C. Adam Carte 2008-07-27

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I am always skeptical of books that try to integrate trends in economics and finance with other disciplines because they tend to be written by experts from the other disciplines with only a facile understanding of economics and finance. The result is that they simply appropriate simplistically and selectively from the complex history of economic events to serve their argument. I was pleased, therefore, to discover right from the introduction of this book that Taylor has made some important and even profound observations on the human condition and its direction in the beginning of the 21st Century. Nonetheless, the book contains significant flaws that, upon reflection, seem unnecessary. Taylor's central argument does not depend on the errors in fact and interpretation that he makes throughout the body of the book.

Taylor is a professor of religion with a deep understanding of philosophy, art history and, naturally, religion. In the mid-1990s he formed an internet-based education company, and in that process developed some real-world experience of modern financial markets. He augments his experience with some thorough study of modern finance and economics, though as becomes clear in the later chapters of the book, finance remains his weakest subject.

Taylor observes that the rapid growth of interconnection throughout the world creates evolving networks that grow in complexity exponentially and unpredictably. In my view, this is the most defining characteristic of our age - not simply because increased complexity makes the world more difficult to understand, predict and navigate, but because the complexity frightens and confuses people, giving rise to fundamentalist movements throughout the world (and George W.'s presidency) as people react against the complexity by trying to force simplistic models onto their world views.

In Confidence Games, Taylor develops this point much more completely. Observing developments in religion, art, physics and economics, Taylor shows how unified or dualistic explanatory models fall short in practice because they never account for the feedback loop that occurs when the object influences the subject, or the effect influences the cause. A straightforward physical example occurs when physicists try to model more than two bodies in motion, only to discover that the reciprocal influences of each body on the others creates highly sensitive nonlinearities that become impossible to model precisely. More to the point of the book, theoretical models of market equilibrium and stock prices do not incorporate the feedback loop of investors influencing each other, which can create unpredictable valuations and extended periods well outside of reasonable ranges for rational valuation.

A better explanation for systems with multiple interrelated participants comes from models of complex adaptive systems, generally used by biologists to understand the behavior of groups of organisms struggling to survive and responding to both endogenous and exogenous influences. This is a consistent theme throughout the book and argued convincingly.

Taylor applies the complex adaptive system model to religion, art and economics to show how each of these disciplines have internally generated feedback loops that influence their respective developments, but also how each discipline influences the others, creating a model that allows us to better understand developments in each of the subjects than we would have by analyzing each independently. For me, this argument is the most enjoyable and profound part of the book. I learned that the concept of the "invisible hand" was first used by Calvin to describe how God influences human affairs. Also fascinating was the drawn out parallels between "value" as it comes to us from either God or money. Parallels between God and gold go back to the origins of money, and the abstraction of money from gold into paper and digital currency in the last century track questions about moral absolutes and the secularization of religion. Taylor observes that "Both religion and financial markets are, after all, confidence games." (p. 122). Otherwise said, the value is a function of the confidence we have in the whatever we are valuing, be it from a religious or economic framework.

Within this argument Taylor raises the question if perhaps the financial markets and market value have supplanted God as the true arbiter of value in modern times. According to market purists and the Efficient Market Hypothesis, markets are omniscient and by their very nature judge the value of almost everything, directly or indirectly. Taylor convincingly shows how art cannot escape market valuation and in modern times, no longer tries to distinguish itself from commercial products. Later in the book Taylor dismisses this question by arguing that market values are rarely in equilibrium, and thus are not omniscient. However, I think this is a subject that could be carried forward profitably (no pun intended).

