Feb. 10, 2010
BOOK REVIEW: 'Complicit' Reveals Extent, Causes, Consequences of Massive Economic Meltdown
Reviewed By David M. Kinchen
Huntingtonnews.net Book Critic
Complicit -–adjective:
choosing to be involved in an illegal or questionable act, esp. with others; having complicity.
-- The Random House Dictionary, © Random House, Inc. 2010.
Guilty! Guilty! Guilty! We're all responsible in some form or another for the greatest economic meltdown since the Great Depression....except for me and thee, and I'm not so sure about thee.
I've been searching for a one-volume, easy-to-understand explanation of the financial meltdown and I believe I've found it in Mark Gilbert's "Complicit: How Greed and Collusion Made the Credit Crunch Unstoppable" (Bloomberg Press, 192 pages, $24.95). Gilbert is a British journalist and his book presents a world-wide perspective on the meltdown.
A good example is his examination of Northern Rock, a Newcastle, England financial institution -- an institution that few Americans have ever heard of. Gilbert describes the rapid expansion of loan activity at Northern Rock, to the delight of shareholders, initially, but to the failure and bailout of the formerly conservative lending institution as the recession deepened.
Gilbert watched the subprime crisis crash into public view in autumn 2008, taking down some financial firms, necessitating an unprecedented government bailout for others, leading to a global economic recession that wiped out nest eggs, destroyed stock market values, and caused home foreclosures and unemployment numbers to skyrocket.
Gilbert describes the crash's entangled root system, one that fed on greed, stupidity, and hubris. Its tendrils,he says, connected "a silent conspiracy of the well rewarded" in banking, real estate, trading, insurance, investing, politics, regulation, credit rating, law, and economic theory. He pulls no punches as he lays the blame for the subprime debt crisis squarely at the feet of those who could have moved to stop it.
I was pleased to see that Gilbert places much of the blame for the recession on the repeal of much of the U.S. Glass-Steagall act in 1999 during the Clinton administration. I've long argued that the demise of much of Glass-Steagall contributed to the meltdown.
Named for its Congressional sponsors, Glass-Steagall was enacted in 1933 during the Great Depression to separate commercial and investment banking -- to separate the "boring" commercial banking from the "exciting" -- and risky investment banking that prevailed during the bubble period of the 1920s that contributed to the stock market crash of 1929.
Naturally, banks, including Bank of America, have opposed the re-introduction of the parts of the act that were repealed more than 10 years ago (one part of the act, the Federal Deposit Insurance Corp., was retained).
In December 2009, Republican Sen. John McCain of Arizona -- remember him? He and what's her name were the GOP Presidential-VP ticket in 2008 -- and Democratic Sen. Maria Cantwell from the great state of Washington, jointly proposed re-enacting the Glass-Steagall Act. Legislation to re-enact parts of Glass-Steagall was also introduced into the House of Representatives.
Former Federal Reserve Chairman Paul Volcker -- currently an advisor to President Obama -- has also been an outspoken fan for the reinstatement of many aspects of Glass-Steagall.
In his conclusions and policy prescriptions at the end of his slim but powerful book, Gilbert says that repeal of much of G-S was the cause of the meltdown and that restoration of the rules will help split off ordinary banking -- how boring! -- from the "casinos" of so-called investment banking.
Gilbert says the major contributor to the meltdown was the Housing Bubble. That's what it was and is. Housing was never intended to be an investment vehicle and for much of the 1980s, homeownership stayed at a reasonable 64 percent level in the U.S. By 2007, it had reached an unsustainable 69 percent, driven by subprime mortgages, Alt-A loans -- just a step above subprime; Liar's loans, No-Doc loans, NINJA (No Income, No Jobs or Assets) loans, etc.
It was in 2005, just before the peak of the bubble, that two respected economists, Robert J. Shiller and David Rosenberg, warned of its imminent collapse, Gilbert notes. Shiller, co-author of the Case-Shiller Housing Price Indices, told the New York Times that housing prices might decline by as much as 40 per cent in the next generation. It only took a couple of years for this to occur in markets like Las Vegas and Phoenix.
