The Death and Life of Great American Cities

Having read The Power Broker and then Wrestling with Moses, the story of Jane Jacobs’ struggle with Robert Moses, it seemed only logical to follow up with Jacobs’ own The Death and Life of Great American Cities.

Death and Life is a big book, but Jacobs helpfully summarizes her prescription for healthy cities in four points.

To generate exuberant diversity in a city’s streets and districts four conditions are indispensable:

1. The district, and indeed as many of its internal parts as possible, must serve more than one primary function; preferably more than two. These must insure the presence of people who go outdoors on different schedules and are in the place for different purposes, but who are able to use many facilities in common.

2. Most blocks must be short; that is, streets and opportunities to turn corners must be frequent.

3. The district must mingle buildings that vary in age and condition, including a good proportion of old ones so that they vary in the economic yield they must produce. This mingling must be fairly close-grained.

4. There must be a sufficiently dense concentration of people, for whatever purposes they may be there. This includes dense concentration in the case of people who are there because of residence.

Death and Life was first published in 1961, yet many of its observations seems startlingly current. On page 180, she argues the importance of social capital, an idea developed at length in Robert Putnam’s 2001 book Bowling Alone. Here is Jacobs:

If self-government in [a good city neighborhood] is to work, underlying any float of population must be a continuity of people who have forged neighborhood networks. These networks are a city’s irreplaceable social capital. Whenever the capital is lost, from whatever cause, the income from it disappears, never to return until and unless new capital is slowly and chancily accumulated.

In a chapter called “Gradual Money and Cataclysmic Money,” Jacobs describes the devastating effects of Robert Moses-style big-money development projects. She contrasts this with the positive impact of money invested gradually over time, which helps add the new businesses and housing stock a neighborhood needs without uprooting the people and destroying the businesses and human connections already there. It’s a philosophy now summed up in the Slow Money movement.

Jacobs’ comments on the use of eminent domain for the benefit of private enterprise would also be very familiar to those involved in the battle over the Atlantic Yards in Brooklyn (a few blocks from where I live). She quotes the following from a 1960 report to the mayor by management expert Anthony J. Panuch.

A druggist purchased a drug store for more than $40,000. A few years later, the building in which his store was located was taken in condemnation. The total sum which he eventually received was an award of $3,000 for fixtures and that sum had to be paid over to the chattel mortgagee. Thus his total investment was completely wiped out.

If taxpayers were made to pay the cost of these developments rather than those whose homes and businesses are in the way, she argues, it would be obvious how unprofitable they are.

It is nice, to see, by the way, that the Modern Library was not too stuffy to use the charming cover photo of the author enjoying a cigarette in a local bar. However you feel about alcohol and tobacco, it’s an excellent illustration of the informal, ever-changing social contacts that make a neighborhood safe and interesting.

The Big Short by Michael Lewis

I came late to the Michael Lewis party, but I’m enjoying it now that I’m here.

In The Big Short, the latest book by the author of Liar’s Poker, Lewis looks at the market meltdown of 2007-2008 from the point of view of the investors who saw the disaster coming and hoped to profit from it. His lively and irreverent style (his standard term for poor mortgage bonds isn’t risky or low-quality but “crappy”) makes for an absorbing read.

Many people have commented on the complexity of the bonds and derivatives created to exploit the mortgage market. On p. 127, Lewis describes how the artful use of language helped shed additional darkness on the subject.

The subprime mortgage market had a special talent for obscuring what needed to be clarified. A bond backed entirely by subprime mortgages, for example, wasn’t called a subprime mortgage bond. It was called an ABS, or asset-backed security. When Charlie [Ledley of the hedge fund Cornwall Capital] asked Deutsche Bank exactly what assets secured an asset-backed security, he was handed lists of abbreviations and more acronyms—RMBS, HELs, HELOCs, Alt-A—along with categories of credit he did not know existed (“midprime”). RMBS stood for residential mortgage-backed security. HEL stood for home equity loan. HELOC stood for home equity line of credit. Alt-A was just what they called crappy mortgage loans for which they hadn’t even bothered to acquire the proper documents—to verify the borrower’s income, say. “A” was the designation attached to the most creditworthy borrowers; Alt-A, which stood for “Alternative A-paper,” meant an alternative to the most creditworthy, which of course sounds a lot more fishy once it is put that way. As a rule, any loan that had been turned into an acronym or abbreviation could more clearly be called a “subprime loan,” but the bond market didn’t want to be clear. “Midprime” was a kind of triumph of language over truth....

