The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
by Charles R. Morris
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Book Summary Information
Author: Charles R. MorrisEdition: Hardcover
Published: 2008-03-03
ISBN: 1586485636
Number of pages: 224
Publisher: PublicAffairs
Book Reviews of The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
Book Review: Intersting, and Greatly Helps Understand Today's Market Problems!
Summary: 5 Stars
Not long ago stocks, bonds, loans, and mortgages together approximated global GNP. Now they total about 4X GDP, and financial derivatives exceed 10X GDP.
Subprime is just the first of an avalanche of asset write-downs that 2008 will bring - corporate debt, commercial mortgages, and credit card debacles will follow. Even municipal bonds may be at risk. Morris attributes our current free-market cycle's birth to the Reagan years.
Restoring credibility requires purging absurd valuations, phony trip-A ratings, inflated balance sheets and hidden liabilities via increased regulation. (By 2006 only about 25% of lending occurred in regulated sectors, vs. 80% 20 years prior. Failure to do so may exceed the forthcoming $1 trillion+ in writedowns.
Morris sees the 1960s as bringing forth a rise in business and government incompetence. The former over-emphasized mergers to smooth earnings, instead of increasing market share and lowering cost structures to reduce vulnerability to foreign competition; the latter was led by LBJs "guns AND butter," and Nixon's floating the dollar away from gold, providing impetus for a rapid oil price rise, price controls, and double-digit inflation after their removal. LBOs of the 1980s helped improve productivity through unwinding these conglomerates.
The current surge in venture investing has its roots in a 1973 law requiring companies to set aside money to fund pension promises and the 1979 easing of regulations that limited where they were used - not the 1978 cut in the capital gains tax (were exempt anyway). Morris also believes that OPECs collapse in the 1980s was not due to Reagan's ending price controls on oil, as some claim - rather, Arabs pouring money into Iraq (vs. Iran) and seven years of world energy improvements.
Clinton's deficit-cutting tax increase had little impact on long-term interest rates (and resulting business investment); the real economic impact came from a "riotous" stock market and an associated upsurge in taxes. Business also improved, adopting Japanese management practices and distributed contributing. As for LTCM, the real scandal was that a small group was able to borrow so much ($100 billion) on so little capital ($1 billion) for such poorly understood purposes. Taxpayer monies were not used for the bailout - instead banks that had profited from its trading were called upon by the Federal Reserve.
Contributors to the Mortgage Meltdown Mess: Fragmentation of the loan industry (national sources, selling off groups of mortgages and tuition loans) have broken down the role of trust in local relationships and encouraged pushing high-priced deals. Investors, in turn, were "insured" by others with "fail-safe" insurance policies based on historic patterns that failed to incorporate hidden risks associated with inter-correlations. At the same time, banks had plenty of access to "free" money post 9/11 - the Fed charged rates less than the rate of inflation. Finally, housing prices are strongly influenced by interest rates (highly leveraged), ARMs were sold on the anticipation of even lower interest rates, processes were sped up through computer scoring and reduced documentation requirements, purchases of second-homes received even less scrutiny, and hedge funds (100:1) leverage became big buyers of repackaged loans.
Then the loans were artfully (and easily) partitioned according to risk tranches, decreasing the importance of loan quality for investors and opening the doors for including the sub-prime market.
Similar strategies have been employed in corporate lending and municipals.
Unfortunately, the subsequent meltdown in housing prices is much more correlated to consumer spending than declines in the stock market. Consumer spending rose from 67% of GDP in the 1990s to 72% in 2007, largely financed by rising housing values. It now must decline.
Finally, Morris is also concerned with rising financial inequality (top 1% share of national cash income went from 9 to 19% between 1980 and 2005; the top one-hundredth of 1% went from .95 to 3.6%.) Rising health care costs, deteriorating infrastructure, and Federal Reserve encouraged moral risk (bailing out large financial institutions) are also briefly covered.
Summary of The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
We are living in the most reckless financial environment in recent history. Arcane credit derivative bets are now well into the tens of trillions. According to Charles R. Morris, the astronomical leverage at investment banks and their hedge fund and private equity clients virtually guarantees massive disruption in global markets. The crash, when it comes, will have no firebreaks. A quarter century of free-market zealotry that extolled asset stripping, abusive lending, and hedge fund secrecy will come crashing down with it.
The Trillion Dollar Meltdown explains how we got here, and what is about to happen. After the crash our priorities will be quite different. But things are likely to get worse before they better. Whether you are an active investor, a homeowner, or a contributor to your 401(k) plan, The Trillion Dollar Meltdown will be indispensable to understanding the gross excess that has put the world economy on the brink—and what the new landscape will look like.
The Trillion Dollar Meltdown explains how we got here, and what is about to happen. After the crash our priorities will be quite different. But things are likely to get worse before they better. Whether you are an active investor, a homeowner, or a contributor to your 401(k) plan, The Trillion Dollar Meltdown will be indispensable to understanding the gross excess that has put the world economy on the brink—and what the new landscape will look like.
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