Rosenberg, chief economist for North America for Merrill Lynch in New York, noted in an August 2005 research report that U.S. housing prices were at their least affordable level since the third quarter of 1989; the following year -- 1990 -- new home sales plunged 20 percent as demand responded to the affordability erosion.
In July 2005, then Fed Chairman Alan Greenspan made "milquetoast" noises about "signs of froth in some local markets" but housing prices continued unchecked, Gilbert writes.
The "securitization" of mortgages was another version of the Ponzi Scheme, with the original lenders handing off their good, bad and ugly mortgages into unrecognizable instruments bearing names like Collaterized Debt Obligations (CDO) to investment firms, who sold them to individual investors and even countries like Iceland and Germany.
Gilbert addresses the "too big to fail" issue, saying that "regulators will have to impose artificial size limitations on banks. He notes near the end of the book that the cumulative assets of two Swiss banks -- UBS and Credit Suisse -- grew to six times the size of the entire Swiss economy during the credit boom.
On the other hand (Harry Truman was always searching for a one-armed economist!) New York Times op-ed contributor and Nobel Prize winning economist Paul Krugman on Feb. 1, 2010 wrote in the Grey Lady that boring Canada managed to escape much of the world-wide meltdown (link: http://www.nytimes.com/2010/02/01/opinion/01krugman.html?th&emc=th)
Krugman on Canada:
"But when things fell apart, the consequences were very different here and there [Canada]. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?
"It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.
"Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene."
What Canada did right is what Gilbert wants the rest of the world -- especially the U.S. -- to do:
"Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending," Krugman wrote in The Times. "The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium. More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money."
Sometimes, most of the time, in fact, when it comes to money and investing, Boring is Good, turning the fictional Gordon Gekko's saying "Greed is Good" on its head.
Gilbert suggests other reforms in final chapter of his book:
* Reform the bonus system by paying in kind, i.e., give the top performers their bonuses in the form of super-senior credit-default swaps instead of money. "Traders shouldn't be able to skip town with bags full of cash., leaving their former employers owning investments that sour...."
* Don't rely on Ivory Tower academics to run central banking. "Every rate-setting committee at every central bank in every country should be obliged to reserve several places at the table for businesspeople, preferably those who have built companies from scratch..."
* Financial ratings need to be reformed, since they've performed so miserably in the past, contributing to the meltdown. "...governments should stop letting ratings companies use nonpublic information to make their judgments. Everyone should have access to the same data, removing Moody's and S&P's current advantage."
* The "testosterone factor" should be modified, with the inclusion of more women in the financial industry. Macho men were overwhelmingly responsible for the meltdown, and the addition of financially savvy women would take the edge off this disturbing element, Gilbert suggests.
Summing up, "Complicit" joins John Perkins' "Hoodwinked" (link to my review: http://www.huntingtonnews.net/columns/091201-kinchen-columnsbookreview.html) as one of the best new books on the financial meltdown. Both books avoid jargon, making them accessible to the general reader who doesn't have an MBA.
About the Author
Mark Gilbert, bureau chief for Bloomberg News in London, has been with Bloomberg News since 1991 and has written a regular column on global financial issues since 1998.
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BOOK REVIEW: 'Complicit' Reveals Extent, Causes, Consequences of Massive Economic Meltdown
Reviewed By David M. Kinchen
Huntingtonnews.net Book Critic
Complicit -–adjective:
choosing to be involved in an illegal or questionable act, esp. with others; having complicity.
-- The Random House Dictionary, © Random House, Inc. 2010.
Guilty! Guilty! Guilty! We're all responsible in some form or another for the greatest economic meltdown since the Great Depression....except for me and thee, and I'm not so sure about thee.
