Managed by the Markets: How Finance Re-Shaped America |  | Author: Gerald F. Davis
Publisher: Oxford University Press, USA
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Rating:  38 reviews
Sales Rank: 190023
Media: Hardcover
Pages: 320
Number Of Items: 1
Shipping Weight (lbs): 1.6
Dimensions (in): 9.2 x 6.5 x 1.1
ISBN: 0199216614
Dewey Decimal Number: 332.0410973
EAN: 9780199216611
ASIN: 0199216614
Publication Date: June 15, 2009
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Product Description
In recent years, we've been rocked by a series of economic jolts, and all of them seemed to revolve around finance. And the most recent, the American mortgage meltdown, has sent shock waves around the world. Managed by the Markets offers an illuminating account of how finance has replaced manufacturing at the center of the American economy over the past three decades, explaining how the new finance-centered system works, how we got here, and what challenges lay ahead.
Since the early 1980s, Gerald F. Davis shows, finance and financial considerations have increasingly taken center stage, dramatically reshaping American society. Corporations now have an overriding focus on creating shareholder value, while their personnel practices no longer provide secure employment, economic mobility, health insurance, or retirement benefits. Instead, employees must become shareholding free-agents, left to their own fate. Banking has shifted from the traditional role of taking in deposits and making loans to the widespread use of "securitization," turning loans (such as mortgages or corporate debt) into bonds owned by institutional investors. The financial services industry is both more concentrated among large banks and mutual funds, yet more spread out among under-regulated specialists such as mortgage finance companies and hedge funds. And states increasingly act as "vendors" in a global marketplace of law, emulating firms such as Nike, hiring contractors to do much of the work of government.
As a result, individuals and households find their welfare tied to the stock market and the mortgage market as never before. And the turbulence of recent years starkly underscores the dangers of depending too much on financial markets. Written in the spirit of C. Wright Mills' penetrating The Power Elite and White Collar, this brilliant study provides an invaluable map of the finance-driven American society.
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Showing reviews 1-5 of 38
Essential outline of a "Copernican shift" in the world economy: from corporations to markets and finance October 24, 2009
Nathan Andersen (Florida)
While the marketing and timing of this book's appearance may suggest that it explains the current economic meltdown, Gerald Davis's real aims are more general: to outline and explore the implications of a major shift in the world's economies (with emphasis on the United States), from a corporate-centered model to a finance-centered model, from an America whose economic and social life is dominated by major corporations and where individuals think of themselves as employees and consumers of good, to an America whose economic and social life is dominated by the stock market and where individuals think of themselves as investors. The current meltdown is a symptom of these changes, but the systematic changes themselves and the failure to consider or grasp their widespread implications are the real culprit.
The view that corporate greed or generosity, or CEO brilliance, determines the fate of markets, or that employees can work hard and have a guaranteed livelihood, obviously belongs to a bygone era. Still, in the face of the current market collapse we tend to want to put the blame on individuals. What Davis aims to show is that corporations no longer rule the world, but markets and do. Especially in the United States, what drives the economy is no longer manufacturing of products but the buying and selling of stock options and derivatives and the like, and everything else is increasingly thought of in terms of its market potential. For example, houses become means to leverage investments and manage credit rather than investments into a community. Development of relations with friends become investments in social capital.
While this book can get somewhat technical for those not well versed in the lingo, it is a readable and clear account of both the reasons for and the significance of the shift. I found it to be quite useful, especially for the upshot, the clarification of the move from a "commodity fiction" to a "capital fiction." First, in order for modern economics to take hold, people had to learn to think about everything (labor, land and money) as commodities, things to be bought and sold in a market. It took a long time for the implications of this shift to take hold to the point where what was a metaphor became descriptive fact. Similarly, we now live in a world increasingly dominated by the "capital fiction," that holds all domains of social life (friends, community, homes, time - think social networking as a potent example) to be objects for investment, elements of a portfolio that each individual invests in, but whose value is determined by market forces. A very useful book.
