theory to show why Anti-trust is not needed.

Great Austrian Economists
Most of the good advances in Economics have come from Austrian Economists. This book goes over the 15 most prominent, from a Spanish Scholastics in the 1500’s to Murray Rothbard, and shows their additions to economic theory.

The Case Against the Fed
In this booklet Rothbard not only goes over the history of the Fed and shows how it was created frivolously, but also why it is unnecessary and a negative for free societies.

Economic Science and the Austrian Method
In this book Hans Herman Hoppe (the current foremost Austrian) destroys positivism and shows why economics must absolutely be deduced from the action axiom, or praxeology.

History
The Politically Incorrect Guide to the Great Depression and the New Deal

The current crisis is very comparable to the Great Depression, realizing this Bob Murphy (of the PIG to Capitalism) wrote a great guide to it and destroyed all the myths surrounding it.

Unfortunately, his book centers more on destroying myths then the ABCT. But, it is full of great stats and facts and arguments to use to destroy the myths (apparently that’s what it does seeing as I’ve said it three times in two sentences). The book also has a chapter on the current crisis and what the government should do.

America’s Great Depression
Rothbard’s book was the first great one on the Great Depression.

Rothbard goes over the ABCT, kills the arguments against it, then shows how the money supply and easy credit rose in the late 20’s. He also goes over how interventionist Hoover was and how Hoover turned a 2-3 year correction into the Great Depression.

Mobs, Messiahs, and Markets
I just finished this book last night. In it Bill Bonner (of the Daily Reckoning)and Lila Rajiva take readers on a gallop through history to show how mobs are usually wrong and why one should take this into consideration when investing.

Final Thoughts
Most of the books here are more specialized than in the prior list, I believe this allows readers to pick and choose which subjects are most interesting to them at the time and read about that. Again, you do not need to read all of these books right away, though it would do one well to read them all eventually.

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I go to school just outside Boston, and my family lives near Philadelphia, so I do a fair amount of travel between the two cities. Lately, I’ve noticed one bothersome change – the amount of traffic created by construction projects has greatly increased the length of the drive. Given the poor shape most state budgets are in, and the emphasis on infrastructure spending in spending stimulus funds, my intuition says that the stimulus funds are financing this construction, which is in turn causing traffic.

Now, my trips are done later at night – I usually work during the day, have dinner, and pack before getting on the road. I’m usually traveling between 8 p.m. and midnight, since it fits my schedule and will theoretically minimize rush hour traffic issues. The favored time to do this roadwork, however, is overnight, when it impacts fewer people than during the day. As much as I don’t like that, at least there’s some forethought there.

One of the dangers of the government allocating funds as it will is that the need for economic value to be created might not be considered. We will spend in the name of taking action, even though taking action is more costly than not doing so, in terms of opportunity costs – the money must come from somewhere, after all.

It’s a fact of life that roadways need to be maintained, and I’m not arguing that. But if less-than-necessary work is being done in the name of “creating jobs” or “investing in America,” all the costs need to be included. There’s little good that can be said about traffic jams, but they do offer plenty of time to think, and this thought experiment occupied me during a recent construction-induced backup on I-84 in eastern Connecticut one evening.

The total time I sat in traffic, which I’m defining as a speed below 10 m.p.h., was 40 minutes – this excludes, for example, when the road was closed down to one lane, but traffic flow was moving along around 40-45 mph. During that time, I traveled about 2.5 miles of road that was bumper-to-bumper across three lanes of traffic, and a half mile that was two lanes of traffic of similar density.

