Yttrium, Scandium and Dysprosium sound like planets in a sci-fi movie teeming with blue Na’vi.
In fact, they’re “rare earth minerals” that China has in abundance -- elements essential to making iPods and hybrid-car batteries, as Ian Bremmer writes in “The End of the Free Market,” one of three recent books assessing the state of capitalism in the wake of a financial implosion that battered many an Ivy-League hedge-fund manager.
Fair enough, you might think: Saudi Arabia has its oil; Kazakhstan is the world’s biggest uranium miner. Then Bremmer reminds us that China supplies more than 90 percent of the world’s rare earths, which are also used in lasers and guided missiles. U.S. generals must cringe.
That unsettling reality illustrates a geopolitical conundrum the West faces following its latest trip to the money madhouse. Authoritarian countries such as China and Russia argue that the free market has failed, proving that the state should play the leading role in the economy, Bremmer says. Though they now embrace capitalism, it’s “state capitalism,” a modern permutation of mercantilism in which a government “uses markets primarily for political gain.”
Bremmer, the president of consultancy Eurasia Group, offers a calm though dry analysis of how state capitalism arose and why it is shaping the future of global politics and economics. He concludes that a familiar rivalry between ideological models is afoot: “Though this isn’t a new Cold War, that conflict offers a useful metaphor for how the battle for free markets can be managed.”
The U.S. and China today face “mutually assured economic destruction,” he says. America needs China to finance its debt, while Chinese exporters depend on U.S. consumers. In place of a Cold War, we have the threat of going cold turkey.
‘Traders, Guns & Money’
At the other extreme, capitalism has a history of running amok when loosed from the regulatory leash. Just ask Satyajit Das, the derivatives specialist who wrote “Traders, Guns & Money,” an acerbic expose now out in a revised edition featuring a blood-red cover perforated with bullet holes.
Das is a cynical man with much to be cynical about. He has more than 30 years’ experience in markets, on both the buy and sell sides. His resume includes stints at Merrill Lynch & Co. and Citigroup Inc.
Though he now serves as a consultant, Das brings a trading- floor perspective to this blunt survey of how derivatives have exposed us to ever greater levels of risk, from the 1987 stock- market crash to the subprime crackup. He knows his inverse floaters and how to describe them in simple language laced with self-deprecation.
“Derivatives traders split the trade up into tiny bits and then buy or sell the bits of risk separately,” he writes. “It is like buying a car, dismantling it and selling the parts separately. You hope to make more money that way. Based on my experience of buying spare parts for my modest car, this is a sure way to wealth.”
He scoffs at how former Federal Reserve Chairman Alan Greenspan praised derivatives for dispersing risk.
“Chairman Greenspan might wax lyrical about the unbundling of risks,” Das writes, “but we spent most of our waking hours frantically rebundling the risks and stuffing them down the throats of any investor we could find.”
Apart from an afterword on the credit crackup of 2007, the revised edition is little changed from the original of 2006. Funny, readable and peppered with one-liners from Groucho Marx, “Traders, Guns & Money” offers an ideal primer for anyone tempted to take a walk on the derivative side.
The era that spawned the rise of state capitalism and the spread of derivatives also saw an explosion of hedge funds. One of them, Holte Capital Ltd., was the creation of a Danish graduate of Harvard Business School, Lars Kroijer. He tells his story in “Money Mavericks,” a flatfooted yet constructive look at how hedge funds really work.
His adventure in Hedgeland brims with naivety and hubris -- his words, not mine. The journey began soon after Kroijer turned 30 in 2002, when he and a buddy set up Holte in a West London apartment. It ended with a bang, then a whimper, five years later, after a position in European shipbuilder Aker Yards ASA came to grief and investors began yanking their funds.
Holte was no headline-grabber; its invested capital peaked at about $1 billion, Kroijer writes. Nor is this the story of enraged quants punching computer screens or Cristal-fueled parties in lap-dancing clubs.
“Sadly for my publishers,” he writes, “there are no excesses of sex and drugs.”
Instead, we get an anecdotal and intermittently amusing account of how Kroijer’s little band raised money, picked promising investments and hedged its trades.
The book could prove useful to those who dream of joining the hedgie game, providing they can stomach the cliches and plodding prose. Readers hungry for tales of hedge-fund high jinks might be better off reading Sebastian Mallaby’s “More Money Than God” or Scott Patterson’s “The Quants.”
“The End of the Free Market” is published by Portfolio (230 pages, $26.95, 20 pounds). To buy this book in North America, click here.
“Money Mavericks” is also from Financial Times Prentice Hall (210 pages, 20 pounds).
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)