[This
book review article is scheduled to be published in the Fall 2009 issue of The Journal of Social, Political and
Economic Studies.]
Book Review Article
The Future
Will Marvel:
The Follies
Leading to the “Great Credit Crunch of 2007-2009”
Dwight D. Murphey
The current age prides itself on its
technical sophistication. It is likely,
however, that future generations will look back on the “follies of global
finance” that led to the “Great Credit Crunch of 2007-2009” with the same
incredulity with which later generations have so long perceived the “tulip
mania” in seventeenth century
Key Words: Global finance, global credit crisis of
2007-2009, recent financial literature, financial architecture, business
failings, financial regulatory deficiencies, ideological over-extension,
proposed financial crisis preventatives.
A visit to the “Business and
Economics” section of any major bookstore in the
The growing pool of writings is authored
almost entirely by people who have worked in global finance for several years
and hence are highly knowledgeable about it.
Somewhat at random, we have as the basis for this article dipped into that
pool to include:
.
Charles R. Morris’ The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the
Great Credit Crash. Morris, a lawyer
and one-time banker, has written prolifically on economic issues for several major
outlets, as well as authored ten books.
.
Daniel Gross’ Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation. Gross is a senior editor at Newsweek and is aptly described as “one
of the most widely read economic/financial writers working today.”
. Robert J. Barbera’s The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our
Economic Future. Barbera is Chief
Economist at the Investment Technology Group.
The tone of these critiques is evident from their titles.
They affirm that the “credit crunch” was preceded by years of
folly. The review of that folly in this
article will reveal that there was a conjunction of (1) ubiquitous
self-regarding behavior, unconstrained because very few were concerned about the systemic
risks that that behavior was creating, with (2) an ideology that encouraged
that behavior and that saw much philosophical virtue in placing no limits upon
it. If we seek an overall understanding of
what happened, we see that this brought together two social pathologies, each
of which reflects developments long in the making: the “do your own thing”
narcissism and essential elitism of a “gimme” mentality that has come to
pervade much of American life; and the transformation of free-market thinking
into an over-extended caricature of itself.
The analysis of these developments is a vast subject that would take us
well beyond the scope of this article, which is intended to look at the
immediate preconditions of the economic collapse...
There were voices that warned of the
impending dangers. Barbera, one of our
authors here, says that “an impressive number of papers were published from
2004 through 2006 that warned of the extraordinary risks building in the
world’s financial system.”[2] The Economist tells us that “some warned
of trouble. The likes of Robert Shiller
of Yale, Nouriel Roubini of
These observers deserve recognition,
but it seems odd that some are given such credit when others sounded the alarm
considerably earlier. (Perhaps the
selectivity reflects a certain pecking order in the intellectual world.) Richard Barnet and John Cavanagh wrote in a
1996 book that “in a globalized economy, wired together by technologies capable
of moving unimaginable funds instantaneously around the globe at the behest of
speculators and immune to any ability to regulate or control this movement, we
are in for more frequent catastrophes… This is a condition the world will not
be able to tolerate for long… It puts the entire international economic
apparatus into a most precarious situation.”[4]
And in 1997, William Greider wrote that
“if my analysis is right, the global system of finance and commerce is in a
reckless footrace with history, plunging toward some sort of dreadful reckoning
with its own contradictions.” He
predicted it was “leading toward an unbearable chaos,” but admonished that
“this outcome is avoidable, I believe, if nations will put aside theory and
confront what is actually occurring, if they have the courage to impose
remedial changes before it is too late.”[5] A decade then passed without his admonition
being heeded, while the world rushed toward crisis.
The books that form the basis for this article do not themselves (except the two by John Bogle)
explore the broader social preconditions
of the meltdown, but they do cite “chapter and verse” about problems in four
closely related areas which we will explore: the global financial architecture;
failings in the business, professional and financial communities; deficiencies
in regulation; and warpings of ideology (which will by the time we reach it hardly
need separate mention).
The global financial architecture. The world financial scene has several facets
that make up what is called its “architecture”:
1.
