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Buy, Lie, and Sell High
by D. Quinn Mills
Prentice Hall
Any investor or person involved in America's financial-services industry will be interested in Buy, Lie, and Sell High: How Investors Lost Out on Enron and the Internet Bubble. In this, his latest book, HBS professor Quinn Mills argues that until plummeting stock valuations in the spring of 2000 burst the Internet stock “bubble,” venture capitalists, investment bankers, mutual funds managers, accountants, and corporate leaders had sponsored a financial mania at the expense of the average American investor and of the American economy. While Enron made the headlines, Mills says, these other actors were culpable as well.
The title of Mills' book derives from a comment made by former SEC chairman Arthur Levitt regarding the actions of teenager Jonathan Lebed who broke federal regulations as a day trader on the Internet. Buy, Lie, and Sell High includes chapters explaining the events leading to the creation of the Internet bubble, from the Internet's humble beginnings in the 1960s as a federally funded defense research tool to the “wild excitement” generated several decades later by discoveries of its vast commercial applications. Mills shows how capitalism's financial value chain — comprising venture capitalists, bankers, and entrepreneurs and compelled by the lure of potential fortunes to be made — failed in its role to exercise caution in the formation and financing of new businesses. “Like sheep to the slaughter” (the title of one chapter), these groups ignored several fundamental tenets of business development: choose leaders with experience, don't grow new companies too fast, and take companies to IPOs only after several quarters of profitability. Without blaming any one group, Mills illustrates how the missteps of each affected the actions of others, culminating in the “mass hysteria” (another chapter title) leading to the crash.
Buy, Lie, and Sell High provides specific suggestions for reforms to the regulation process in the United States that could help to avert another such disaster in the future. It also includes a section about Germany's similar experience with Internet commercialization, as well as contributions from ten industry participants and observers.
“Unless fundamental changes are made,” Mills says, “another bubble is a certainty, with the likelihood of another recession following it and of another serious setback for further privatization of pensions in America.”
When All Else Fails
by David A. Moss
(Harvard University Press)
Although Associate Professor David Moss completed his draft of When All Else Fails: Government as the Ultimate Risk Manager five months before September 11, 2001, that day's tragic events offer a precise illustration of the book's theme: the all-important role of government in managing risk, catastrophic and otherwise. In an era when the purpose of government has been debated and the privatization of many governmental responsibilities — schools, prisons, and garbage collection among them — has been attempted, When All Else Fails argues that government has been and will inevitably continue to be the nation's ultimate risk manager and insurer of last resort.
Drawing on history and economic theory, Moss investigates the formation of policies as diverse as limited liability, deposit insurance, Social Security, and federal disaster relief, paying particular attention to the original thinking behind them. He concludes that the nation's lawmakers, finding shortcomings in the private sector's ability to manage risk, have ensured over time that individual citizens are protected.
Tracing governmental involvement in risk management to the early 19th century, Moss shows how government institutions have served to promote capitalism and economic growth by shifting risk from shareholders (through limited liability) and from entrepreneurs (via bankruptcy laws) to creditors, and by spreading risk throughout the population (via deposit insurance and even the use of government-issued money). He discusses how the rise of big business provoked reforms that, by the early 20th century, transferred the risks of industrial accidents and worker safety to the employer. Later governmental measures protected workers in the event of unemployment and provided for security in retirement. Today, the government protects citizens from an array of hazards ranging from defective products, to environmental pollution, to floods and other natural disasters.
Adam Smith's free markets notwithstanding, Moss reminds the reader that government involvement in the management of private-sector risks is nothing new in the United States. “Policymakers have long played a vital role in helping to manage risks in the private sector,” says Moss. “Never has this been more evident than it is today, in the aftermath of September 11. When all else fails, government truly does emerge as the ultimate risk manager.”