According to this from Edmunds.com, the average mid-size sedan in 190 inches (15.83 ft.) long, and the average length of a trailer truck is 80 feet (various sources). I’d say about 15% of the traffic on the road with me at that point was trailers, giving an average length of 25.45 feet for vehicles on the road. Assuming 10 feet between vehicle in either direction, and each vehicle takes up 35.45 feet – meaning 149 vehicles would fit in one lane one mile long. Approximating that for the number of “lane-miles” (8.5) yields 1266.5 vehicles in the traffic jam with me at that point in time (about 10 p.m., for the record). If there are 1.2 adults per car, then 1520 adults had their time wasted by sitting in traffic caused by road renovations; with Connecticut’s minimum wage of $8.00/hr. (being conservative), I calculate that it costs $12,150 in lost time per hour wasted, or $8,000 for the 40 minutes I sat in traffic.

These assumptions were meant to be conservative (i.e. not counting wasted gas), and it makes me wonder whether or not we’d actually be better off just dropping money from helicopters as stimulus, rather than making busy work that creates negative externalities. Since we’ve clearly committed to trying to carry trade the economy back to profitability, we might as well take the next step in forming the Hedge Fund of the United States and find the best relative value opportunities.

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One phrase I keep coming back to is “playing for time” – I see it as a good description of the strategy (or lackthereof) underlying most of the economic policy decisions that emanate from Washington.

What areas are being targeted, and how is it being accomplished?

Real Estate

Autos

Banks and Other “Financials”

The entire point of playing for time is to increase optionality. More information becomes available, and perhaps the economic situation will change for the better. But keeping businesses alive comes with indirect costs – more competition reduces the ability of healthier firms to pick up profitable customers – and with an implicit backstop from the government, borderline financial companies are incentivized to take more risks than usual.

The immediate result of those actions is to accelerate consumption, defer pain (losses), or interfere in allowing the market to set the prices it would otherwise set. To loosely quote a recent note from David Rosenberg, only in America are policies that encourage excessive consumption celebrated as a success. Yet that’s exactly what’s being done through a program like Cash for Clunkers, and the public reception has been very enthusiastic – a dangerous turning point in the series of bailouts.

I’m wary of data (and interpretations) suggesting that recovery is at hand, because uneconomic activity can only be encouraged for so long. That’s a lesson the Fed should have learned from previous heroic rescues during downturns, but chooses not to, because the expedient solution is to shovel money into any area of the economy that will take it.

Home prices, which undoubtedly went through an enormous bubble, are now the subject of a great experiment in controlled deflation. “Affordability” products sprung up earlier in the decade, when buyers had no savings for a down payment. Those turned out to have disastrous consequences, and yet policy now is directed toward offering what amounts to down payment assistance via a tax credit, and artificially low mortgage rates through the Fed’s market operations. We’ve been down this road before…

Boosting GDP for one or two quarters with the $3 billion (at present) Cash for Clunkers will quickly be revealed as wasted money; there are only so many new cars that people need. Most shrewd observers have realized by now that the program will skew statistics favorably for a time, without doing any real good. Of course, if the point is to save the “American” automakers, the program has been a failure on that front too.

The silent bailout of the financial system through zero interest rates and guaranteed debt is more pernicious – the TLGP, for instance, is estimated to be a $24 billion gift to those using it. And yet, little will be said about that as long as the impact on the Treasury’s borrowing costs remain marginal. Can we carry-trade weak financial institutions to profitability by leveraging the U.S. government’s borrowing ability? Likewise, can we store the health of balance sheets by stealing from savers through interest rates effectively at zero? We’re certainly trying.

Across sectors, there are many companies awaiting a turn in the cycle – and the only reason they’re still around is due to the good graces of the government. But cycles don’t truly turn until fewer people are around to looking at them, and it’s doubtful policymakers are willing to adopt this position and let liquidations occur. Playing for time comes at a cost – on a personal level, it means delaying decisive action that stands a chance of accomplishing something. I can only imagine what it will mean for the country as a whole.

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Editor’s Note: Mike Price sends this list of books on economics and investing he has found helpful.

Economics

Economics in One Lesson
This book by (one time New York Times and The Nation writer) Henry Hazlitt, is widely considered the best intro to free-market economics.

