Tuesday, February 24, 2009

The Trillion Dollar Meltdown by Charles R. Morris

In his book The Trillion Dollar Meltdown, Charles R. Morris tries to explain how we got into this economic mess in which we now find ourselves. It is a rather short book, but I think that is due to Mr. Morris' concise explanations. This concision makes his book fairly easy to understand, even if you don't work on Wall Street or spend all day watching CNBC.

Mr. Morris clearly lays the blame for our economic problems at the feet of the Chicago School of Economics. To be fair, in tracing recent historical precedents for economic difficulties, he points out that historically there is a cycle between the more liberal and the more conservative economic ideas that hold sway. So, he does not say that there is something wrong with the Chicago School per se. However, Morris strongly believes that the Chicago School's cheerleading for laissez-faire capitalism got out of hand and led policy makers into a hands-off approach to financial engineering that allowed greed to get the better of caution, to the detriment of us all.

The belief that markets can regulate themselves and Greenspan's refusal, despite warnings, to prick the developing credit bubble, have created an unstable financial system. The combination of complicated financial instruments and leverage are at the root of the current problems in the financial sector. Surprisingly, Mr. Morris makes no proposals for actually solving those problems. Instead, he appears to assume that we just have to stomach the bitter pill of unwinding the financial positions positions in question.

On the other hand, Morris does have suggestions for what to do to prevent this kind of thing from happening in the future. He recommends greater regulation of the financial industry -- transparency, exchange trading of financial instruments instead of over the counter trading, capital requirements for financial institutions that make loans of any kind, and the reinstatement of the Glass-Steagall act or something like it. In addition, Morris warns, in somewhat of a non sequitor, that health care also needs to be reformed. In fact, he recommends universal health care of some kind.

One quote from the book stood out. In discussing how the rich seem to get richer, but the rest of us are at best no better off, Morris says:

There is no conspiracy against the poor and middle class. It's more the inevitable outcome of our current money-driven political system combined with the disposition to admire, and almost worship, the rich and powerful, which Adam Smith fingered as the great and most universal cause of the corruption of our moral sentiments.


Some interesting books cited in The Trillion Dollar Meltdown to read or follow-up on:

  • The Way We Live Now by Anthony Trollope -- according to Mr. Morris this book portrays a Victorian version of our current problems.

  • The Secrets of the Temple: How the Federal Reserve Runs the Country by Wm. Greider -- for a good history of the battle against inflation during the 1980s.

  • Den of Theives by James Steward

  • The Predator's Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders by Connie Bruck -- with the book above, histories of the leveraged buyout boom.

  • When Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger Lowenstein -- which I too have read and recommend. Talk about hubris!

  • Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You with the Bill) by David Cay Johnston -- from which Mr. Morris got the Adam Smith quote I like.

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