I've been searching for a one-volume, easy-to-understand explanation of the financial meltdown and I believe I've found it in Mark Gilbert's "Complicit: How Greed and Collusion Made the Credit Crunch Unstoppable" (Bloomberg Press, 192 pages, $24.95). Gilbert is a British journalist and his book presents a world-wide perspective on the meltdown.
A good example is his examination of Northern Rock, a Newcastle, England financial institution -- an institution that few Americans have ever heard of. Gilbert describes the rapid expansion of loan activity at Northern Rock, to the delight of shareholders, initially, but to the failure and bailout of the formerly conservative lending institution as the recession deepened.
Gilbert watched the subprime crisis crash into public view in autumn 2008, taking down some financial firms, necessitating an unprecedented government bailout for others, leading to a global economic recession that wiped out nest eggs, destroyed stock market values, and caused home foreclosures and unemployment numbers to skyrocket.
Gilbert describes the crash's entangled root system, one that fed on greed, stupidity, and hubris. Its tendrils,he says, connected "a silent conspiracy of the well rewarded" in banking, real estate, trading, insurance, investing, politics, regulation, credit rating, law, and economic theory. He pulls no punches as he lays the blame for the subprime debt crisis squarely at the feet of those who could have moved to stop it.
I was pleased to see that Gilbert places much of the blame for the recession on the repeal of much of the U.S. Glass-Steagall act in 1999 during the Clinton administration. I've long argued that the demise of much of Glass-Steagall contributed to the meltdown.
Named for its Congressional sponsors, Glass-Steagall was enacted in 1933 during the Great Depression to separate commercial and investment banking -- to separate the "boring" commercial banking from the "exciting" -- and risky investment banking that prevailed during the bubble period of the 1920s that contributed to the stock market crash of 1929.
Naturally, banks, including Bank of America, have opposed the re-introduction of the parts of the act that were repealed more than 10 years ago (one part of the act, the Federal Deposit Insurance Corp., was retained).
In December 2009, Republican Sen. John McCain of Arizona -- remember him? He and what's her name were the GOP Presidential-VP ticket in 2008 -- and Democratic Sen. Maria Cantwell from the great state of Washington, jointly proposed re-enacting the Glass-Steagall Act. Legislation to re-enact parts of Glass-Steagall was also introduced into the House of Representatives.
Former Federal Reserve Chairman Paul Volcker -- currently an advisor to President Obama -- has also been an outspoken fan for the reinstatement of many aspects of Glass-Steagall.
In his conclusions and policy prescriptions at the end of his slim but powerful book, Gilbert says that repeal of much of G-S was the cause of the meltdown and that restoration of the rules will help split off ordinary banking -- how boring! -- from the "casinos" of so-called investment banking.
Gilbert says the major contributor to the meltdown was the Housing Bubble. That's what it was and is. Housing was never intended to be an investment vehicle and for much of the 1980s, homeownership stayed at a reasonable 64 percent level in the U.S. By 2007, it had reached an unsustainable 69 percent, driven by subprime mortgages, Alt-A loans -- just a step above subprime; Liar's loans, No-Doc loans, NINJA (No Income, No Jobs or Assets) loans, etc.
It was in 2005, just before the peak of the bubble, that two respected economists, Robert J. Shiller and David Rosenberg, warned of its imminent collapse, Gilbert notes. Shiller, co-author of the Case-Shiller Housing Price Indices, told the New York Times that housing prices might decline by as much as 40 per cent in the next generation. It only took a couple of years for this to occur in markets like Las Vegas and Phoenix.
Rosenberg, chief economist for North America for Merrill Lynch in New York, noted in an August 2005 research report that U.S. housing prices were at their least affordable level since the third quarter of 1989; the following year -- 1990 -- new home sales plunged 20 percent as demand responded to the affordability erosion.
In July 2005, then Fed Chairman Alan Greenspan made "milquetoast" noises about "signs of froth in some local markets" but housing prices continued unchecked, Gilbert writes.