The massive commercialization of the world, abetted by globalization and the complex networks described in the book, in my view stands in stark contrast to the ambivalent relationship that religion has generally had with money. Until modern history, "value" as it is broadly understood when applied to people or ideas, was primarily the domain of religion. Insular and largely homogeneous societies had relatively static distributions of wealth with the aristocracy seeking to justify their prestige in religious terms. Modern societies, in contrast, are much more heterogeneous and have more dynamic allocations of wealth. Confronted with alternative religious views with differing value judgments, financial value among many societies becomes the universal arbiter of value without, or at least with less, dependence on religious or moral affirmation. In many cases the traditional relationship between money and religion is inverted as evidenced by the rise of mega churches that lead their congregants to believe that their church will help them to become financially successful. For these churches, the value of their religion becomes dependent on financial values whereas the reverse was true historically (think about the divine rights of kings!).

And if financial value is perceived to be the primary universal arbiter of value, hasn't money replaced God as he-she-it was traditionally understood?

I sensed while reading Confidence Games that Taylor saw his argument progressing in this direction, and stepped away from it. If so, that could explain the otherwise disappointing weaknesses in the body of the book.

First, the book was clearly written for an audience knowledgeable in philosophy, religion and art, but with a sketchy understanding of finance and economics - which is not surprising as this was clearly Taylor's starting point when he stepped into the world of finance in the 1990s. Consequently, much of the body of the book is a primer on theories of modern finance, valuation, the loss of the gold standard, the relative values of currencies, the growth of securities markets, derivative markets, and computer driven trading. While I was impressed by the accuracy of Taylor's factual descriptions of these developments, his interpretation of them revealed the shallowness of his understanding. In contrast to his descriptions of the developments in religion and art where he was fully equipped to step back and observe the changes dispassionately and with a long-term view, when Taylor observed recent developments in finance his view was generally politically biased or simply demonstrated an incomplete understanding of the subject.

For example, throughout his discussion of finance he creates an artificial distinction between real value and "spectral" value to differentiate between real value and value that has no foundation. While I wouldn't dispute his point that market valuations can rise irrationally, trying to draw a subjective line at a fair valuation independent of the market is impossible. For Taylor, it appears that any increase in market values since Volker shifted to a monetarist policy in 1979 is spectral in a pejorative sense, which is absurd. What's more, is the value of a machine or agriculture fundamentally different than the value of a service or information? Can't the valuation of both hard and digital assets rise and fall irrationally? It is a strange position for someone who has made a career as an academic and ultimately profited by selling his knowledge and teaching skills through an internet company. Does he think that his "product" is inferior to the produce he buys at the grocery store? His position makes little sense.

Taylor is clearly uncomfortable with the deregulation trend that began in the 1970s and argues that the increase in volatility and financial turbulence is a function of this deregulation. However, he never clearly links the deregulation to the financial crisis, or, to the extent that the link is self-evident, never discusses the motivation for the policy change or the possible benefits that were derived. Sometimes, he simply doesn't understand the facts. For example, he writes:

"The financial economy was roaring but the productive economy was sagging. When the economy entered recession in 1981-82, it became apparent that the very [Federal Reserve and deregulation] policies that were creating record profits in the banking industry were also sowing the seeds of a crisis that began with S&Ls and quickly spread throughout the entire system. In 1980, there were 4002 S&Ls; three years later, 962 had failed. Multiple factors contributed to this collapse. A drop in real estate values in the Southwest created problems for savings and loan associations, which had recently ventured into unfamiliar investment territory. In addition to this, the policies of many lending institutions during boom times returned to haunt them when the economy slowed. With inflation and interest rates rising rapidly, banks encouraged many property owners - especially farmers - to borrow more money to cover operating expenses. The logic was as familiar as it was flawed: borrow now at lower interest rates, pay back later with cheaper money. The only way people could do this was to leverage their land. But as the economy fell into recession and interest rates did not adjust quickly enough, property owners could not meet their debt obligations and defaulted on their loans. At the same time, the value of their land was declining, thereby decreasing the value of their collateral. As matters worsened, debtors' problems quickly became creditors' problems. (p. 139-140)."

