The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash

This is a great book for those of you like me who are not in the financial services industry but who want to understand why our economy is melting down as we speak. It will also help you understand why this upcoming election is so important: The author describes the seismic ideological shifts over the last 40 years, from the Liberal/Keynsian era that imploded in the late 70s, to the current dying embers of the Chicago-School free market ideology that has held sway from Reagan up to the present moment. The author believes it is time once again for the pendulum to swing in the direction of more activist, socially conscious government intervention. He is not a liberal ideologue but a former banker who comes to his conclusions based on objectivity, knowledge, and lucid thought. The integrity of his thinking shines through every page. This is not always an easy book to read; due to the subject matter it is rife with all sorts of financial industry acronyms and terms like “tranch” and “quant” and “put”, but don’t let that throw you. Just keep reading with the big picture in mind and it will all come together in the end. It’s well worth the effort!
Rating: 5 / 5

I am learning a lot reading this, even though I’ve followed the economy for years. The preface summarizes the situation and outlines the book, but is maybe slightly dense and technical for the average person. But the first chapter is great for giving perspective on how the US economy has evolved, especially the troubles of the stagflation period and what caused that. The book goes up to November 2007, with a clear understanding that the credit bubble was going to have to unwind, and it was either going to cost $1 trillion, or, if the government tried to paper it over, a lot more.
Rating: 5 / 5

In this excellent, highly readable book, Charles R. Morris combines legal and financial experience with literary craft. No ideologue, no partisan and certainly no salesman, Morris traces the roots of the 2007-2008 mortgage securities crisis to its distant origins in the 1970s. He argues that policy missteps under the Nixon, Ford and Carter administrations, when Arthur Burns chaired the Federal Reserve, led to dollar debasement. He contends that the decline of America’s currency and its business sector at that time led in turn to the Reagan administration’s zeal for deregulation and Chicago-school economics. He details his belief that Alan Greenspan’s policies took America from a relatively healthy financial status to a position perhaps as dire as in the late 1970s. Morris also reveals the privileges enjoyed by an out-of-control financial services system. getAbstract found this to be a trenchant and provocative read.
Rating: 5 / 5

As a lawyer and former investment banker, Charles Morris can appreciate the power of free-market capitalism to drive economic growth and financial innovation. Now, however, he believes the era of market fundamentalism has come to an end, just as Keynesian interventionism came to an end in the 1970s. He estimates conservatively that the recent writedowns and defaults of residential mortgages, corporate debt, credit card debt, and bonds will be about $1 trillion. But this book was written before even more recent revelations such as the Bear Sterns insolvency. It is now estimated that the bill could be 3 or 4 times as high.

Morris gives a brief but excellent history of events that led up to the current credit crunch that is paralyzing global financial markets. Disasters have many fathers, but Morris lays much of the blame on bond rating agencies, financial insurance companies and the Federal Reserve under Alan Greenspan. After 9/11 the Federal Reserve lowered the interest rates below the rate of inflation, essentially giving banks free money. Banks then lent money for fees up front and then repackaged the loans – turned them into securitized debt – and sold them to investors. It was basically cost free and risk free, so they lent money as if there was no tomorrow.

These securitized debts or CDOs (collaterilized debt obligations) were sold and resold throughout the global financial system and no longer did anyone know how to measure their value or their risk.

Add to this the fact that homeowners were using the rising equity of their homes as atms and pumping another $4 trillion into the economy.

Also add to the mix $700 billion annual trade deficit that indicates that much more consumption over production. The party was really in full swing.

But the party couldn’t last forever. The bubble started to deflate last summer when housing prices began to fall and homeowners began to default on their mortgages. The government initially thought it was just a typical market adjustment, but with the imminent collapse of Bear Stearns they finally took decisive action. Bear Stearns was holding $46 billion worth of securitized mortgages with an estimated value of 30 cents on the dollar.

As the crisis has been unfolding, it has been estimated that the federal government has authorized about $1 trillion in new lending through agencies such as Fannie Mae, Freddie Mac, Federal Housing Finance Board, and the Federal Reserve. This was done solely to keep the economy afloat. But no one knows yet where this will end. Massive infusions of money will lead to a weaker dollar, as we have already seen. A weaker dollar against the background of rising oil and food prices tells us the crisis is far from over.

Morris does not tell us exactly how we will get out of this mess, but he is sure that in the end a new system of financial regulation will be in place.
Rating: 5 / 5

I was very much impressed by Charles R. Morris’s “The Coming Global Boom” in the early 1990’s, so this book was quite a disappointment. “The Trillion Dollar Meltdown” is an example of the phase Charles Kindleberger describes in his “Panics, Manias, and Crashes” as “looking for the scapegoats.” Here the principal scapegoats are Milton Friedman and Alan Greenspan. Morris both decries and predicts the demise of Friedman’s free market “ideology” and Reagan’s idea that government is part of the problem and not the solution.

Morris sets up his argument by describing how liberalism and fiscal Keynesianism lost credibility by the end of the 1970’s with what has been described as stagflation. Fiscal stimulus no longer stimulated an economy mired in so much debt. Morris then describes how Paul Volker implemented Friedman’s Monetarism policy , but according to Morris, it worked because Volker didn’t believe in the ideology. Volker just wanted to demonstrate to the world he was serious about inflation.

While I think Morris brilliantly critiqued the Liberalism of the 1970’s, I disagree with his argument that it went away. Reagan promised to abolish the Energy and Education Departments and that went nowhere. Republicans talked about “government as the problem” but then expanded most government programs. The liberal interest groups that proliferated in the 1970’s turned their attention to the Federal Courts and achieved many of their goals there. Interest group Liberalism didn’t go away in the 1980’s. It’s agenda was still advanced merely by changing venues.

My point is that big government never died, Morris’s claims notwithstanding. Nor did financial regulation end with the repeal of Glass-Steagall Act. In the aftermath of the Dot.com boom-bust, the Sarbanes Oxley Act—which Morris doesn’t mention—put heavy restrictions on new stock issuances. So, the money went where the regulations aren’t. As it usually does.

I would also say that in dealing with the current crisis, Fed Chairman Bernanke is not using the Milton Friedman approach of letting the “fire burn itself out.” Instead, Bernanke is using the Walter Bagehot strategy of finding the lender of last resort to bail out the ailing institutions.

Now, I agree with Morris that many of these `investments” he describes are scams. I think variable rate mortgages are a bad idea because most people who agree to one have no idea that they are placing a bet on what the Fed will do over the life of the loan. They are signing up for what could be a rather bumpy ride.

I also agree with Morris’s criticisms of Sallie Mae and the student loan mess, but I would point out that the colleges themselves are considerably to blame for these problems. Many colleges have accumulated vast trust funds while doing little to help their students. It sometimes seems to me that a college education has become like home ownership: having one is better than not having one but too many bucks have been chasing too little bang for some time now.

I think the institution that is most profoundly in need of reform in America is the United States Congress. When the Republicans forgot what they had been elected to do, they were turned out of office. But, when the Democrats returned to power, I saw that many faces of the Committee Chairs were the same as those who were turned out of power in 1994. Do you think they learned anything in the interim? I don’t.

Rating: 3 / 5