The "securitization" of mortgages was another version of the Ponzi Scheme, with the original lenders handing off their good, bad and ugly mortgages into unrecognizable instruments bearing names like Collaterized Debt Obligations (CDO) to investment firms, who sold them to individual investors and even countries like Iceland and Germany.
Gilbert addresses the "too big to fail" issue, saying that "regulators will have to impose artificial size limitations on banks. He notes near the end of the book that the cumulative assets of two Swiss banks -- UBS and Credit Suisse -- grew to six times the size of the entire Swiss economy during the credit boom.
On the other hand (Harry Truman was always searching for a one-armed economist!) New York Times op-ed contributor and Nobel Prize winning economist Paul Krugman on Feb. 1, 2010 wrote in the Grey Lady that boring Canada managed to escape much of the world-wide meltdown (link: http://www.nytimes.com/2010/02/01/opinion/01krugman.html?th&emc=th)
Krugman on Canada:
"But when things fell apart, the consequences were very different here and there [Canada]. In the United States, mortgage defaults soared, some major financial institutions collapsed, and others survived only thanks to huge government bailouts. In Canada, none of that happened. What did the Canadians do differently?
"It wasn’t interest rate policy. Many commentators have blamed the Federal Reserve for the financial crisis, claiming that the Fed created a disastrous bubble by keeping interest rates too low for too long. But Canadian interest rates have tracked U.S. rates quite closely, so it seems that low rates aren’t enough by themselves to produce a financial crisis.
"Canada’s experience also seems to refute the view, forcefully pushed by Paul Volcker, the formidable former Fed chairman, that the roots of our crisis lay in the scale and scope of our financial institutions — in the existence of banks that were “too big to fail.” For in Canada essentially all the banks are too big to fail: just five banking groups dominate the financial scene."
What Canada did right is what Gilbert wants the rest of the world -- especially the U.S. -- to do:
"Canada has an independent Financial Consumer Agency, and it has sharply restricted subprime-type lending," Krugman wrote in The Times. "The United States used to have a boring banking system, but Reagan-era deregulation made things dangerously interesting. Canada, by contrast, has maintained a happy tedium. More specifically, Canada has been much stricter about limiting banks’ leverage, the extent to which they can rely on borrowed funds. It has also limited the process of securitization, in which banks package and resell claims on their loans outstanding — a process that was supposed to help banks reduce their risk by spreading it, but has turned out in practice to be a way for banks to make ever-bigger wagers with other people’s money."
Sometimes, most of the time, in fact, when it comes to money and investing, Boring is Good, turning the fictional Gordon Gekko's saying "Greed is Good" on its head.
Gilbert suggests other reforms in final chapter of his book:
* Reform the bonus system by paying in kind, i.e., give the top performers their bonuses in the form of super-senior credit-default swaps instead of money. "Traders shouldn't be able to skip town with bags full of cash., leaving their former employers owning investments that sour...."
* Don't rely on Ivory Tower academics to run central banking. "Every rate-setting committee at every central bank in every country should be obliged to reserve several places at the table for businesspeople, preferably those who have built companies from scratch..."
* Financial ratings need to be reformed, since they've performed so miserably in the past, contributing to the meltdown. "...governments should stop letting ratings companies use nonpublic information to make their judgments. Everyone should have access to the same data, removing Moody's and S&P's current advantage."
* The "testosterone factor" should be modified, with the inclusion of more women in the financial industry. Macho men were overwhelmingly responsible for the meltdown, and the addition of financially savvy women would take the edge off this disturbing element, Gilbert suggests.
Summing up, "Complicit" joins John Perkins' "Hoodwinked" (link to my review: http://www.huntingtonnews.net/columns/091201-kinchen-columnsbookreview.html) as one of the best new books on the financial meltdown. Both books avoid jargon, making them accessible to the general reader who doesn't have an MBA.
About the Author
Mark Gilbert, bureau chief for Bloomberg News in London, has been with Bloomberg News since 1991 and has written a regular column on global financial issues since 1998.
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