This lengthy paragraph is indicative of the weaknesses of Taylor's tutorial on modern financial issues. First, it is not clear at all clear from the passage how the Federal Reserve and deregulation policies contributed to the failure of 962 S&L's. Of the factors cited (drop in real estate values, S&L moving into new investment territory, policies of lending institutions, increasing inflation and interest rates and aggressive lending practices going into a recession) only increasing inflation and interest rates can be arguably tied to the Fed's policies. S&L's did eventually move into new investment territory due to a change in banking regulation, but not until the Garn-St. Germain Depository Institutions Act of 1982, which preceded the more memorable S&L crisis of 1988-89, not the crisis described by Taylor here.

Secondly, of the "multiple factors" mentioned, the most prominent factor in the collapse of S&L's during the 1981-82 recession is overlooked entirely. When the Federal Reserve restricted the money supply in 1979 to control inflation, not only did it drive up short-term interest rates to record levels, but it also caused long-term interest rates to decline rapidly - a fact never mentioned at all. This interest rate environment (generally referred to as an inverted yield curve) caused S&L's primary liability, savings accounts, to become more expensive, and their primary asset, real estate mortgages, to pay out at lower rates. S&L's that had not prepared for this interest rate risk lost money rapidly and often failed.

Finally, there's no recognition of the long-term benefit of Volker and the Fed's decision to control inflation in 1979 by restricting the growth in the supply of money. Many economists credit this decision with creating the conditions for much of the economic growth that followed for a generation, not just in the U.S., but throughout the world where central banks learned from Volker's success and followed his lead. While many experts may disagree on various points here and there, no mainstream economist, irrespective of political leanings, disputes that Volker's decision was beneficial in aggregate.

Taylor's description of the S&L crisis is not an isolated weakness. Whenever he discusses deregulation, changes in financial institutions or the financial crises of the last 25 years, the logical construction of his arguments are weak, he commits errors in fact or omission, and he fails to present the corresponding benefits of the policies that he links to the argument. While not evidenced in the passage above, sometimes the weakness is simply an inexplicably pejorative comment as on page 172 when he refers to the derivative markets in the mid-1990s as "spinning out of control" because the notional value of the contracts was greater than that of stocks and bonds. Do we know that this is bad? If so, it is not supported elsewhere in the book. And if the derivative markets were spinning out of control in the mid-1990s, then we are still waiting for them to unravel because the notional value of derivative markets today are substantially more than they were then. Still spinning uncontrollably I guess.

But in conclusion, I still believe that this is a very important book that raises important long-term questions that should be taken further. Understanding "value" and the cultural implications of how we ascribe value go to the very heart of the human condition. Taylor's discussion of this issue in Confidence Games lays the groundwork for this topic in a manner that only a deeply insightful and broadly educated person could. Furthermore, the weaknesses of the book do not impact the strength of the larger argument other than by association.

William R. Neil 2008-04-27

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This is obviously, from the Title, a very contemporary review (April 27, 2008) of Mark Taylor's "Confidence Games," which was published in the fall of 2004. Since July of 2007, financial markets in the United States are going through the longest and most rattling crisis since the Great Depression, when measured by the extent of the mortgage crisis (10% of the mortgages are "upside down" - with projections of from another 10-20% to follow) and the degree and nature of interventions by the Federal Reserve and central banks in Europe. The collapse of the investment bank Bear Stearns in under a week (Wed. March 12th- Monday, March 17th, 2008) was the dramatic punctuation mark upon the shakiness and utter incomprehensibility of the new financial architecture both to the general public and the Beltway elite. It was a run against a major bank, but without the public lining up in the streets for withdrawals. Instead, the run occurred due to loss of confidence by unspecified major players operating in the spectral electronic spaces described so well in Taylor's book - years in advance. We are still waiting, the public and investigating Congress, to find out what really happened.

Today, as the press and public increasingly ask how this could have happened, even "wise men" such as Robert Rubin from the Clinton era "Committee to Save the World" are being questioned for their roles in and understanding of the still unfolding calamity.

This reviewer thinks it is important to credit those who, however far removed from mainstream press consideration, saw the dangers early and clearly in the brave new world of our financial markets, built between 1980 and the late 1990's, the era of de-regulation and free market worship - and idolatry. Now Taylor's book is breathtaking in it's scope and interdisciplinary reach, not easy reading, but given the breadth of what he covers, it deserves a much wider audience.