Perhaps the most striking feature of recent global finance is the
immensity of its capital flows. Bogle gives
us the incredible statistic that “the notional principal value of all
derivatives is… some $600 trillion, nearly 10 times the…
This lends itself to a potentially
catastrophic herd-effect that is far beyond anything central banks and
government fiscal policy can handle. Smick
warned that “the global financial system… is vulnerable to a psychological herd
effect that could wreak havoc with the industrialized world economics.”[8] Greider
says “a nation may find itself inundated with ‘hot money’ from abroad that can
ignite a giddy boom – or abruptly starved for credit when the foreign money
decides, for whatever reason, to leave.”[9] Barbera tells how at the time of the U.S.
stock market crash in October 1987 “thousands of institutional investors watched
their automatic sell orders kick in on the same day… delivering a one day 25
percent decline in the Dow.”[10] The
Economist reports about the herd-effect in the money-market fund industry
that in September 2008 there was “a run on money funds… forcing the American
government to guarantee the industry’s almost $4 trillion of assets – and
confirming fears that it had become a big source of systemic risk.”[11]
The danger comes from the acts of a
few and of the many. As to the few,
David Smick tells us that “the industrialized world has surrendered control of
its financial system to a tiny group of five thousand or so technical market
specialists spread through investment banks, hedge funds, and other financial
institutions.”[12] As to the many, Smick gives the example of
the Japanese housewives, who taken together control the enormous pool of
household savings in Japan (some $11 trillion), invest through the Internet,
and may well react spontaneously in tandem with one another to any given
economic shock.[13]
2.
The ingenuity of a good many bright people has been brought to bear to
create an extensive array of complicated financial instruments involved in the
“securitization” of debt of all kinds. This was a process pioneered, Gross
tells us, by the
Likewise, Morris says “the complexity
of the instruments spiraled into absurdity.”
Many of the securities divided the underlying loans into segments known
as “tranches,” and Morris mentions “phantasmagorical 125-tranche instruments
that no one could possibly understand.”[15]
3.
Smick mentions how the precarious the currency markets are. “If the financial market perception developed
that [an] economy was about to weaken, the traders across the board would dump
[the currency], sending it into free fall.”
We saw in our Summer 2009 review of his book that he added that there is
“a highly leveraged, globalized ocean of skeptical currency traders.”[16]
4.
“Sovereign wealth funds” – huge investment pools created by various
governments, mostly nondemocratic such as those of China, Russia and Saudi
Arabia – have become prominent actors in the global financial architecture,
dwarfing the International Monetary Fund.
Smick points to the danger that in a crisis the
5.
Smick also perceives considerable risk in the West’s growing
interdependence with
6.
The Federal Reserve in the
7.
The global financial architecture was built in part on misdirected computer
modeling. Morris calls “the increased
dominance of investment decisions by mathematical constructs” a “dangerous
trend.” We see an important part of
global financial architecture in the detailed description he gives: “A root
cause of the credit crisis was the shift over the early 2000s to the new ‘Basel
II’ system of calculating leverage through
model-based ‘value-at-risk’ (
Failings of the business and financial
communities. Although we are
listing this as a separate category, it is in many ways indistinguishable from the
issue of “financial architecture” that
we have been discussing.
1.
Systemic brinksmanship lay at the heart of the crisis. Barbera has high praise for the economist
Hyman Minsky, who considered it a principle never to be forgotten that “a long
period of healthy growth convinces people to take bigger and bigger risks.”[24] In the years immediately preceding the
crisis, there was a well-nigh universal drive to take borrowing and lending to
the point of extreme risk-taking. The
quest for fees, commissions and other profit by economic actors of many types
(from local mortgage brokers on up the chain) was accompanied by an insouciance
toward the dangers, not just to oneself but to the society as a whole, arising
from growing systemic risk. Certain mental
features were essential to this: the elan of a profit-engendering atmosphere
(which critics aren’t necessarily off the mark in calling “greed”[25]);
the readiness to believe that prices and values would go up forever; an
abandonment of fiduciary responsibility by those in charge of large
institutions; and an implicit understanding by smaller actors that their own
actions were of little importance so far as “the bigger picture” was concerned.
