The Financial Crisis Within - Michael Lewis

The financial crisis, which began in 2007 in the USA, turned into a global recession and affected American as well as European and Asian markets. The years preceding the crisis were marked by dramatic structural transformations in the American economy and by changes in the real sector. A large number of jobs were exported into developing countries such as China and India. Without any sufficient protection measures, many sectors in the American economy experienced a crisis leading to the inability of the working force in these sectors to pay their loans back; the result was a massive wave of bankruptcies and bank failures. Secondly, before the crisis the market experienced strong economic growth, partially due to the boom of the construction business. The interest rates were low and the government encouraged individuals to buy new homes. The large economic growth lead to a strong competition between banks and financial institutions, which focused on maximizing short-term profits by unprecedented credit expansion. Combined with the free market structure of the financial industry and the lowered governmental regulation this resulted in the collapse of the financial markets. The government intervention was inadequate; it existed but it was not administered correctly and on time. In the presence of this inadequate control the use of complicate financial derivatives lead to a deep recession, decline in trust in the financial markets, unemployment, etc. Moreover, governments had to invest huge amounts of money (which resulted in higher taxes for the common individual) in order to cover the losses and to save the financial system from collapsing.


Understanding the machinations behind the financial crisis is difficult. Most people know only that "it has to do with lending too many mortgage loans". In fact, the doomsday machine from inside is much more complicated. Even the traders, bankers, and investors on Wallstreet do not understand some of the financial derivatives used to trade billions of American dollars from mortgage loans, which eventually lead to the near collapse of the US economic system.

Writing about the financial crisis is also difficult. Actually, writing about it in a way so that people, who are not in the area of finance will understand is actually almost impossible. Yet, Michael Lewis, a former investment trader on Wallstreet manages to produce a masterpiece, that targets not financial experts, but common individuals more or less affected by the crisis. Thus, The Big Short is a not a complicated financial interrogation about the causes and results of the 2007 economic disaster. It is a novel that explores the moral hazards of investors to undertake large risks, the inadequate actions by the US government, and the effects on the American taxpayer in order to save the economy from collapsing. It is a novel about a few people, who were the only ones to predict doomsday in the financial world. Clever but criticized for their beliefs, Steve Eisman, Michael Burry, Charley Ledley, James Mai, Meredith Whitney and Greg Lippmann are the eccentric investors, traders, and analysts who go against the market and end up profitting after the bubble burst. Who are those people, who go against the grain even when most of the financial world ridicules them? What qualities do they possess in order to capture the downfall of the market, when most of its most clever Wall Street participants are blind for the consequences of their actions. How do they manage to defend their point even when all of their clients leave them and the whole financial world condemns them.

Michael Lewis gives us an answer by following the rebellion of these really amazing minds, who forecast the crisis but unfortunately there was no one to listen to them. The novel explores beneath the surface of the glamorous financial world with sarcasm, black humour, and wit. Definitely a worth-reading non-fiction even for people with little or no financial background. Lewis did an outstanding job in being comprehensible and entertaining.

Freemium - The Business Model of the 21st Century

Have you always wondered what the secret of  Google, Yahoo, and Facebook is? How a company that essentially offers all of its products for free, has managed to turn itself into a multi-billion corporation? The answer comes in Free by Chris Anderson

Chris Anderson, born in 1961, is the editor-in-chief of Wired, an American magazine and on-line periodical, which reports on how technology affects culture, the economics, and politics. He has a degree in Physics from the George Washington University. His first book, The Long Tail: Why the Future of Business is Selling Less or More argues that products with a low demand or low sales volume make up a market share that rivals or exceeds the few current bestsellers and blockbusters, if the distribution channel is relatively large. His newest book Free: The Future of a Radical Price examines the rise of an economic system, where products and services are given for free. By exploring this new business model Anderson proves that Free is the only possible future and a future that offers endless and unlimited possibilities to improve and share.

The main distinction Anderson draws is that the 20th century model is about the economics of atoms, while the 21st century one - about the economics of bits. With the development of bandwidth, storage, and processing technology has become faster, better, and cheaper. The marginal cost of reaching another user online is close to zero; in other words it is too low to meter. The reason that digital costs degrease at a faster rate is that most of their inputs are in fact intellectual - ideas propagate virtually without limits and without cost. Thus, the incentive to turn things digital is because they operate faster and they are quickly accelerating. Bits have the property of making everything cost less and do more. Information becomes cheaper because the cost of extracting it gets lower and lower (take Wikipedia as an example). In the 21st century economics model information wants to be free and unrestricted. Abundance thinking is the new trend; that is people must embrace waste in the digital world, because the cost of distribution is very low to even matter.

You might ask: how to make money on something that is essentially free? Anderson gives a clear answer - it takes creativity and innovation to adapt to this new business model, because it is the model of the future. Companies look at their portfolio of products and services and price some of them at a cost of zero (or close to it) to make other products on which they make healthy profits more valuable. The 20th century is full of such examples. Gillette started giving away razors for free only to stimulate demand for the blades, without which the razors were useless. Think about free cell phones, which come with a monthly contract, cheap video consoles with expensive games, or free fancy coffee makers at offices, which require superior coffee sachets. If we get to think about it, free is everywhere around us. The biggest challenge is how to make it work in our advantage.