I direct readers' attention, in light of contemporary events, particularly to Chapter 5, entitled "Specters of Capital," just about 25 pages long, which should be required reading on Wall Street, in Congress, and in the world of journalists, such as they are, especially the ones who question and write about our presidential candidates.

Here is the essense of Taylor's findings on the fruits of decades of "financial engineering," or, as I like to call it, our "new financial architecture."

Page 152: "Contrary to expectation, the strategies and new financial instruments designed to avoid risk often end up creating greater volatility and thus actually increase risk."

Page 166: "Derivative investments are not only highly speculative but are also off-book, i.e., they do not show up on balance sheets. Moreover, derivatives are highly leveraged; in some cases they require little or sometimes even no capital up front. Throughout the 1990's, the derivatives market continued to grow until, in 1998, it had a nominal value of $70 trillion, eight times the annual Gross National Product of the United States." (Note: by 2008, the notional value is in the hundreds of trillions of dollars).

Pages 176-177: "With the attitudinal shifts about borrowing and debt and new government policies encouraging the creation of the new financial products computers and networks make possible, a collateral crisis became unavoidable...With Wall Street leveraged at 25:1 it might have seemed reasonable at least to extend margin rules to derivatives. But policies tended in the opposite direction. In his testimony before Congress in 1995, Alan Greenspan actually proposed completely eliminating all margin requirements....Indeed even the mortgage market changed in the 1990's. In their ongoing effort to make something out of nothing, financial engineers ended up transforming something into nothing; the ground virtually disappeared from beneath the real estate market. The securitization of mortgages through the creation of Mortgage Backed Securities and Collaterilized Mortgage Obligations led to pyramiding schemes in markets that once seemed secure."

On page 178 is a graphic of the Mortgage Market illustrating the layers and distance of investors from the actual real estate mortgages themselves - with collateral being used three times. Taylor, quoting author John Geanakoplos, nails the events of July 2007- to the present right on the head: "'Mortgage pass through securities offer a classical example of pyramiding. Pyramiding naturally gives rise to chain reactions, as a default by Mr. A ripples through, often all the way to D.'" (Page 179).

Just after this quote, Taylor comments: "At this point it becomes difficult to deny that the confidence game has become not only a casino but is actually a house of cards."

I don't think that much more needs to be said about whether our troubles could have been anticipated; they were and very clearly. This review writer knows that it was possible. He gave Taylor's book and warnings central "booking" in his own essay, "Fiscally Responsible, or Ingredients for an Economic Katrina?" The date? February, 2007.

William Neil

Christopher Hefele 2005-04-07

12 of 12 people found the following review helpful:

What gives money its value? Are financial markets truly linked to the "real" world? Professor Mark Taylor, who has been praised as an "awe-inspiring theorist of everything," explores these and related issues in this interdisciplinary book. Taylor attempts to show the links between economics, financial markets, money, postmodernism, complexity theory, media, art and religion. It's quite an audacious task, and although one might debate if he was successful, Taylor takes the reader on a thrilling intellectual journey.

Taylor claims you can't study markets in isolation. Markets are embedded in society, so to fully understand them you must understand politics, culture, science, religion, sociology, and psychology. To do so, Taylor takes us on a tour of not only various academic fields, but also of places from Las Vegas to Times Square. Stops on this tour support his thesis, which is that money and markets are essentially artful confidence games.

For example, he notes that in the 1987 movie "Wall Street," the character Gordon Gekko says "Money...is transferred from one perception to another." Taylor then recounts how Wall Street fueled the public's perceptions of Internet stocks during the late 1990s stock bubble. Financial journalists, stock analysts, traders, advisors, and company officials all promoted fledgling Internet companies with skyrocketing stock prices. Ambitious teenagers talked up the price of small stocks in Internet bulletin boards and then sold them at a profit. The NASDAQ market opened a glitzy new TV studio for business reports in the media saturated & neon-lit Times Square. Using these examples, Taylor makes the point that the financial markets and the media are clearly intertwined, and that just some misplaced trust in them can bring financial markets through a boom & bust cycle.

