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Looking back on my books from 2013, I realized I’d only read one book from the large pile of financial-catastrophe-related books I’d borrowed from Paul a while ago, and figured I’d need to start making better progress than that if I’m going to return them this decade. So I picked up a nice slim one, Charles R. Morris’ The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash.
The Trillion Dollar Meltdown chronicles the major developments in the finance industry and in government economic policy from about the 1970s until 2008, when the book was written. Towards the end, he makes a series of educated guesses about how the next several years could turn out. Five years later, most of what he says still seems pretty sensible, if a bit disheartening (we really should have done more by now).
There are two things I particularly appreciated about this book. One is that it is very good at concisely explaining how various financial instruments and markets work, which is extremely important for me in reading any book about banking or finance, because I have no head for dealing with any of the mathy stuff, and I sometimes forget things I learned from one finance book to the next. The other thing I really appreciated is the discussion of politics and finance as being cyclical, and the inevitability of having to continually adjust the way countries and markets are run (i.e., there is no one, lastingly perfect system). From what I can tell, the author comes off as being a moderate (an actual moderate, not a golden-mean type of false equivalence moderate) who is currently in the position of pushing left-wing views as a direct result of thirty years of free-market fundamentalism. He gives a brief overview of Arthur Schlesinger’s hypothesis of twenty-five to thirty-five year shifts in political consensus, and posits that we’re probably at the end of a conservative cycle. In terms of public political opinion, he seems to be spot-on—economic populism looks to be making a comeback. (Whether the government will actually do much about it is obviously another question.)
The earlier part of the book is largely concerned with government monetary policy in recent history, discussing inflation, stagflation, demographics, the oil price shocks of the early seventies, and Paul Volcker’s victory over inflation. (I really appreciate that the book, despite being very short, still touches on demographics; a lot of discussions of economics I’ve seen are surprisingly willing to completely leave out questions of “how many people are competing for these resources anyway” even though economics is literally the study of allocation of resources among people.)
From there it goes into the meatiest (and most intellectually challenging) part of the book, walking us through a number of historically and economically significant market failures, from the development of asset bubbles and the invention of new, complex financial instruments through the profit-seeking behaviors of various banks, funds, and investors, and how they ended up collapsing. The brief overviews of the 1994 residential mortgage crisis and the 1998 Long-Term Capital Management crisis are extremely helpful in understanding foundations of the subprime mortgage crisis, the catalyst for the 2008 crash. We learn about the derivative financial instruments created out of mortgages, and particularly the collateralized mortgage obligations (CMOs) that allowed large quantities of subprime mortgages to be turned into double- and triple-AAA rated securities, and how this rather suddenly caused banks to not only lose all their prior reluctance to extend mortgages to people deemed to be credit risks, but actively develop lending practices designed to get more people to sign on for subprime mortgages (some of these practices seem to be developed to ensure that the loans would never get paid back, and yet the ratings of the derivative instruments based on these loans were determined according to the usual assumptions of the numbers of people who default on their mortgages) (but finance people get paid more than us regular working Joes in other industries, because they’re so smart).
After walking us through the beginnings of the crash, Morris identifies other similarly shaky credit markets and why they are shaky (shady accounting practices, overly optimistic views of the real assets they are based on, overleveraging leading to extreme sensitivity to minor market shifts… there’s a whole load of unstable things going on in the world of high finance), and gives some estimates for what could be affected and how badly in the coming years. (I haven’t gone and fact-checked all of his predictions, but I Googled a few of them while I was reading and he seems to have been broadly correct on the ones I was curious about—there was a big spate of bank write-offs of consumer credit card debt, for instance.) (The fact that this book was rereleased a year or two later with some updates and under the title “The Two Trillion Dollar Meltdown” seems to indicate that he underestimated some things, but I’d have to find a copy of the rerelease and look at the new information to see what it is.) He also points out a couple of areas where he says it is imperative we bring in some reasonable regulation, and discusses the issues with the current systems. Everything he mention has become a hot-button issue in the past few years: he talks about our expensive but embarrassingly inefficient healthcare system (including our abject failure to apply technology to healthcare administration in anything resembling a sensible way), the student loan debt load and the shady practices of loan servicers like Sallie Mae, and the need to reinstate some kind of reasonable federal oversight of banking, such as reinstating an updated version of the Glass-Steagall Act.
I would definitely recommend this book to anyone who wants to learn some basics on the how and why of the financial crash, and I would particularly recommend that you read this book rather slowly (at least, if you’re not a finance person). At less than 200 pages, it doesn’t go into too much minor detail on any subject, but there’s still a lot of information packed into such a little book. While the writing style is blessedly conversational—and occasionally even mildly funny—finance is a world of acronyms, jargon, and slippery concepts based on other slippery concepts, and it’s easy to mix stuff up or forget what a structured investment vehicle is.