 How the portfolio society went bust October 5, 2009
Harry Eagar (Maui)
1 out of 1 found this review helpful
Except for the title, which should be "Mismanaged by the Markets," University of Michigan business professor Gerald Davis's book is as compact and clear a description of how we screwed up a fine economy as you will find.
It is presented in the form of a quick history of the changes in American business over the past century or so, and while I think it leaves out some important stuff, it does hit the high points.
One thing it leaves out is that until the 1920s, about two-fifths of American households were primary producers (farmers, mostly) or almost totally and directly dependent on primary producers (country stores, millers). These people represented a good deal less than two-fifths of wealth, but they were not greatly dependent on big city banks. They were dependent on wider markets and suffered when prices crashed in 1922, but if there had been a run on National City Bank, they would hardly have noticed.
Bankers were important, but their role was circumscribed. There could not have been a national housing bubble in the '20s, because mortgage lending was local, as was much banking. There was no FDIC, although some states, like Nebraska, had state bank deposit insurance (which, in the case of Nebraska, went bust in '28, without setting off any wider tremors). As Davis recognizes, banking was about to become even more circumscribed in the middle years of the century.
The dominant firms of the American economy, the giant manufacturers, were so profitable that they didn't need Wall Street or banks for any fundamental task: They found the capital they needed for expansion and renewal in their retained earnings. (Davis, keeping his eye on the target, does not mention that one of the biggest, Ford, twice nearly went broke and both times bulled its way through without giving up control to bankers or bondholders. Even if Ford was hardly typical of American management style, the fact that it could ignore bankers in a crisis confirms Davis's conception.)
As manufacturing waned as a proportion of the overall economy, finance took over. I think Davis puts this too late. The turning point can be exactly dated, to 1953, when General Motors went to the bond market for the first time and when its replaced its chief, who until then was always a production man, with an accountant.
This still might not have affected Joe Sixpack, but the worshippers of market dynamics wanted to persuade people who were too small to operate in financial markets to directly tie all their assets to market trading. Davis calls this the portfolio society. Its high (or low, depending on your point of view) point came when George Bush tried to bully Americans into transferring all their mobile wealth into the hands of Wall Street traders.
Even though Bush failed in his attempt to force Main Street to go to Wall Street, the American householder, seduced by the innovation of convenient home equity loans (you could, literally, treat them as checking accounts), transferred even his immobile wealth into the hands of Wall Street traders. If Main Street wouldn't go to Wall Street, Wall Street figured out how to come to Main Street. In the '20s, shoeshine boys played the stock market and, notoriously, Joseph Kennedy liquidated his securities when his taxi driver started giving him stock tips; but back on the farm, nobody was buying Radio on margin and hoping to see it break $1,000. By 2007, everybody was a playah.
The theory of market orientation as the sole and only good form of economic organization assumes participants (and especially those with asymmetrical power) are at least conventionally honest in the sense that you could invite them into tea and not have to count the spoons afterward. That was the unspoken foundation behind the Bush proposal.
In fact, of course, that assumption is unjustifiable. Davis has plenty of examples dating back to the Roaring Twenties and he makes use of many of them. Despite the fact that anybody who opened his eyes could see that the financial markets never had operated as the efficient market theorists had theorized, there was a well-greased publicity organization set up to persuade people not to believe their own eyes.
Davis calls this a faith-based economic system.
He is one of many observers to have noticed that the switchover from a production economy to a finance economy coincided with a generation of workers who, for the first time in American history, could not expect their children to enjoy better material terms of existence than they had; and, for the majority of workers, not even the ability to maintain their own position.
It was said that shipping productive jobs overseas would free American workers to do new, yet undreamed of tasks that would pay better. The theorists of this view failed to care that there were millions of Americans who were in no position to take these new jobs, even if they were offered (which, for the most part, they were not).
The only really basic economic statement ever made was spoken by a social worker, Harry Hopkins, who said, "People don't eat in the long run. They eat every day."
The prophets of finance never concerned themselves about that. In the new economy "workers were all temps."