“It took me a while to figure out that all of this stuff inside the bonds was pretty much exactly the same thing,” said Charlie. “The Wall Street firms just got the ratings agencies to accept different names for it so they could make it seem like a diversified pool of assets.”

Eventually, like a con man who starts to believe his own con, professional investors were fooled and confused by the very language they created.

Howie Hubler [of Morgan Stanley] was taking a huge risk, even if he failed to communicate it or, perhaps, understand it. He’d laid a massive bet on very nearly the same CDO tranches that Cornwall Capital had bet against, composed of nearly the same subprime bonds that FrontPoint Partners and Scion Capital had bet against. For more than twenty years, the bond market’s complexity had helped the Wall Street bond trader to deceive the Wall Street customer. It was now leading the bond trader to deceive himself.

The result of Hubler’s bet was a loss of nine billion dollars for Morgan Stanley, “the single largest trading loss in the history of Wall Street.”

The Quants

The Quants is a lively and accessible introduction to the mathematicians, physicists, and various other geeks who, as the subtitle puts it, “conquered Wall Street and nearly destroyed it.” Written by Wall Street Journal staff reporter Scott Patterson, The Quants has enough technical detail to satisfy students of the hedge fund world, but its storytelling momentum is strong enough to carry those who are mostly interested in the plot.

Patterson makes his job more difficult by focusing not on any one prototypical quantitative investor but on several: Peter Muller of PDT, Ken Griffin of Citadel Investment Group, Cliff Asness of AQR Capital Management, and Boaz Weinstein of Deutsche Bank. All are described as brilliant and secretive, and all seem to have been inspired by Ed Thorp, whose two books Beat the Dealer and Beat the Market made the mathematical connection between success at Twenty-One and success in the stock market.

By seeking out previously unnoticed patterns and arbitrage opportunities in the financial markets, the new generation of investment geeks seized power from the “Big Swinging Dicks” of the 1980s, the testosterone-fueled traders who succeeded with nerve and gut instincts. A symbolic changing of the guard came when the quants devised a way to beat the Big Swinging Dicks at their trademark game of Liar’s Poker. The BSDs accused them of cheating, but the game quietly went away.

If the quants didn’t have the same swagger as their predecessors, they succumbed to their own brand of hubris: the belief that their sophisticated models didn’t simply capture temporary inefficiencies in the market but that they represented The Truth. ("Beware of geeks bearing models,” said Warren Buffett.) Once they had been created, some of the models worked brilliantly for extended periods of time, generating millions of dollars with no apparent effort.

Until they didn’t. The quants failed to recognize the full risk of what Nassim Nicholas Taleb described as a Black Swan: an unpredictable event with a massive impact. And they failed to realize just how irrational people and markets could be. The classic quote attributed to John Maynard Keynes does not appear in this book, but sums it up well: “Markets can remain irrational longer than you can remain solvent.”

Though the quants and their models can’t bear all the blame for the market meltdown of 2008 (and the hedge fund meltdown that preceded it), they must accept some of it. And the last few pages of The Quants are not reassuring.

There were legitimate concerns that as computer-driven trading reached unfathomable speeds, danger lurked.

Many of these computer-driven funds were gravitating to a new breed of stock exchange called “dark pools”—secretive, computerized trading networks that match buy and sell orders for blocks of stocks in the frictionless ether of cyberspace.... In these invisible electronic pools, vast sums change hands beyond the eyes of regulators. While efforts were afoot to push the murky world of derivatives trading into the light of day, stock trading was sliding rapidly into the shadows.

