Peripatetic, itinerant, eclectic musings about books, politics, history, language, culture, and anything else that interests me.
I’m just finishing up Bad Money, by Kevin Phillips. I can’t honestly say I understand all the economics, but as a general primer on the background and history of the current Wall Street meltdown, it’s very eye-opening.
Here is the major point I am taking away from the book:
The subprime mortgage mess is only the most immediate cause of the current crisis. The larger causes go back decades. They are rooted in a major shift in thinking about banks and finance — away from the post-World War II feeling that banks were basically corrupt institutions that should be heavily regulated and not allowed to amass excessive amounts of power (a feeling that came out of the Great Depression, and that was strong throughout the 1950s, 1960s, and much of the 1970s), toward a growing emphasis on deregulation, concentration of power in a handful of giant firms (merger mania), and financialization of the economy.
Beginning in the 1980s, a switch-over from manufacturing (products and product-based services) to financial services took place, and that switch-over is at the heart of the U.S., and global, economy’s downfall. Phillips makes a compelling case that economies that are based on the movement and repackaging of money rather than on products and related services are doomed to failure over the long term. He cites other empires in history (Rome, England, Spain, Holland) that went through similar financial transformations on the road to political and economic oblivion.
Reviews and commentary:
… The economic expansion that has occurred during the Bush administration was the first in U.S. history to exclude the middle class. Previous booms had left the poor behind, but this one was the first to benefit only the rich. Median family income is still less than it was in 1999, which makes this the longest slump ever measured in that key indicator of middle class well-being. The Clinton boom was no great shakes for the great middle either: Since 1983, according to a recent survey by the nonpartisan Pew Research Center, “the median net worth of upper-income families more than doubled, while the median net worth of middle-income families grew by just 29%.”
… The 1980s were the start of “three profligate decades,” when the expansion of mortgage credit and the invention of financial instruments like collateralized debt obligations (C.D.O.’s) led to an orgy of leveraging and irresponsible speculation. The Federal Reserve kept the bubble afloat with easy money, while regulators and ratings agencies looked the other way.
By 2007 total indebtedness was three times the size of the gross domestic product, a ratio that surpassed the record set in the years of the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion, and home mortgage debt ballooned to almost $10 trillion from $4.9 trillion, an increase of 102 percent. A crisis in the mortgage market in August 2007 brought the party to an end. Since then we have been living in a twilight zone of what a security analyst quoted in the book calls “one of the slowest-moving train wrecks we’ve seen.”
Over the many years that he’s been observing and writing about the American political scene, Kevin Phillips has had his share of detractors. David Brooks once devoted an entire column to attacking his work, calling him a “conspiracist” who embodies “a strain of paranoia running through American politics” (you can see Phillips’ devastating reply here). His previous book, American Theocracy, was attacked by the Heritage Foundation’s Joseph Loconte as being rife with “irrational, fantastical, near-nativist charges.”
And no doubt his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism will be greeted with dismissive hoots from the right-wing crowd that used to cheer his every word, too. After all, it clearly depicts a Republican-fueled economic disaster in the unfolding, and the solutions he proposes are anathema to movement-conservative dogma. It’s a message they won’t want to hear, and whenever that happens, as we’ve seen over the past eight years, Republicans just clap their hands over their ears and shout, “I’m not listening!”
April 21, 2008, Tyler Cowen, Marginal Revolution (Cowen begs to disagree with Phillips — his dismissive sneer of a post is particularly amusing on the day after the House rejected the biggest Wall Street bail-out in U.S. history to try to stave off global economic disaster):
… Overall this book is a catalog of the usual arguments about the financial problems of the United States, peak oil, the potential weakness of the dollar, and related worries. Phillips doesn’t seem to think that finance is much of a productive economic sector. He is keen on the “inflation is larger than we realize” line, citing high growth rates for M3 (he doesn’t realize how much the different aggregates can move around and differ from each other) and then the Fed’s discontinuation of that statistic. But who has been tricked? Either the current market estimate of inflation is the best estimate available, or you know that it is wrong and you will be a very rich man. I find the former scenario more plausible.
Who has been tricked, again, Tyler?
… With the collapse of the housing market and the rise in oil prices, much attention has been paid to the question of whether the US is in a recession. But is it possible the nation’s economic well-being is in even deeper financial straits?
A new book by the renowned political analyst Kevin Phillips argues it is. Phillips says successive administrations have imperiled the US by a combination of shortsighted policies and a trend against regulation. These include unparalleled credit card debts, the expansion of financial industries such as hedge funds, ballooning national debts, and deliberately altering statistics like inflation and unemployment to mask the accurate picture.
In the preface of his book, he has written that these things usually come to fruition in August and September. And sure enough, here we are coping in September with the effects of bad money. …
Google video, Kevin Phillips, Bad Money: The Global Crisis of American Capitalism: The author discusses his book.