Daniel Gross says Fannie Mae and
Freddie Mac “had thin layers of capital underlying… [the] trillions of dollars
in debt” that they issued and insured.[26] It is Charles Morris who tells of hedge fund
partners’ being “leveraged… 100:1.” At
this level of borrowing, he says, “a loss of 1 percent on the
2.
The “credit rating agencies” were of pivotal importance, depended upon
to perform with great integrity a function that was vital to the market. Barbera tells how poorly they performed:
“Rating agencies, mesmerized by the math and oblivious to the need for ever
higher home prices, gave triple A ratings to highly dubious mortgages.”[29] Gross explains that the real risk of the
securitized debt instruments was masked: “The ratings agencies – Standard &
Poor’s, Moody’s, or Fitch – happily slapped ratings on them in exchange for the
mother’s milk of Wall Street: fees.”[30] To Morris, “it seems clear that the agencies
slanted their ratings to please their clients.”[31]
3.
Bogle has rightly described a market economy as depending upon “a
virtuous cycle of trusting and being trusted.”
It is a systemic flaw of the first order when such an ethos no longer exists, which now seems to
be the case. Bogle speaks of “how rotten
our investment banking system had become.”
Similarly, he mentions “the over-reaching by the sell-side of the
powerful marketing machine that is Wall Street.
Puffery is its stock in trade….”[32] More generally, he says that “not knowing
what enough is… makes salespersons of those who should be fiduciaries… It turns
a system that should be built on trust into one with counting as its
foundation.”[33] He refers to this as “a ‘bottom line’
society.”[34] (This reminds us of Thomas Carlyle’s complaint
more than a century and a half ago about things centering on a “cash nexus.” So the recent exacerbation would seem just a
heightening of a long-standing problem.)
Our other authors share in this
perception of the loss of trustworthiness.
Morris writes about “the consistent failure of profit-making entities as
statutory fiduciaries,” and says that “the securities laws assume that lawyers,
accountants, and credit raters will not allow monetary incentives to override
their professional ethics – an assumption that draws little support from the
abysmal recent record.”[35] He mentions that the appraisers who were
important to property lending were corrupted: “Tracking appraiser performance
pressured appraisers to conform their values to a bank’s mortgage targets.”[36] We should notice that what he has been doing
is to name various of the economy’s “gatekeepers” as among those who have
defaulted. Bogle adds to the list when
he tells of the “62,000 who hold the designation ‘chartered financial analyst’”
and says that “these independent analysts apparently succumbed to the mania as
well… As money poured into the funds they managed, they were well
compensated….” As to American
politicians, he says “too many of our elected officials abdicated their public
duty,” blocking reforms in response to political contributions and to “the
fierce lobbying efforts of corporate
This matter of trust raises a question
that goes to the heart of free-market theory.
Adam Smith argued that if economic actors pursued their own
self-interest, an invisible hand would lead them, in doing so, to serve the
public good. This has long seemed to be
a major advantage of a capitalistic system over a socialist one: self-interest
is a much more effective motivator than a collectivist system’s continuing
exhortations to individuals to serve whatever public purposes the particular system
considers valuable. People seem to be
obdurately resistant to exhortation, a human quality that frustrates idealists
of all sorts. But one of the reminders from
recent experience is that for everyone to be at all times to the fullest extent
self-regarding, in the many ways we have described in this article, leads to
disaster. What we see is that the
pursuit of gain needs to be tempered by an inbred, acculturated sense of
values. These values must include respect
for others and adherence to a set of obligations: honesty, a conscientious
regard by each actor about whether he is rendering genuine value (referred to
in the labor context as “an honest day’s pay for an honest day’s work”) – what
Bogle calls “trustworthiness” and “stewardship.” It is often forgotten that Adam Smith was fully
conscious of this, as we see from his book The
Theory of Moral Sentiments. The need
to temper self-interest takes away the pure black-and-white polarity, and means
that a free society must be informed by much that idealists value.