Increasingly, hedge funds had been crafting new systems to game the pools, hunting for price discrepancies between them in the eternal search for arbitrage or even causing price changes with dubious tactics and predatory algorithms. Hedge funds were “pinging” the dark pools with electronic signals like submarines hunting prey, searching for liquidity. The behavior was largely invisible, and light-years ahead of regulators.

Adam Smith on the class struggle

Just as Thomas Hobbes is generally remembered only for his observation that life in the state of nature is nasty, brutish, and short (actually “solitary, poor, nasty, brutish, and short"), so Adam Smith is remembered only for the idea of the invisible hand, which allegedly works to benefit society even when economic actors are working only for their own benefit. The invisible hand has been a handy (sorry) bit of rhetoric for generations of free-market ideologues and advocates of deregulation.

Yet as Andrew Tobias pointed out the other day, Adam Smith’s argument is not so simple, and in parts of The Wealth of Nations he shows a keen understanding of the lopsided struggle between workers and employers.

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same.  The workmen desire to get as much, the masters to give as little, as possible.  The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.  The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen.  We have no acts of parliament against combining to lower the price of work, but many against combining to raise it.  In all such disputes, the masters can hold out much longer.  A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired.  Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment.  In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen.  But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject.  Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate.  To violate this combination is everywhere a most unpopular action, and a sort of reproach to a master among his neighbours and equals.  We seldom, indeed, hear of this combination, because it is the usual, and, one may say, the natural state of things, which nobody ever hears of.  Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate.  These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people.  Such combinations, however, are frequently resisted by a contrary defensive combination of the workmen, who sometimes, too, without any provocation of this kind, combine, of their own accord, to raise the price of their labour.  Their usual pretences are, sometimes the high price of provisions, sometimes the great profit which their masters make by their work.  But whether their combinations be offensive or defensive, they are always abundantly heard of.  In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage.  They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands.  The masters, upon these occasions, are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen.  The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing but the punishment or ruin of the ringleaders.

— The Wealth of Nations, Chapter VIII (“Of the wages of labour”)

The Power Broker

After more than a thousand pages, I am nearing the end of The Power Broker by Robert A. Caro, a book I have been meaning to read for more than 30 years.

I had thought that I would learn a lot about Robert Moses and the modern history of New York State and New York City, and I have. I also expected that the book would be a bit of a slog—and in that I was wrong. It is a mark of the energy of this book that I will be a little sorry to come to the end. In its clarity, its erudition, its character drawing, and its flashes of emotion, it reminds me of The Making of the Atomic Bomb by Richard Rhodes.

The Power Broker would have been a great reading experience years ago, but now that I have spent more than a decade in New York City, it becomes much richer. I have been to Inwood Hill Park, and was startled to see that a highway built by Robert Moses cuts through what is still billed as the only unspoiled indigenous forest in Manhattan. I’ve spent time looking out from Battery Park, and shudder to think that Robert Moses nearly succeeded in demolishing historic Castle Clinton and covering the park with a highway overpass. I’ve been to the site of the 1964 World’s Fair in Queens, one of Moses’ last great projects, and seen the Unisphere standing in the rather bleak surroundings of what was meant to be one of his greatest parks.

I knew that Robert Moses had reshaped Long Island and much of New York City for the benefit of drivers, so when I decided one day that I would like to walk across the Verrazano-Narrows Bridge, I was not too surprised to find that the bridge had been built by Moses without pedestrian access. But I didn’t know until reading this book that Moses himself never learned to drive.

Though Moses was unquestionably a ruthless, arrogant bastard, he Got Things Done, as Caro puts it. The Power Broker dramatically conveys the almost impossible technical challenges of, for instance, threading the Cross-Bronx Expressway through a densely populated borough and across or under existing highways, water mains, and railroad lines.

But, especially in the chapter “One Mile,” Caro underlines the human cost of his subject’s success. Time and again—as when he sacrificed the neighborhood of East Tremont rather than reroute the expressway by two blocks—Moses added to that cost through stubbornness and vindictiveness.

Asked why he demolished the valuable clubhouse of the Columbia yacht club after taking it over for the city, he replied, “Because they were rude to me.”