The Death of Capital by Michael E. Lewitt, Wiley 2010
Reviewed by Hazel Henderson
Michael Lewitt’s The Death of Capital is the most erudite, broad view of the still ongoing financial crises worldwide. At the same time, Lewitt is a market participant, as president of Harch Capital Management, LLC , and editor of the HCM Market Letter. Lewitt’s unusual depth of scholarship from Minsky and Keynes back to earlier insights from Fernand Braudel, Theodor Adorno, Adam Smith and Karl Marx makes The Death of Capital as enjoyable as Nassim Nicholas Taleb’s The Black Swan (2007) and Fooled by Randomness (2001).
Lewitt deeply understands Wall Street and how it evolved over the past decades into what he sees as largely a Ponzi scheme, preying on “greater fools.” The moralistic tone is well-taken as Lewitt describes in useful detail for average investors the latest scams facilitated by globalization, computer technology, faulty ideologies and the processes of financialization. Thus, the world’s real economies of investment in production, research, entrepreneurial activities of real people, households and firms were captured and exploited. Lewitt closely examines securitization; off-balance sheet special investment vehicles (SIVs), CDOs, CDOs squared, CDSs (those credit default swaps betting on the defaults of companies and countries); hedge funds and their over-rated performance. Lewitt takes a closer look at private equity funds and how many of their practices of loading companies with debt, stripping their assets and flipping them contributed to the financial debacle. The book is full of examples of the kind of “financial innovations” we all could do without and why they need regulating or banning outright.
Lewitt’s prescriptions are sound: from across-the-board, below 1% financial transactions taxes to slow high-frequency trading and produce revenues to repay taxpayers; banning naked credit default swaps and “front-running” by flash traders; reforming ratings agencies, Fed policies; breaking up TBTF banks; beefing up regulations and regulators. Lewitt joins many in advocating updating curricula at business schools and finance courses, beyond the idiocies of their two outdated assumptions: efficient markets and rational investors. He also challenges old asset valuation models: MPT, CAPM and the mantras of seeking diversification and un-correlated asset classes when computers have melded them all into digitalized uniformity (see my “Updating Fossilized Asset-Allocation” for more needed overhauls at www.ethicalmakets.com).
Any portfolio manager or financial adviser who doesn’t buy this book may be blind-sided by the next financial meltdown – which could happen any time until the fundamental reforms Lewitt addresses are enacted. These now need to be worldwide, as I have been advocating for decades to finally tame the global casino and defend the global commons, in for example The United Nations: Policy and Financing Alternatives, which I co-edited with Harlan Cleveland and Inge Kaul, Elsevier Scientific, UK, 1995 – still available today. Many retail investors like me will be calling on Lewitt for further advice!