There are even further
implications. Free-market advocates have
felt strongly that private companies, competing against each other to attract
customers, are something solid to rely upon – much more reliable than most
government operations with their bureaucracy and politics. That faith in the private sector is an
essential part of a “free society” as Americans have known it. But it is now under a cloud. We see this nowhere better than in the health
field, where it becomes difficult to have implicit confidence that the private
health insurance companies will by themselves be faithful servants of the
public good. Only through a renewal of
Bogle’s “trustworthiness” can the confidence in the private sector be restored.
4.
The atmosphere has lent itself to a number of abuses beyond those we
have mentioned. Bogle, who has long
championed “index” mutual funds for their low fees and superior performance (in
comparison to the many funds that would seem to be exercising professional
judgment in picking stocks but rarely even do as well as the stock market index
they’ve selected as a benchmark), describes in detail how most of the mutual
fund industry skims returns from the millions of investors who entrust as much
as $8 trillion to them. He speaks of
“the huge returns earned by fund management companies regardless of whether
fund shareholders are making any money,” and adds that “I have seen no defense
of the inadequate returns delivered by mutual funds to investors.”[38] He quotes with favor a statement by U.S. Sen.
Peter G. Fitzgerald (R-Ill.) in 2003: “The mutual fund industry is now the
world’s largest skimming operation – a $7 trillion [now $8 trillion, according
to Bogle] trough from which fund managers, brokers and other insiders are
steadily siphoning off an excessive slice of the nation’s… savings.”[39]
None of our authors (who are by no
means anti-capitalist) embraces the commonly-heard ideological rationalization
that “any amount of profit is acceptable in a capitalistic system.” They all condemn what they see as “obscene
compensation.” Bogle tells of “the
billion-dollar-plus annual paychecks that top hedge fund managers draw” and
refers to “the obscene (there is no other word for it) compensation paid to the
chief executive officers of our nation’s publicly held corporations – including
failed CEOs, often even as they are being pushed out the door.”[40] He mentions a startling fact: that “it’s hard
to see that the CEOs of our great corporations, as a group, have added much
value to the natural growth of our economy,” pointing out that over the
preceding 25 years “CEO compensation rose at a rate of 8.5 percent annually”
while “in real terms, aggregate corporate profits grew at an annual rate of
just 2.9 percent, compared to 3.1 percent for our nation’s economy.”[41]
Morris cites an example: “Stan Oneal,
ousted as CEO of Merrill, was paid more than $200 million from 2006 through the
fall of 2007.” He adds this about the
compensation received by financiers: “Nine-figure compensation packages for
bankers – and billion-dollar paydays for takeover artists and hedge fund
managers – became routine in the 2000s.”[42] Daniel Gross tells of private equity funds
that “take control of a company, have it issue $500 million in bonds, and use
the cash to pay the new owners a $500 million dividend.”[43] He points to a mentality that has infuriated
the public (the members of which, however, as with so many things, seem
impotent to do much about it): that during the bailout, “Wall Street firms,
which had literally become wards of the state, were unable to understand why
they should reduce bonuses.”[44]
Another abuse was the decline in
lending standards. I lectured to real
estate brokers for a number of years, and was later dumbfounded when I learned
that the standards that had so long been conventional had been abandoned. The Community Reinvestment Act was passed
during the Carter administration, and “required banks to lend to the poor
communities in which they took deposits.”
There was much “civil rights” pressure against the ostensible abuse called
“redlining,” which referred to lenders’ (and insurance companies’) blocking off
of certain parts of a city that they would not do business in. Anti-discrimination law made such companies
vulnerable to punishing litigation if they didn’t comply. This meant that stern realities (such as I
once saw in a burnt-out, post-riot section of St. Louis when I went there to
interview a basketball player’s mother as part of a university investigation of
possible NCAA[45]
violations) had to be overridden. One
way to think of it is that there was an unfunded mandate for the companies to
take extraordinary risks that they would not otherwise have taken.