It might have worked even so, if the financial manipulators had been honest and if they had understood the risks they were creating. With trivial exceptions, they were neither. "Wall Street came to Main Street like a tornado in a trailer park." Square dealing -- to the extent it was ever common -- was replaced by "cynical pragmatism."
Now all the fine theories have been exposed -- again -- as mistaken, but the fine theorists are not budging.
Despite the fact that the era of mixed capitalism inspired by the New Deal was the richest and most stable in history, the finance- and market-oriented theorists and practitioners worked hard and successfully to dismantle it.
"Managed by the Markets" is not some mere Progressive or left-liberal polemic against Wall Street manipulators. Because it is based in an accurate historical review of the stepwise process by which financial considerations replaced virtually every other concept of economic or social good, Davis' book delivers a believable verdict on a sort of mass delusion, akin psychologically and spiritually to the Children's Crusade of the Middle Ages or the witch mania of the 17th century.
Thought Provoking Review of Changes in the U.S. September 27, 2009
Dale C. Maley (Fairbury, IL United States)
0 out of 1 found this review helpful
Davis attributes the changes in U.S. society over the last 100 years to changes in the field of finance. He splits the last 100 years into three phases: 1) 1900-1980 2) 1980-2000 3) 2000-2008. Some of the trends in the U.S. he has observed include:
Companies have trended from complete vertical integration (e.g. Ford Rouge works) to some outsourcing and then on to complete outsourcing. Our current phase includes the massive outsourcing of governmental tasks (supporting war in Iraq) as well as private sector outsourcing.
Companies tended to provide for the social needs of employees by providing defined benefit pension plans and medical insurance. The shift has been to 401K's and no medical coverage.
The economy has trended from having well defined career paths in large corporations to shorter and shorter tenures at many different firms...e.g. Walmart. Our current state is employment contract by contract.
Traditionally mortgages were provided by S&L's who took in savings from the community and then loaned them back to home buyers in the community. Now banks are just financial conduits to borrowing money from anywhere on the planet. Securitization has taken over the mortgage industry and many others.
Financial institutions traditionally required 20% minimum downpayments. Since 2000, this minimum evaporated to 0% down....and no job or income qualifications.
The U.S. went from virtually no stock ownership around 1900 until 50% of the households by the 1980's.
The U.S. used to be the world's leader in manufacturing. In 1944, 45% of the private sector was employed in manufacturing. By 2008, this had shrunk to 10%. He attributes most of this decline due to increased productivity from computers and the internet. Now China is the world's leading manufacturer. The one statistic from the author that made an impression on me was that Walmart now has more employees than the 12 largest U.S. manufacturers combined! The U.S. gradually transformed from a manufacturing economy to a service economy with mostly low paying service jobs.
We traditionally had a high personal savings rate that trended towards 0% and finally negative savings around 2006.
The author does not assert that the field of finance was the sole cause of the changes in the U.S. noted above. He also mentions that advances in computers, the Internet, and wireless communication were also significant drivers.
For our children, the author recommends a generalized college education where you will learn new updates throughout life. He suggests to focus on careers requiring a personal touch with the customer........so the job does not face outsourcing to another country.
Although the author does not specifically recommend more federal government involvement to improve things, I gathered this was the gist of his recommendations for improvement. He suggests that all U.S. institutions need to adjust to the realities of the new economy and government structure in the U.S.
I found this book a little difficult to read. Many people suggest that when you give a talk, you tell people what your are going to say, then you say it....then you remind them what you told them. Although this teqnique might be effective in public speaking, I find it slightly distracting in a book. All-in-all a thought provoking book.
In this age of full disclosure, it can be noted that I am the author and publisher of the book INDEX MUTUAL FUNDS: HOW TO SIMPLIFY YOUR LIFE AND BEAT THE PROS. This book is an introduction to the concept of index funds is and is sold on Amazon. I am also a contributing author to the book THE BOGLEHEADS GUIDE TO RETIREMENT PLANNING available from Amazon with an estimated release date of October 2009. I have also written 21 short stories on investing which are also available on Amazon.