It starts with the simple lesson (from Bastiat) that in economics one must evaluate every outcome for every group of people, then applied this lesson to a multitude of topics, all popular when he wrote the book 50+ years ago, and most still valuable today.

An Introduction to Economic Reasoning
This is a text book, it starts with the simple axiom that humans act and logically concludes economics from there.

Gordon fills the book with humor and easy-to-understand examples, plus, since it’s a textbook it comes with many question each chapter to solidify the knowledge learned.

Economics for Real People
Gene Callahan is one of my favorite thinkers today, this is his intro to Austrian Economics book.

Callahan starts by introducing real economics as an a priori science, one that must deal with real individuals, not aggregates. Then, like Mises & Rothbard, shows how economics logically follows from the action axiom.

I have read a lot of economics books before this one and understood likely outcomes of different situations, but this book is the one that tied it all together logically in my head.

The Politically Incorrect Guide to Capitalism
Bob Murphy is my favorite blogger, and his guide is the best for ending arguments (by winning them).

Like all the books in the PIG series (a couple of which are great, but some are crappy) he goes through the main arguments against his position and then destroys them.

It’s great for when you think you found a weakness in the market or can’t find a good way to show someone with whom you’re arguing why they are wrong.

The Politically Incorrect Guide to American History & 33 Questions About American History You’re Not Supposed to Ask

I own about 7 Tom Woods books and have read all but one of them - he is my favorite modern author. These two are great introductions to revisionist US history, showing how, in the US times of prosperity have always come from times of little government and much free market.

The Concise Guide to Economics
This book is more of an index, it contains 37 chapters, all economics topics, with 1-3 pages on each and 3-4 book recommendations for each.

I use it whenever I need a quick refresher on a topic.

Basic Economics
Sowell has written a litany of good economic books, and has a talent for finding examples for what he is trying to say and making it very easy to understand.

Sowell says economics is a science of scarce resources with alternative resources and show economics in that light. The book is very good, but does have some problems.

What Has Government Done to Our Money? Case for the 100 Percent Gold Dollar
In the best book on money ever written, Murray Rothbard shows that money always starts as a commodity, and that the same laws of supply/demand prevent government from doing any good when money is involved.

Investing

The Warren Buffett Way
This book is probably the most read book about Buffett, Hagstrom has written about 7 books about Buffett, Munger and how they invest and use mental models (a couple of which will be in future articles).

In this book, Hagstrom introduces the tenets Buffett uses to evaluate businesses - he looks at the Business, Management, Financials, and Valuation.

The Little Book That Beats the Market
Greenblatt has two books that are in the top ten investing books of all time. This one introduces earnings yield and return on capital, and shows how a screen of these companies returned 30% a year over an 18-year period.

The book serves as a great introduction to value investing and evaluating businesses.

Financial Fine Print & Quality of Earnings

The next two books serve as great introductions to accounting and starting to dig into the footnotes to gain a better understanding of the business and the integrity of those who run it.

Mosaic: Perspectives on Investing
The last book on this list is by, possibly, the best modern thinker in investing - Mohnish Pabrai. I have been to three of his investor’s meeting and can attest that they live up to the expectations.

This book is a collection of articles on investing, Pabrai has a lot of unorthodox views, he talks a lot about finding a company’s DNA, using a latticework of mental models and using a DCF that has a lot of conservatism built in.

The book starts at $130 on Amazon and is approaching Margin of Safety like prominence, but most of the articles have been archived on the internet and you can find them here.

Conclusion
My public speaking professor showed our class a statistic that claimed humans, on average, retain only about 20% of what they read - so don’t get let down if you’ve read 3-4 of these books and still don’t quite ‘get it,’ I am still not as proficient in economics and investing as I’d like after reading these books and many more, but after each book I read more and more of the whole framework ‘clicks’ in my head and I not only understand that part, but the rest of what I understand seems to make more sense.

Also, I welcome any and all suggestions of different books that also serve as great introductions to investing and economics.

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