Because of this, the frantic push for
commissions, and the absence of regulatory oversight, the home-lending industry
moved into an era of “collapsed borrowing standards, leaving the housing
financing market with absolutely no margin of safety,” according to Barbera.[46] The phenomenon was by no means limited to
subprime mortgage lending in the housing market. We see it, too, in the broader area of
finance when Gross tells us that “as private equity firms started to do larger
deals [buying up businesses], banks competed for their business by lowering
standards.”[47]
Anti-regulatory ideology (to which
anti-discrimination laws remained an exception) prevailed and was basic to the
thinking of the chairman of the U.S. Federal Reserve, Alan Greenspan. Morris speaks of “Greenspan’s resolute
insistence on focusing only on consumer price inflation, while ignoring signs
of rampant inflation in the price of assets, especially houses and bonds of all
kinds.”[48] This lack of concern for “bubbles” and, every
bit as importantly, for systemic risk carried with it an indifference to the
abandonment of lending standards. It
meant, too, a failure to pay attention to the financial architecture with its
opaque securities and far-over-extended leverage.
Nonbank lenders and off-balance-sheet
entities came to the fore. Gross speaks
of “a new class of Cheap Money businesses: lightly regulated nonbank lenders
who could borrow money in the capital markets, rather than from depositors,
lend to whomever they saw fit, and then sell the mortgages as bonds.”[49] Morris follows up on this by pointing out
that “since loans are held only long enough to repackage and sell them… the
pressure is to increase volumes by increasing leverage.”[50]
Morris gives us a description of the
off-balance sheet entities: “Big banks, especially Citigroup,… held hundreds of
billions of long-term loans in mysterious off-balance sheet entities called
SIVs [“structured investment vehicles”] that they financed in the short-term
commercial paper market.” He says they
were “run within – but legally separate from – the major money center
banks.” The entities were “typically
Absence of appropriate and effective regulation. Each of the dangers and abuses recounted by
our authors testifies, in effect, to a lack of suitable regulation to establish
“rules of the game” that would assure a sound system.
Partly this was caused by ideational
deficiencies:
Anti-regulatory ideology became the
conventional wisdom. Morris says “the
watershed presidential election of 1980 brought free-market ‘
He points out that in 1995, Greenspan
“argued against margin – or minimum capital – rules on derivative
positions.” In Greenspan’s thinking,
markets would police themselves. The Fed
chairman argued that “market pricing and counterparty surveillance can be
expected to do most of the job of sustaining safety and soundness.”[53] This reminds us that the animus against
regulation was part of a larger body of thought. This placed abiding faith in the
self-automating ability of markets.
Beyond that, it accepted an over-simplified free-market philosophy that was
not fully adequate to meet a free society’s needs – in that it failed to
appreciate that a market economy requires an elaborate skeleton of laws, ethics
and institutions.
The
We have seen how the collapse of
lending standards arose out of a combination of anti-regulatory and Civil
Rights ideology.
The use of essentially naïve computer
models has to be attributed to conceptual deficiencies of a different sort. There is a tendency for much modern thought
to proceed in lock-step, with reductionist over-simplification and a hubris
that insists that the over-simplified models tell the whole story.
Another ideational factor was the
change in thinking by monetary authorities away from a concern about the volume
and velocity of money. This lent itself
to “easy money” policies in national economies, leading to “bubbles” – and,
perhaps much more significantly, created the bland acceptance of international
credit expansion to the point at which, as we have seen, “hundreds of trillions
of dollars” came into existence.
It is a mistake, however, to think that misdirected
ideas have been alone in causing the catastrophe. The ideological factors behind the collapse
of lending standards, for example, were accompanied by the cupidity that drove
both borrowers and lenders to take advantage of the standards’ removal with an
attitude of “damn the torpedoes, full speed ahead.”. No one’s philosophy dictated the washing-away
of ethical and professional standards among the many “gatekeepers” – corporate
directors, accountants, lawyers, financial consultants, credit rating agencies,
and the like. Nor did philosophy drive
the clever sophisticates of the financial world to create and then indulge in
the drive toward ever-more elaborate securities and derivatives.