The Trillion Dollar Meltdown chronicles the major developments in the finance industry and in government economic policy from about the 1970s until 2008, when the book was written. Towards the end, he makes a series of educated guesses about how the next several years could turn out. Five years later, most of what he says still seems pretty sensible, if a bit disheartening (we really should have done more by now).
There are two things I particularly appreciated about this book. One is that it is very good at concisely explaining how various financial instruments and markets work, which is extremely important for me in reading any book about banking or finance, because I have no head for dealing with any of the mathy stuff, and I sometimes forget things I learned from one finance book to the next. The other thing I really appreciated is the discussion of politics and finance as being cyclical, and the inevitability of having to continually adjust the way countries and markets are run (i.e., there is no one, lastingly perfect system). From what I can tell, the author comes off as being a moderate (an actual moderate, not a golden-mean type of false equivalence moderate) who is currently in the position of pushing left-wing views as a direct result of thirty years of free-market fundamentalism. He gives a brief overview of Arthur Schlesinger’s hypothesis of twenty-five to thirty-five year shifts in political consensus, and posits that we’re probably at the end of a conservative cycle. In terms of public political opinion, he seems to be spot-on—economic populism looks to be making a comeback. (Whether the government will actually do much about it is obviously another question.)
The earlier part of the book is largely concerned with government monetary policy in recent history, discussing inflation, stagflation, demographics, the oil price shocks of the early seventies, and Paul Volcker’s victory over inflation. (I really appreciate that the book, despite being very short, still touches on demographics; a lot of discussions of economics I’ve seen are surprisingly willing to completely leave out questions of “how many people are competing for these resources anyway” even though economics is literally the study of allocation of resources among people.)
From there it goes into the meatiest (and most intellectually challenging) part of the book, walking us through a number of historically and economically significant market failures, from the development of asset bubbles and the invention of new, complex financial instruments through the profit-seeking behaviors of various banks, funds, and investors, and how they ended up collapsing. The brief overviews of the 1994 residential mortgage crisis and the 1998 Long-Term Capital Management crisis are extremely helpful in understanding foundations of the subprime mortgage crisis, the catalyst for the 2008 crash. We learn about the derivative financial instruments created out of mortgages, and particularly the collateralized mortgage obligations (CMOs) that allowed large quantities of subprime mortgages to be turned into double- and triple-AAA rated securities, and how this rather suddenly caused banks to not only lose all their prior reluctance to extend mortgages to people deemed to be credit risks, but actively develop lending practices designed to get more people to sign on for subprime mortgages (some of these practices seem to be developed to ensure that the loans would never get paid back, and yet the ratings of the derivative instruments based on these loans were determined according to the usual assumptions of the numbers of people who default on their mortgages) (but finance people get paid more than us regular working Joes in other industries, because they’re so smart).
After walking us through the beginnings of the crash, Morris identifies other similarly shaky credit markets and why they are shaky (shady accounting practices, overly optimistic views of the real assets they are based on, overleveraging leading to extreme sensitivity to minor market shifts… there’s a whole load of unstable things going on in the world of high finance), and gives some estimates for what could be affected and how badly in the coming years. (I haven’t gone and fact-checked all of his predictions, but I Googled a few of them while I was reading and he seems to have been broadly correct on the ones I was curious about—there was a big spate of bank write-offs of consumer credit card debt, for instance.) (The fact that this book was rereleased a year or two later with some updates and under the title “The Two Trillion Dollar Meltdown” seems to indicate that he underestimated some things, but I’d have to find a copy of the rerelease and look at the new information to see what it is.) He also points out a couple of areas where he says it is imperative we bring in some reasonable regulation, and discusses the issues with the current systems. Everything he mention has become a hot-button issue in the past few years: he talks about our expensive but embarrassingly inefficient healthcare system (including our abject failure to apply technology to healthcare administration in anything resembling a sensible way), the student loan debt load and the shady practices of loan servicers like Sallie Mae, and the need to reinstate some kind of reasonable federal oversight of banking, such as reinstating an updated version of the Glass-Steagall Act.
I would definitely recommend this book to anyone who wants to learn some basics on the how and why of the financial crash, and I would particularly recommend that you read this book rather slowly (at least, if you’re not a finance person). At less than 200 pages, it doesn’t go into too much minor detail on any subject, but there’s still a lot of information packed into such a little book. While the writing style is blessedly conversational—and occasionally even mildly funny—finance is a world of acronyms, jargon, and slippery concepts based on other slippery concepts, and it’s easy to mix stuff up or forget what a structured investment vehicle is.