Thursday, 16 April 2009

“The Two Trillion Dollar Meltdown”, by Charles R. Morris (PublicAffairs)


Easy Money, High Rollers, and the Great Credit Crash

In Two Trillion Dollar Meltdown, Charles Morris walks the reader through the instruments involved in the current economic crisis – how they work, and how they are abused, to provide us with a brief, accessible account of why the economy is in the state it is.

This is easily one of the best books on the current crisis, as it offers – in clear language with minimal jargon – an introduction to the whole problem. The book starts with a description of how New Deal and Keynesian liberalism was replaced by Milton Friedman’s “monetarism”, and what this meant for the American economy, provided through a detailed almost journalistic account of the American economy from LBJ to George W. Bush.

The author’s outlook is understandably bleak:

“as of this writing, the sickening stock market down-drafts continue, and credit markets remain semicatatonic. The gut-freezing comprehension is finally taking hold that this is not really, at the end of the day, just a banking phenomenon. America’s problems, and therefore the world’s, go much deeper than that”

Morris has a great deal to say about the economic system, most notably the self-inflicted nature of its downfall: “It’s impossible to exaggerate the sheer idiocy of the financial machinery of the 2000s… An evil genie would not have designed a structure more prone to disaster.” The book also details the connectedness of the global system, starting with the knock-on effects of Bear Stearns’ trouble in 2007 and what it started (described, at two different occasions, in an scary-domino-effect way).

Based on high consumer spending and insane leverage of assets, the system was built on shaky foundations. With personal consumption reaching a staggering, unprecedented 72% of GDP in 2007, and a trade deficit of 4.8% of GDP, the United States found itself in a dire situation. Like many others, Morris lays the blame for America’s condition (“a debt-fuelled party, marked by a consumer binge on imported goods”) at the feet of the free-market zealotry that has come to embody conservative politics in the United States. Unlike some, however, he knows what he’s talking about, giving proper accounts of the financial “inventions” and evolutions in finance that helped create the credit bubble.

These include: the rise of “shadow banking”; breakthroughs in personal computing (though this is difficult to consider evil); an increase in mathematics PhDs on Wall Street and their ability to “carve up and reassemble old-fashioned asset classes so they were custom-fit to investor needs” (leading to a pretense that all finance can be “mathematized”); new classes of complex, structured investment instruments; an exploding, largely unregulated sub-prime mortgage market; the shift of financial transactions to unregulated markets; the continued interest-rate cuts; securitization (i.e. the packaging of loans as collateralized mortgage obligations); Ralph Cioffi at Bear Stearns; the “tsunami of dollars” in the world system and the US’s foreign debt.

His prescriptions for how to fix the system don’t run on the same lines as President Obama’s bailouts (indeed, published before the new administration rolled out its inflated bailout estimates, it would be interesting to know what Morris thinks of Obama’s policies). “Re-energising consumer borrowing and spending with cheap money is exactly the wrong prescription”; instead, according to Morris, consumption has to fall, while savings and investments need to rise. Equally, the United States has got to start producing more than it is consuming, something that hasn’t been the case for decades. Morris, however, is not too optimistic:

“The sad reality is that there is no easy way out. For about a decade now, we have had a false prosperity based on a huge water-wheel of money, fuelling a debt-financed, import-driven consumer binge. Personal savings rates have dropped to zero, and the world is flooded with dollars. The new dollar lakes from the Paulson/Bernanke rescue efforts just put us deeper underwater.”

The author also asks why the Fed hasn’t stepped in more aggressively, and the simple answer is that it can’t:

“there isn’t much the Fed can do. All the years of working the liquidity pump has sucked out everything but the brine.”

In an updated chapter for this new edition of the book, Morris voices his concern about Bernanke’s actions at the Fed, and the Fed’s questionable asset acquisitions since 2007, which might make Federal balance sheets look increasingly like the banks they are trying to save – which won’t be encouraging to foreign or domestic investors in Fed/Treasury notes or bills.

The book is gloomy, for sure. It will make you angry and frustrated with bankers, hedge-fund managers, and other financial-sector employees. There’s no real way the book could have been anything else. Morris is, however, an authoritative voice on the subject, and as a result his words come across as measured and calm. The book is accessible and short (177 pages, I read it in a day), but there are times when his explanations of economic systems just went over my head (this is more an indictment of my own failure to understand economics than anything else). That being said, his explanations often illuminated parts of the crisis and financial system that I had long considered beyond my ken, and for this he deserves considerable praise.

As an introduction to the crisis lacking in hyperbole, or for anyone who wants to know what caused it without being steamrolled by copious amounts of economics jargon only MBAs will understand, Two Trillion Dollar Meltdown is the brilliant place to start.

Also try: Jeffrey Goldberg, “What Now?” (The Atlantic, May 2009); Henry Blodget, “Why Wall Street Always Blows It” (The Atlantic, December 2008); Simon Johnson, “The Quiet Coup” (The Atlantic, May 2009); William Cohan, House Of Cards (2009); George Soros, The Crash of 2008 (2009) Reviews of both of these books are currently in the works

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