The marriage of the American political
and governmental system with lobbyists from Big Money and a raft of other
pressure groups militates strongly against a disinterested, rationalized system
of controls. When legislators and
administrators move from their positions into lobbying, where they receive
extraordinary compensation, and then back again into government in a perpetual
game of musical chairs, personal gain rather than principled thinking takes
center stage. Policy, even ideas, are
driven by the contending interests. This
is not to say that a democratic system, even at its best, will not need to hear
from and work out compromises among existing interests; but there is a
necessary line between a process in which “public servants” are stewards of the
public good, and one driven by each individual’s pursuit of maximum personal
gain. Thus, the problems of character
that pervade so much of American life, including but not limited to the
business and political worlds, are central to the crisis and are not themselves
due to inappropriate ideas.
Still further, the existence of sensible
controls doesn’t prevent economic actors and their lawyers from engaging in a
perpetual quest to find ways around them.
Daniel Gross is perceptive when he says: “Define a practice as regulated
or proscribed, and a lawyer will craft a new practice that allows companies to
do essentially the same thing.” He cites
the example that “after Congress struck a blow against excessive executive pay
in the early 1990s by limiting the [tax] deductibility of salaries greater than
$1 million, companies dispensed stock options by the gazillions.”[54]
Looming large as a non-ideational
factor is the enormous growth in scale of the global financial system. The
scale is beyond the capacity of central banks to manage. It is also combined with a breaking-free from
national constraints. In a globalized
market, many actors have transcended national ties and loyalties. The world community has been far short of having
a system of international controls, although it is working toward one in the
aftermath of the present credit crisis. Even
remedial measures, once calamity has struck, are lacking, as Smick tells us
when he says that “the world today lacks a financial doctrine, or even much in
the way of a set of informal understandings, for establishing order in a
financial crisis.”[55]
Even if such controls were agreed upon
and effectively administered, the problem of a possible international “herd-effect,”
with vast simultaneous tidal-waves of capital battering existing economies and
currencies, would to a large extent remain a source of unfathomable systemic
risk. One can well imagine the amount of resistance that any attempt to “reduce
the scale” of global finance to manageable markets will run into.
Our authors have many reforms to suggest, although we can admire the candor Morris exemplifies
when he, one of our experts, admits that “I don’t pretend to know how to
start.”[56] The knot is too tangled with human failings
to lend itself to solutions, much less easy ones. Nevertheless, here are some of the measures
the authors recommend:
1.
As to improving the transparency of executive compensation, Bogle
believes that “all types of stock options should be treated as corporate
expense.”[57]
2.
Bogle would have large corporations adopt a practice of separating the
CEO position from that of Chair of the Board.
He would like to see boards much more independent, making judgments on
their own. This would be enhanced, he
says, if boards had staffs under their
own direction. Speaking especially of mutual
funds, he says “we need a board wholly independent of the manager.” Further, the nominating/governance committee
“should be independent of management.”[58]
3.
As a example of what is needed to cause the economy’s “gatekeepers” to
function as they should, Bogle would like to see a strengthening of the
standards requiring auditors to be rotated.[59] Much needs to be done to assure the
professionalism of accountants, the independence of appraisers, the
client-serving orientation of financial consultants, the proper restraint of
mortgage brokers, and the mentality lawyers bring to the task of serving their
clients. It is obvious that “more rules”
will only partly be effective in the absence of a change in spirit.
4.
Barbera wants the problem of systemic risk addressed. “The overarching theme of regulatory reform
has to be about instituting rules that create safety margins for the myriad
nonbank financiers….”[60] Moreover, monetary authorities must stop
ignoring financial markets and the viability of the processes within them.[61] He calls for making finance simpler, more
transparent. [62] Morris wants a return to the “
5.
Since Barbera concludes that “it is not possible to regulate hedge funds
and private equity funds effectively – they can be domiciled in
6.
