More about Monetarism and Swedish Financial Crisis
THE HIGH-RISK SOCIETY Peril and Promise in the New Economy.
By Michael J. Mandel. 227 pp. New York: Times Business/Random House.
$25.
THE TROUBLE WITH PROSPERITY The Loss of Fear, the Rise of Speculation, and the Risk to American Savings. By James Grant. 348 pp. New York: Times Books/Random House. $30.
Just Speculating Date: November 10, 1996, By John Rothchild
These two books are so completely at odds, it's remarkable that they were published in the same month by the same house. ''Americans are angry and worried'' is the ''Call me Ishmael'' that leads off ''The High-Risk Society.'' With pink slips flying and Social Security in doubt, says Michael J. Mandel, the economics editor of Business Week, the meek will not inherit the condo at Lake Tahoe. To get anywhere in this high-risk society, we all have to run risks: take the demanding job over the cushy one, put money in stocks instead of a bank.
The author of ''The Trouble With Prosperity'' couldn't agree less. As far as most stocks are concerned, James Grant, the author of ''Money of the Mind,'' prefers money in the bank. His first line might as well be ''Americans are giddy and deluded.'' In particular they are deluded about stocks, which these days are being snapped up at crazy prices. As Mr. Grant describes the rise of speculation in the 1990's, it sounds as though he's talking about Mr. Mandel: ''America was becoming financially bolder.
It was coming around to the philosophy that there was more to be feared in not making money than in risking its loss. Such, of course, is the psychological hallmark of every boom.''
According to Mr. Mandel, before we became the high-risk society we lived in the Age of Security, where jobs were here today, here tomorrow, and where people could get ahead without taking chances. But in Mr. Grant's view, there never was an Age of Security, because in every economic cycle fortunes are made and lost, industries are started or shut down; what's good for the Farm Belt may be bad for the Rust Belt, and while they're popping corks in the Texas oil patch, they're circling the want ads in Silicon Valley. The risk in every era is the same. A euphoria develops around a certain kind of investment, and people end up overpaying for whatever it is: stocks and Manhattan real estate in the late 1920's, bonds in the 50's, gold in the early 80's, commercial real estate in the late 80's and so on. Large chunks of capital are foolishly deployed, resulting in large losses to the owners of the capital and a misallocation of resources.
Mr. Mandel's notion that inhabitants of the high-risk society should automatically invest in stocks is to Mr. Grant's way of thinking too popular not to be dangerous. He reminds us that in the 50's, during the Age of Security Mr. Mandel writes about, the average investor preferred bonds, which everyone knew was a risk worth taking, while stocks were disparaged as something to bet on when the horses weren't running.
Because of their popularity, bonds were selling for crazy prices, so they yielded a pittance (3 percent) at a time when inflation was on the rise. Not surprisingly (at least not to Mr. Grant), stocks produced many happy returns in the 50's, while the bondholders got clobbered. Bonds lost roughly 80 percent of their value from 1946 to 1981.
Neither book is an investment guide per se, but this reviewer can't help noticing that whenever Mr. Grant finds people paying unreasonable prices for whatever's popular, the least popular alternative (stocks in the 50's, gold in the 70's, bonds in the 80's) becomes the source of great wealth for the oddballs who invest in it. Today, the oddball choice would be raw materials, because in the 14 years during which stocks have gone up, commodity prices have gone sideways or down, which to a Grant disciple means they'll make up lost ground in the next cycle. Naturally, Mr. Mandel predicts the opposite: because commodities have done nothing for 15 years, they will continue to do nothing.
In the high-risk society, Mr. Mandel sees government in retreat: less regulation, less consumer protection, big holes in the safety net. He is alternately thrilled and disturbed that people are being left to succeed or fail on their own. But what irks Mr. Grant about today's high finance is that the financiers aren't allowed to fail. By lowering interest rates in the early 90's and providing the easy credit that saved the likes of Citicorp and the Bank of America, the Federal Reserve created the flood of cash that has lifted stocks to a precarious height.
On the readability scale, Mr. Mandel's book is low-risk and low-gain, short on anecdote and long on generality and annoying repetition. In one painful stretch of 30 lines, we find ''uncertainty,'' ''high levels of uncertainty,'' ''far less certainty,'' a ''rise in uncertainty,'' ''the certain career paths,'' ''increasingly uncertain alternatives,'' ''such uncertainty,'' ''economic uncertainty'' and ''the uncertainty,'' along with ''the old rules for success do not work in an economy where the sources of growth are also the sources of uncertainty.''
Mr. Grant's book is demanding in spots, because it requires a working knowledge of Wall Street mechanics, but witty and informative throughout. Readers of his popular newsletter, Grant's Interest Rate Observer, will recognize the prose. In recent years, Mr. Grant's chronic bearishness on stocks hasn't helped his readers get any richer, but who else can make interest rates interesting, not to mention downtown real estate, the bond market, Federal Reserve policy and other subjects dear to Wall Street?
A recurring theme in his narrative is the skyscraper Mr. Grant can see from the window of his own office. Built in 1929 during the lower Manhattan boom, 40 Wall Street was expected to produce $3.9 million in revenues, a yield that didn't materialize until the mid-1950's. Mr. Grant's account of the owners, the tenants and the debts at 40 Wall is 67 years' worth of cyclical history crammed into one building. There was never an Age of Security at 40 Wall.
Mr. Grant notes the astounding popularity of mutual funds -- 7,773 and counting -- making the fund industry as overbuilt and overcrowded as lower Manhattan before the great crash of '29. ''Like the Manhattan skyscrapers of the 1920's and the Texas oil rigs of the 1980's, the white elephants of the 1990's,'' he writes, ''will bring grief to their sponsors and drama to the next recession.''