The idea behind freemium is pretty obvious, once you come to think about it - a few paying customers subsidize a large group of non-paying.  At some point people realize they have more money than time; hence ready to pay for something to get it more quickly then to wait for a while and get it for free. The risk of producing it yourself is that you are not even paying yourself the minimum wage and you might not get what you want at the end. And all the other customers, who do not wish to spend the money, benefit for free. A media model of Free is also very popular - a third party (the advertiser) subsidizes content (the media); the listener or the viewer gets it at no charge. This relates not only to TV and radio, but also to paid media (newspapers, magazines, cable TV) allowing them to be much cheaper than they actually would be.

Of course, one of the biggest losers in the 20th century used to be the music industry. The profits from selling CDs fell dramatically with the availability of music online. However, enterprising producers found a way to generate profits - they made all the music available online, thus increasing awareness, reputation, and attention. They earned money from merchandizing, advertising, and concerts. And the biggest music fans still continued to buy CDs.

Google is the biggest corporation that built a working economic model around free - essentially all of its services, from search, e-mail, to Google Maps are free. So how does Google management succeeded in turning it into a multi-billion corporation? First, it introduced countless new and free services to increase attachment to the company. And second, it used customized advertising to reach the relevant customer market. Google's data costs are lower and fall faster than any other company due to economies of scale; thus the more free products and services they offer, the bigger their profits are. Even we, as free users, contribute to Google's success - every blog post improves Google search, every click on Google maps tells more about consumer behavior, and every sent e-mail is a clue to a human network of connections. In addition, the Google Ads program ensures that advertising messages reach the relevant customers. Clever and simple.

Chris Anderson's book offers much more interesting examples, pros and cons around the concept of Free and its future. I strongly recommend it to all those of you interested in business, economics, and marketing. For those of you not that passionate about the area, I still believe it will be an intellectually stimulating reading. Of course, as the title of the book, I downloaded it for free from scribd.com. Regardless of the free online copy, the hard $29.99 copy of Free:The Future of a Radical Price debuted as number 12 on the New York Times Best Seller List. Proving Anderson's point that business can actually make money on Free; it just takes bravery and creativity.

If you get to think about it, even with my blog post Anderson is getting free advertising, which increases attention and awareness about his book and works well for his reputation. Only one of the many examples how Free can be used to generate profits. Something to think about if we are to become the future leaders of tomorrow.

Freakonomics - The Hidden Side of Everything

When I share that I am studying International Business, Finance, and Economics, I usually get three responses from people having no experience in this area:

1. "Isn't business, finance, economics, accounting, and management all the same?"

2. "This sounds really boring and dry. "

3. "Well, good for you but I always found this subject to be really distant from me."

I gave up long time ago trying to explain the differences between finance, economics, accounting, and business (yes, they are as different as physics, chemistry, and biology). I also gave up convincing others that my studies do not encompass only numbers, calculations, and graphs. After all I find my course quite interesting and stimulating and I am sticking to my point. 

Personally, I have my preferences and I have always found finance to be much more exciting and challenging than economics and accounting. The former for me was just dry theories about consumer behavior, demand and supply, inflation and exchange rates, GNP and GDP. The latter - well I hate accounting as soon as I think of the endless balance sheets, income statements, and cash flows I had to calculate. 

Reading Freakonomics by Steven Levitt and Stephen Dubner I realized I judged economics far too quickly. It has the potential to be a really exciting, amusing, and unpredictable subject. It just depends on your attitude, your approach, and the questions you ask yourself. I strongly recommend the book to all those, who have no idea what economics is about and quickly judge it  "by the cover" and to all those who actually study it but hate its strict theoretical models, implications, and rules. 

Freakonomics is the product of a rather strange cooperation: Levitt is a young, eminent, and unordinary economist and Dubner is a journalist. Levitt graduated from Harvard University with a BA in Economics and received his Phd in MIT. Currently, he is a professor in the University of Chicago. 

The two of them came together to prove 4 basic points about economics: incentives are the main causes in modern economics, conventionality is often wrong, events sometimes have distant and strange causes, and experts use their knowledge in their advantage. Instead of looking at endless statistical data, equations, or tables, Levitt attempts to defend these four postulates by asking weird questions: Why do all drug dealers live with their mothers?; What do schoolteachers and sumo wrestlers have in common?; What makes a perfect parent? You might consider these topics as far from economics as the sun is from the earth but do not be quick to judge before you read at least one chapter. Levitt is not just another mediocre economist, who decided to make some money by shocking people. He won the John Bates Clark medal, awarded to the most promising US economists under 40 (the equivalent of a Noble Price under 40, I would say) and was chosen by Time's Magazine as one of the "100 People, who shape our world". If this is not an inspiration to check Freakonomics out, than I do not know what is. 

Of course, this novel has many critics, who claim it is NOT really about economics as it parts from the conventional and strict economic theory. What I like about Levitt can be summarized in two points: 1) He found a way to show that economics is not a boring academic subject; in fact it is quite exciting and offers may new exploratory possibilities; and 2) He admitted he was terrible in statistics in university. Obviously, this did not affect his development as many consider him one of the most prominent and innovative economists of our generation. 

The Steven-Stephen tandem has published a sequel, Superfreakonomics, due to the unbelievable success of the first one. I can't wait to read what more startling questions and proves Levitt has prepared for us. What I will always remember from the first novel is how he defended and convinced that crime rates are not connected only to police control, laws, and income, but are highly linked to legalized abortion! Are you already running to the bookstore to find out why?

Check them both out @ Amazon: SuperFreakonomics: Global Cooling, Patriotic Prostitutes, and Why Suicide Bombers Should Buy Life Insurance and Freakonomics: A Rogue Economist Explores the Hidden Side of Everything