Taylor also discusses money and how it gets its value. Prior to 1971, the value of the US dollar was backed by gold held by the US Treasury. Generally, a gold standard prevents governments from arbitrarily running the presses to pay debts, which reduces the threat of inflation & boosts investor confidence. But what backs the value of gold? In short, only our collective confidence in it. Gold's value is not intrinsic to the metal; it's purely mental, and based on communal faith and trust. Because of that, going off the gold standard was difficult mental and emotional step for some in 1971.

Taylor also discusses the sociologist Georg Simmel and his work on the philosophy of money. Simmel's view was that economic exchanges are a form of social interaction, albeit interactions that are turned into quantitative, rational, impersonal ones. He thought that the flow of money shows the relationships between people. Thus, money derives its value from to what one can exchange for it in these social interactions, and its value is just socially constructed.

Taylor goes on to discuss multiple views of the economy. He cites Friedrich Hayek's view that the economy is a vast, distributed, complex information processing system, in which prices are used as signals to coordinate peoples' actions. He also discusses modern complexity theory, which views the economy as a dynamic, complex, adaptive system, with self-organized emergent group behavior that transcends any individual person. In both these views, the economic "invisible hand" guides peoples' actions worldwide, and is seemingly omnipresent and omnipotent. This description, Taylor poignantly notes, is very similar to descriptions of God; in fact, Adam Smith's original view of the "invisible hand" was influenced by Calvinism and had God in mind. Thus, God is not dead as some have claimed; he has simply been reborn as the market.

These are just a sampling of topics discussed. Overall, I thought the book had many thought-provoking ideas (& a few bad ones, honestly). It was rich in detail and well researched. But also I thought it could have been structured better to bring out the main points - it was easy to lose the main points amongst the thicket of details about Babbage, Bauhaus and the bond market. Nevertheless, I thought the good outweighed the bad, so I'd recommend it to anyone who is interested in viewing financial markets and the economy from a new perspective, that of a humanities professor and cultural critic.

J. Marquez 2004-10-06

30 of 33 people found the following review helpful:

Having read-or having attempted to read-a few of Mark C. Taylor's recent books, I was delighted to discover that this one, "Confidence Games" was both entirely different and more of the same. Where his always lucidly written, often provocative and sometimes esoteric reviews of contemporary science, art, architecture and fashion have often left me grasping for a conclusion, this book, "Confidence Games" delivers-BIG.

If writing about the meaning of it all were a physical sport, I would hazard that this fleet-footed journey from the birth of money to the terrorist attacks on the World Trade Center is Taylor's marathon: a long, fast ride that covers as much ground as an old school Hollywood epic without the tin-eared dialogue.

Throughout, Taylor deftly summarizes insights from celebrated economic and cultural thinkers of the last several centuries without getting bogged down in the dense foliage of history, all the while reminding readers that what paths may look today like a straight line are almost always a zig zag.

What can you expect to get from this book? For many, it will be a pithy introduction to the incredibly complex financial world we have inherited. Others will likely nod their head as Taylor provides intriguing evidence for the parallels and connections between high finance and high art, God and Mammon, computers and contemporary culture.

Like the best music, this book finds a deep groove early on and smoothly segues from pleasant chords to surprising riffs, never missing a beat even as the drummer gets wicked. This is clearly not summer or beach reading. But, given the often-cited consensus that 9/11 changed everything, a book like "Confidence Games" gives readers an unabashedly pleasurable opportunity to struggle with the very complicated questions that define the world in which we have found ourselves.

Taylor's tenacity in pursuing "the meaning of it all" through the lens of money and markets provides us with the rare opportunity to see the big picture in sharp focus.

Disclosure: Over a decade ago, I was a student of Mr. Taylor's and continue to correspond with the author on current affairs.