Oren — Power, Faith, and Fantasy

Oren, Michael B., Power, Faith, and Fantasy: America in the Middle East 1776 to the Present, Norton & Co., New York, 2007. 778pp.

History, at its most useful, steadies the nerves and provides perspective on the events splashed daily across TV screens and PC monitors. It should also give us a feel for the problems amenable to solution and those that are permanent (or, at the very least, enduring).

By these criteria, Michael Oren’s Power, Faith, and Fantasy is a history book that should be on the shelf of most American homes … and available at every public library.

The author has made an explicit attempt to write a history of America’s relations with the Middle East that serves the general reader rather than just an academic audience. Practically speaking, this means drawing more extensively on biography and the popular culture of each period of American history to illustrate relations with the Middle East. To better organize the book’s contents, he employs the three themes listed in the title. Power references American trading initiatives, commercial interests, and security concerns. Faith refers to the Christian and Jewish religious interests in the Middle East (as home to Holy Places, putative location for Christ’s reappearance, potential source of converts, and national homeland for the Jews). Fantasy describes the American representations of the Middle East, first triggered by the anonymous 1706 English translation of the Arabian Nights, and elaborated in subsequent years in many books, exhibitions, social fashions, and movies.

Oren weaves the impact of these three themes through the different eras of American history … from the turbulent post-Revolution, pre-Constitution time up to our own. Post-WW2 American involvement in the Middle East is already very thoroughly documented in English, so Oren provides a quick summary of the most recent period in his book. It’s a worthwhile coda but primarily serves those not already familiar with the details. The bulk of Power, Faith, and Fantasy focuses on the period 1776 to 1950.

Risking gross over-simplification of a very large and careful summary, I’d like to highlight the historical phases in America’s relations with the region, as presented by the author.

Read more

Quote of the Day

One Western-trained Chinese economist said: “We just don’t know how to do capital markets. The only countries that get the message — proper financial risk accounting, etc — are the ones that were formerly in the British Empire. Anglo-Saxons seem to have something the rest of the world just hasn’t got.”

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Asked about reserve diversification, a senior Chinese official told a leading Western banker that China took the long view: “In half a century from now, there will still be the dollar and there will still be China.” What this remark drily acknowledged was a truth overlooked by the “decline of American power” school. Viewed from one angle, the US is the world’s biggest debtor. Looked at from another, however, it has taken over the business of managing the world’s savings.

Taking note of Asian Achilles’ heel (Financial Times)

“How to Define EU Failure for Betting Purposes?”

I have a blog post on this topic up at Midas Oracle. There are also some excellent comments there from readers.

The EU’s survival prospects should be a rich topic for betting and trading, and hence for predictive purposes. However, the design of prediction-market contracts to maximize the attractiveness of the trading proposition in this area requires some thought. Since I want to design, or at least to encourage other people to design, such contracts, I am soliciting ideas. Please feel free to use the forum to share yours.

Discuss this post at the Chicago Boyz Forum.

Midas Oracle – The New Prediction-Markets Blog

Our friend Chris Masse has made himself into the world’s coordinator of news and information about prediction markets. Now he has set up an excellent group-blog, Midas Oracle, which looks very good so far and strongly displays Chris’s commitment to dispassionate, fact-based inquiry. It promises to be a major forum and resource for people who are interested in prediction markets.

Check out and bookmark Midas Oracle.

(Disclosure: I am a minor contributor to Midas Oracle.)

Amaranth Blowup

Hedge fund blowups fascinate me. You may have heard about the latest: Amaranth Advisors and Brian Hunter. It’s the biggest blowup since Long Term Capital Management in 1998. The markets barely blinked this time. The difference is that LTCM traded in bonds, and with bonds, banks give you much greater leverage – ie they lend you more money on margin. LTCM had 5 billion in equity, borrowed up to $125 billion, and leveraged up via derivatives to $1.25 trillion. LTCM borrowed about 20x-25x their equity. Hunter borrowed about 5x his equity. Assuming Amaranth let him run 1/3 of their portfolio, or $3 billion, Hunter borrowed about $12 billion off that $3 billion equity, for a combined $15 billion bet. With 5x leverage, a 20% decline wipes you out. Leverage kills if you get it wrong.