March 9, 2008
BOOK REVIEW: 'The Trillion Dollar Meltdown' Paints Grim Picture of U.S. Economy
By David M. Kinchen
Huntingtonnews.net Book Critic
Ripped from the pages of the N.Y. Times:
Sharp Drop in Jobs Adds to Grim Economic Picture
The story by Edmund L. Andrews underneath this headline reads, in part:
"The worst fears of consumers, investors and Washington officials were confirmed on Friday (March 7, 2008), as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.
"In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.
"Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.
"In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation’s banking system this month — with more to come after that — by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.
"Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.
“Godot has arrived,” wrote Edward Yardeni, who had been one of Wall Street’s most relentlessly upbeat forecasters. “I’ve been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy.”
* * *
I saw this online story hours after I had finished reading "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash" (PublicAffairs, 224 pages, $22.95) by Charles R. Morris.
I have to admit serious eye glazing problems with all the CDO's, CMO's, CBO's and CLO's peppering the pages of this slim but comprehensive look at the nation's shaky economy. A persistent reader should be able to make sense of all the C -Words (for Collateralized) Morris, a lawyer, former banker and financial journalist, throws at us, because he explains them in clear, non-technical language, without a lot of math.
It's been a long time coming, this reckless financial environment of subprime mortgages, the worst foreclosure crisis in decades, massive job losses, talk by Barack Obama and Hillary Clinton alike about opting out of NAFTA or modifying it, high energy prices -- the whole Perfect Storm, to use a cliche, that afflicts the American economy.
Add to this war in Iraq and Afghanistan that costs billions of dollars with no end game in sight -- a war that already has cost more than World War II -- and Morris's view that the restructuring needed will be at least as painful as the "difficult period of 1979-1983."
It will be far worse than the Stock Market crash of 1987, Morris argues. Stick with the author as he describes the arcane financial instruments, the chicanery, the policy misjudgments, the dogmas and the delusions that have created the greatest credit bubble in world history.
In the section "Minsky, Ponzi, and the Logic of Markets," beginning on Page 133. I was delighted to see the name Hyman Minsky, the University of Chicago economist who believed that "instability and crises were inherent features of financial markets" -- since i had written about Minsky several months ago.
Morris opines that "the final stages of a Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt obligation continuously increases." Does this sound familiar to holders of multiple credit cards, who use a cash advance from one credit card to pay off the balance on another one?
Who the heck is Ponzi? You ask, having forgotten everything you learned in Econ 101. According to Wikipedia:
"A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. "The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.
"The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the U.S. in 1903. Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known throughout the United States. Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit lapses in judgment arising from investor naïveté."
Morris comes close to slamming the government's definition of inflation, which omits "volatile" food and energy costs (what else are we spending our money on?), but he attacks (on Page 63) former Fed Chairman Alan Greenspan's "resolute insistence on focusing only on consumer price inflation, while ignoring signs of inflation in the price of assets,[Morris's emphasis] especially houses and bonds of all kinds....common sense demands some intervention when prices of a major asset class are soaring beyond all reason."
This exactly the position I've held regarding housing, a subject I've covered for several decades now at metropolitan daily newspapers and now online. The housing bubble didn't represent appreciation so much as inflation -- at least that's been my position for many economic cycles.
The "trillion dollar" in the title isn't just a number picked out of the air; Morris calculates that $1.1 trillion dollars is the figure that will be required to bring some semblence of reality to the nation's economy...money that will be borrowed from the Chinese, the Japanese and the absolute monarchs of the Middle East, more than likely.
We not only don't make much of anything in this country anymore (e.g. the iMac I'm using certainly wasn't manufactured in Cupertino, CA), we're in debt up to our eyeballs, which should turn our brown or blue or green eyes red.
Among the changes Morris suggests at the end of the book is a return to an updated form of the Depression era Glass-Steagall "separation of commercial and investment banking...using depositors' money to drive investment banking fees is the kind of abuse to be targeted by an updated version of Glass-Steagall."
Morris also addresses the gap -- chasm is a better term -- between the richest people in the country and the middle class and poor-- beginning on Page 139 -- and he deflects arguments by conservatives and libertarians that government transfer payments balance out the inequality of income that favors the top 10 percent. No other country in the world has such inequality, just as no other industrialized country has a health care system like ours that has tens of millions of people without health insurance.
"The Trillion Dollar Meltdown" is an important book that should be -- and can be -- read by everyone concerned with our nation's economy.
Publisher's web site; www.publicaffairsbooks.com
Make HNN Your Homepage (IE Users Only)
BOOK REVIEW: 'The Trillion Dollar Meltdown' Paints Grim Picture of U.S. Economy
By David M. Kinchen
Huntingtonnews.net Book Critic
Ripped from the pages of the N.Y. Times:
Sharp Drop in Jobs Adds to Grim Economic Picture
The story by Edmund L. Andrews underneath this headline reads, in part:
"The worst fears of consumers, investors and Washington officials were confirmed on Friday (March 7, 2008), as deepening paralysis on Wall Street collided with stark new evidence of falling employment and a likely recession.
"In a report that was far worse than most analysts had expected, the Labor Department estimated that the nation lost 63,000 jobs in February. It was the second consecutive monthly decline, and the third straight drop for private-sector jobs.