If you want practical ideas on long term passive investing, read some of the books below:
The Richest Man in Babylon
Bogle on Mutual Funds: New Perspectives for the Intelligent Investor
The Millionaire Next Door
The Four Pillars of Investing: Lessons for Building a Winning Portfolio
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing, Ninth Edition
The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On With Your Life
The Bogleheads' Guide to Investing
 History & sociology of finance September 24, 2009
Kanishk Rastogi (Albany, NY United States)
0 out of 1 found this review helpful
Written by a B-School finance professor, this is well researched & documented account of the development of finance to the current extent. In short, I'd say that it provides an excellent detail of the history & sociology of finance and how it shaped our current society. It is not about investment & finance strategies to tap the market. It is definitely not about that aspect. Author has weaved together his viewpoint and substantiated it through various theories of finance dating early 20th century. There is a chapter titled Conclusion, where he claims about talking about future, but that is only highlighting the problems/issues we will face, and not the solution or an approach towards those problems.
He has divided the advent of finance based society in following first parts, which are also the chapters of the book:
Chapter 1: Advent of post-industrialism in early 20th century, growth in productivity and a shift from manufacturing to service sector.
Chapter 2: Corporate governance & Development of IT & Communications technologies, which made the financing tasks easier and available to everyone.
Chapter 3: The dependence of society & community on corporations, growth of shareholders in organizations.
Chapter 4: Shifting of banking & financial services to markets.Wall Street's rise to power.
Chapter 5: Transformation of states to vendors 7 corporations.
Chapter 6: Mortgage crisis of 2008
There are plenty of interesting facts & figures through out the book with well-supported arguments and references.Chapter 7 is the conclusion chapter and I was expecting a bit more from this one, but it is just a summary of the overall book. You'd like this book if want to understand the societal impacts of finance.
Slow read about the development of the post-industrial US economy September 9, 2009
L. C Glover (Half Moon Bay Ca, USA)
1 out of 2 found this review helpful
"Managed by the Markets" is an interesting book to read for factual elements gathered by the author. The authors conclusions seem heavily skewed to the center-left or left. The reader should be aware of this going into the book.
The authors description of how the current financial crisis came to be is mostly accurate. The omission of some key elements of what happened clearly skew the reader to thinking free market economics are not good. The key point overlooked was the Community Reinvestment Act of 1976 where by congress started to force lenders to make bad loans based to help people of all races get loans in any area. The goal of increasing home ownership in America as if it is a right seems to be good on the surface. However, if the person can not fundamentally afford the mortgage they should not get a mortgage. As lenders were forced to make more and more bad loans, they come up with selling off large packages questionable loans mixed in with performing (good) loans to make the package palateable for the purchaser. As the purchasers of these loans did actual due diligence on the loans, they realized that they were going to lose a lot of money. So, then MBS (mortgage backed securities) came into to being to help put another obfusication layer of risk mitigation into the mix. MBS then directedly connected Wall Street to Main Street which then destroyed the portfolio diversification that people really need to mitigate financial risk.
Many key people in congress (both parties), US presidents (starting with Carter), Wall Street CEOs are all complicit in this disaster. If the government has not gotten involved in regulating the mortage industry, the bad loans would NOT have been happening in the first place -- the law of unintended consequences really kicked in here or the road to hell is paved with good intentions.
The book tries to say that big government is good and needed to stop the greedy capitalists. I agree that some basic regulation needs to be in place to make sure fair and equal transactions are happening along with good visibility into the economic value/basis of the various financial instraments being traded. The SEC is a good and needed body to make sure investors are working with accurate information. However, as soon as government steps in and starts to force the market to do specific things counter to how the market works (you must lend to people who can not pay you because of racial demographic makeup)...all bets are off and the market can not function properly.
Overall, the book does bring up useful information and some interesting interpretations of the events. The forward looking view of economy is just one person's view and should not be taken as gospel. If nothing else, the book will make you think hard about the US economy and where it is going.
Showing reviews 1-5 of 38
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