JUICE: Summer Reading

By Published On: June 26, 2009

The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street by Justin Fox isn’t exactly this summer’s DiVinci Code but for those of us who take the changes in energy politics and policy to heart, this book is a ray of sunshine. Unfold that sand chair and read up. The book shines light on the making of markets--be it a greenhouse gas cap-and-trade market in California or across the nation. His account makes the free hand of the market about as appealing as sand in the sandwiches. In spite of the crunch, the book still is a good read. It investigates personalities as well as market history. The book focuses on learning from U.S. economic history, specifically avoiding mistakes. “It’s really easy to get a market wrong,” Fox told Circuit. “I learned from researching the book, the idea that markets can be more efficient. But markets are volatile.” The book attracted my attention because I witnessed California’s deregulated electricity market and the nation now is approaching a nascent cap-and-trade market. The experience is like a beach swim. It could feel great or trap the swimmer in a dangerous undertow or rip tide. After researching his book, Fox noted that as California and the nation face a cap-and-trade system they need to beware of “dumb simple solutions.” That includes “regulated prices.” He added, “It’s simpler to tax the carbon.” Fox, currently a journalist for Time, grew up in the Bay Area writing for small California newspapers. He eventually gravitated to the Washington, D.C. beat as he moved east with his wife. He currently lives in Manhattan--near Wall Street and near a culture that creates new ways of trading every morning with café lattes, in order to skim milk off potential profits and trader fees. The author’s take on California’s 2000-01 energy crises resulting from that era’s newly deregulated market is that if the state “allowed someone from CalTech to design it” instead of regulators and legislators, it may have worked. Instead, Fox added, there was this “naïve belief that making something into a market makes it better.” He agreed, though, that markets do provide incentives for efficiency. He cited markets for commodities that, over time, developed mechanisms to trade pork bellies and minerals in a usually low cost manner. (Regulators and legislators in the mid-1990s were operating on the belief that a market in wholesale and retail electricity would cause competition to lower prices. At the time, there was commercial and industrial outrage that California prices were off the chart. Industry was threatening to leave the state for cheaper electricity climates. When California deregulated its market, however, traders like Enron easily found methods to game the system for profits. State legislators and regulators later blamed many traders for ripping off ratepayers for over $8 billion and litigated for restitution.) For market history buffs, the book addresses what Fox calls an “intellectual edifice” of rationality to which former Federal Reserve Bank chair Alan Greenspan was an adherent. That rationality was the same one that California regulators and legislators were responding to in the 1990s. Fox investigates several personalities on the market history front, including my eponymous favorite Jimmie Savage. “Savage set out his philosophy of probability in 1954,” write Fox. He contrasted the proverbs “Look before you leap and you can cross that bridge when you come to it.” More proverbs apply to the market, he writes, taking a note from Mark Twain--”Put your eggs in one basket, and WATCH THAT BASKET.”

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