"Even before the bad news on jobs emerged, the Federal Reserve was already racing to ease the latest crisis in the credit markets, where seemingly rock-solid companies have been caught short because the markets are devaluing the collateral they had posted to back billions of dollars in loans. Much of that collateral consists of mortgages.
"In a surprise announcement early Friday, the Federal Reserve said it would inject about $200 billion into the nation’s banking system this month — with more to come after that — by offering banks one-month loans at low rates and in return letting them pledge mortgage-backed bonds and even riskier assets as collateral.
"Though monthly payroll data are notoriously volatile and subject to revision, the jobs report was so bleak that many of the few remaining optimists on Wall Street threw in the towel and conceded that the United States was already in a recession.
“Godot has arrived,” wrote Edward Yardeni, who had been one of Wall Street’s most relentlessly upbeat forecasters. “I’ve been rooting for the muddling through scenario. However, the credit crisis continues to worsen and has become a full-blown credit crunch, which is depressing the real economy.”
I saw this online story hours after I had finished reading "The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash" (PublicAffairs, 224 pages, $22.95) by Charles R. Morris.
I have to admit serious eye glazing problems with all the CDO's, CMO's, CBO's and CLO's peppering the pages of this slim but comprehensive look at the nation's shaky economy. A persistent reader should be able to make sense of all the C -Words (for Collateralized) Morris, a lawyer, former banker and financial journalist, throws at us, because he explains them in clear, non-technical language, without a lot of math.
It's been a long time coming, this reckless financial environment of subprime mortgages, the worst foreclosure crisis in decades, massive job losses, talk by Barack Obama and Hillary Clinton alike about opting out of NAFTA or modifying it, high energy prices -- the whole Perfect Storm, to use a cliche, that afflicts the American economy.
Add to this war in Iraq and Afghanistan that costs billions of dollars with no end game in sight -- a war that already has cost more than World War II -- and Morris's view that the restructuring needed will be at least as painful as the "difficult period of 1979-1983."
It will be far worse than the Stock Market crash of 1987, Morris argues. Stick with the author as he describes the arcane financial instruments, the chicanery, the policy misjudgments, the dogmas and the delusions that have created the greatest credit bubble in world history.
In the section "Minsky, Ponzi, and the Logic of Markets," beginning on Page 133. I was delighted to see the name Hyman Minsky, the University of Chicago economist who believed that "instability and crises were inherent features of financial markets" -- since i had written about Minsky several months ago.
Morris opines that "the final stages of a Minsky cycle arrive with a proliferation of Ponzi firms, which must borrow to meet all their interest payments, so their debt obligation continuously increases." Does this sound familiar to holders of multiple credit cards, who use a cash advance from one credit card to pay off the balance on another one?
Who the heck is Ponzi? You ask, having forgotten everything you learned in Econ 101. According to Wikipedia:
"A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. "The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.
"The scheme is named after Charles Ponzi, who became notorious for using the technique after emigrating from Italy to the U.S. in 1903. Ponzi was not the first to invent such a scheme, but his operation took in so much money that it was the first to become known throughout the United States. Today's schemes are often considerably more sophisticated than Ponzi's, although the underlying formula is quite similar and the principle behind every Ponzi scheme is to exploit lapses in judgment arising from investor naïveté."
Morris comes close to slamming the government's definition of inflation, which omits "volatile" food and energy costs (what else are we spending our money on?), but he attacks (on Page 63) former Fed Chairman Alan Greenspan's "resolute insistence on focusing only on consumer price inflation, while ignoring signs of inflation in the price of assets,[Morris's emphasis] especially houses and bonds of all kinds....common sense demands some intervention when prices of a major asset class are soaring beyond all reason."
This exactly the position I've held regarding housing, a subject I've covered for several decades now at metropolitan daily newspapers and now online. The housing bubble didn't represent appreciation so much as inflation -- at least that's been my position for many economic cycles.
The "trillion dollar" in the title isn't just a number picked out of the air; Morris calculates that $1.1 trillion dollars is the figure that will be required to bring some semblence of reality to the nation's economy...money that will be borrowed from the Chinese, the Japanese and the absolute monarchs of the Middle East, more than likely.
We not only don't make much of anything in this country anymore (e.g. the iMac I'm using certainly wasn't manufactured in Cupertino, CA), we're in debt up to our eyeballs, which should turn our brown or blue or green eyes red.
Among the changes Morris suggests at the end of the book is a return to an updated form of the Depression era Glass-Steagall "separation of commercial and investment banking...using depositors' money to drive investment banking fees is the kind of abuse to be targeted by an updated version of Glass-Steagall."
Morris also addresses the gap -- chasm is a better term -- between the richest people in the country and the middle class and poor-- beginning on Page 139 -- and he deflects arguments by conservatives and libertarians that government transfer payments balance out the inequality of income that favors the top 10 percent. No other country in the world has such inequality, just as no other industrialized country has a health care system like ours that has tens of millions of people without health insurance.
"The Trillion Dollar Meltdown" is an important book that should be -- and can be -- read by everyone concerned with our nation's economy.
Publisher's web site; www.publicaffairsbooks.com
Make HNN Your Homepage (IE Users Only)