Morris argues that there is need for “limits on the size of
non-regulated entities, to head off the ‘too big to fail’ syndrome.” He admonishes that “an ‘entity’ should be
defined by control parties rather than legal structure.”[65] The plan announced by the Obama
administration in the United States in a “financial white paper” in June 2009
calls, according to The Economist,
for making “the Fed directly responsible for the supervision of all firms
deemed too big to fail.”[66]
7.
We would have liked for Morris to have written much more specifically
about what he thinks should be done about the proliferation of types of
securities, “collateralized debt obligations” (CDOs), “credit default swaps”
(CDSs), and the like. Perhaps Daniel
Gross provides the answer: he calls for the creation of a “stabilization fund”
as “bubble insurance.” It would be
supported by “a tax on securities trading and the creation and trading of
structured financial products.” He sees
such a tax as a way to cause less securitization: “As the free-market
economists say: If you want less of something, tax it.”[67] In this connection, it’s worth noting that Morris
would limit the trading of “immature instruments, like credit default swaps,”
to “exchange-traded, standardized, paper.”[68]
8.
In an article about the response to the September 2008 crisis in
money-market-funds, The Economist
says that on
9. The
Economist considers it a “glaring shortcoming” that the new
consumer-protection agency called for by the Obama white paper will “provide
little enforcement over thousands of state-regulated finance companies and loan
brokers.” It says those are the companies
that were mainly responsible for “a large share of toxic mortgages and abusive
loans.”[70]
The
One point in particular remains puzzling. David Smick seems clear and emphatic when
he tells us that the volume of subprime mortgages originated in the United
States was not itself a vast problem, amounting “to, at worst, $200 billion in
exposure in a global market worth hundreds of trillions.” The problem, he says, is that the problems of
obscurantist manipulation within the financial world created a “world-wide
distrust of the asset-backed securities market.” After securitization had “divided the total
sum into many smaller portions, and sold these pieces to financial institutions
throughout
If this is so, why did then-U.S.
Treasury Secretary Henry Paulson initially think in the fall of 2008 that a solution would be to “buy up the toxic
assets”? Did he not understand what the
financial world in general perceived, which was that the problem was precisely
that the toxic assets couldn’t be identified?
And why had not the segmentation of securities through the “tranching”
process made it clear what tranches were sound and which ones were far
riskier? After all, Morris tells us that
“the top tranches had first claim on cash flows” and “qualified for the highest
investment-grade ratings,” while “the bottom tranches absorbed all initial
defaults but paid high yields.”[73] Were not the lower tranches “the toxic
assets”? The answer must lie in the
“opaqueness” of the resulting securities, but it is puzzling why they were
somehow allowed to be opaque.
Our authors cover a lot of ground despite limiting themselves to the credit crisis. Their discussion is not the same thing,
though, as a comprehensive overview of the challenges faced by the American and
global economies. They don’t discuss the
deindustrialization of the United States; the flood of low-cost imports
accompanied by unprecedented trade imbalances; the actual and potential impact
of the scientific/technical revolution; the role of low-cost imports,
cheap-labor immigration, and outsourcing in keeping consumer-good prices and
wages down, serving as cover for a long period of “easy money” central bank
policy; and a number of other facets of a complete analysis. To point this out is not to fault the books
reviewed here, but simply to say that there is much more to consider.
As mentioned earlier, another wave of
books is to be expected soon that will tell how the crisis unfolded and how the
world managed (if it did) to swim to shore from such an ocean of defaulted-upon
risk.
[1] . Wikipedia
says the tulip mania “is generally considered the first recorded speculative
bubble.” It reached its height in
[2] . Robert J. Barbera, The Cost of Capitalism: Understanding Market Mayhem and Stabilizing Our
Economic Future (
[3] . The
Economist,
[4] . Richard Barnet and John Cavanagh, “Electronic Money and the Casino Economy,” in The Case Against the Global Economy and For a Turn Toward the Local (San Francisco: Sierra Club Books, 1996), p. 373.
[5] . William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism (New York: Simon & Schuster, 1997), p. 316.
[6] . Daniel Gross, Dumb Money: How Our Greatest Financial Minds Bankrupted the Nation
(
[7] . Greider, One World, Ready or Not, pp. 317, 263.
[8] . Smick, The World is Curved, p. 8.
[9] . Greider, One World, Ready or Not, p. 263.
[10] . Barbera, Cost of Capitalism, p. 85.
[11] . The
Economist,
[12] . David M. Smick, The World is Curved: Hidden Dangers to the Global Economy (
[13] . Smick, The World is Curved, p. 141.
[14] . Gross, Dumb Money, pp. 20, 6.
[15] . Charles R. Morris, The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the
Great Credit Crash (
[16] Smick, The World is Curved, pp. 174, 181.
[17] . Smick, The World is Curved, p. 66.
[18] . Smick, The World is Curved, p. 95.
[19] . Smick, The World is Curved, p. 209.
[20] Smick, The World is Curved, p. 188.
[21] . Morris, Two Trillion Dollar Meltdown, p. 134.
[22] . Morris, Two Trillion Dollar Meltdown, pp. 56, 165.
[23] . The Economist,
[24] . Barbera, Cost of Capitalism, p. xiv.
[25] . Smick, The World is Curved, p. 243.
[26]. Gross, Dumb Money, p. 86.
[27] . Morris, Two Trillion Dollar Meltdown, pp. 119, 60.
[28] . Smick, The World is Curved, pp. 45-6.
[29] . Barbera, Cost of Capitalism, p. 132.
[30] . Gross, Dumb Money, p. 50.
[31] . Morris, Two Trillion Dollar Meltdown, p. 77.
[32] . Bogle, The
[33] . Bogle, Enough:
True Measures of Money, Business, and Life
(
[34] . Bogle,
[35] . Morris, Two Trillion Dollar Meltdown, p. 150.
[36] . Morris, Two Trillion Dollar Meltdown, p. 68.
[37] . Bogle,
[38]. Bogle, Enough, p. 148.
[39]. Bogle,
[40]. Bogle, Enough, p. 2.
[41]. Bogle, Enough, pp. 130-132.
[42] . Morris, Two Trillion Dollar Meltdown, pp. xiii, 145.
[43] Gross, Dumb Money, p. 10.
[44] . Gross, Dumb Money, p. 92.
[45] . “NCAA” is the acronym for the “National
Collegiate Athletic Association,” whose rules govern college athletics in the
[46] . Barbera, Cost of Capitalism, p. 123.
[47] . Gross, Dumb Money, p. 54.
[48] . Morris, Two Trillion Dollar Meltdown, p. 63.
[49] . Gross, Dumb Money, p. 29.
[50] . Morris, Two Trillion Dollar Meltdown, p. 147.
[51] . Morris, Two Trillion Dollar Meltdown, pp. xii, 82.
[52] . Morris, Two Trillion Dollar Meltdown, p. xxii.
[53] . Morris, Two Trillion Dollar Meltdown, p. 54.
[54] . Gross, Dumb Money, p. 96.
[55] . Smick, The World is Curved, p. 6.
[56] . Morris, Two Million Dollar Meltdown, p. 170.
[57] .
Bogle,
[58] . Bogle, Enough, pp. 155-6.
[59] .
Bogle,
[60] . Barbera, Cost of Capitalism, p. 187.
[61] . Barbera, Cost of Capitalism, p. 22.
[62] . Barbera, Cost of Capitalism, p. 214.
[63] . Morris, Two Trillion Dollar Meltdown, p. 165.
[64] . Morris, Two Trillion Dollar Meltdown, p. 166.
[65] . Morris, Two Trillion Dollar Meltdown, p. 166.
[66] . The Economist,
[67] . Gross, Dumb Money, pp. 99, 100.
[68] . Morris, Two Trillion Dollar Meltdown, p. 167.
[69] . The Economist,
[70] . The Economist,
[71] . Smick, World is Curved, pp. 11, 249, 12, 13.
[72] . Morris, Two Trillion Dollar Meltdown, p. 72.
[73] . Morris, Two Trillion Dollar Meltdown, p.