Review by James Pressley
May 26, 2009
SourceMay 27 (Bloomberg) -- Let’s pause for a minute and think about $15 trillion.
That’s roughly how much money the U.S. has committed toward rescuing the economy from the credit meltdown, housing collapse and recession, according to the number-crunching of Barry Ritholtz, chief executive officer of research firm FusionIQ.
Find that figure hard to grasp? Ritholtz has some handy comparisons: In inflation-adjusted terms, $15 trillion is more than the U.S. spent on the Louisiana Purchase, he says. It’s bigger than the Marshall Plan. More money than the government paid for the Race to the Moon, the savings-and-loan crisis, the Vietnam War -- or all of the above combined, he says.
“The only event in American history that even comes close to matching the cost of the credit crisis is World War II,” Ritholtz explains in “Bailout Nation,” a bracing look at how a country of self-reliant individualists became what he calls “a nanny state for well paid bankers.”
Another book on the financial crisis, you ask? Hasn’t the subject been bludgeoned to death? Surprisingly, no. Ritholtz makes a valuable new contribution to our understanding of how we arrived at this sorry juncture.
Ritholtz, a tireless financial blogger, places the current crisis in historic context, showing how a nation that long found government intervention in business abhorrent came to embrace bailouts as normal.
Darwinian Competition
Once upon a time, the U.S. government got involved in companies “more as an incubator than a rescuer,” he reminds us. Think back to the 19th century, when railroads and telegraphs received easements and rights of passage. The cash outlays in those operations were modest, and the government’s aim was to “jump-start a sector and then allow a brutal Darwinian competition to take place.”
The government did engage in economic stimulus during the Great Depression and World War II, yet the goal wasn’t to bail out specific corporations, Ritholtz says. Anticipating possible entry into the conflict, the U.S. extended government assistance to war-related sectors -- steel, rubber, munitions.
The fatal step into Bailout Nation came, Ritholtz says, when the government decided to save Lockheed Aircraft Corp. in 1971. That created a blueprint for future rescues, including those of Penn Central railroad, Chrysler Corp. and Continental Illinois National Bank and Trust Co., not to mention the savings-and-loan cleanup.
‘Perverse Effect’
Each intervention had negative consequences. And each had “the perverse effect of making future bailouts less surprising and more tolerable -- and therefore more likely,” he writes.
Ritholtz waltzes the reader though the decisions and missteps that landed us in this morass, including the Federal Reserve’s power grab over the years, notably during the leadership vacuum of 2007 and 2008, when markets melted like a Salvador Dali timepiece and President George W. Bush went AWOL.
Much of the chronology laid out here is all too familiar, as Ritholtz follows the radioactive trail that leads from the U.S. stock-market crash of 1987 to the rescue of hedge fund Long-Term Capital Management LP in 1998, the “tech wreck” of 2000 and the subsequent credit and housing bubbles.
Along the way, the book supplies useful sidebars, charts and textboxes on subjects ranging from funky mortgages -- when did “liar loans” supersede “fixed-rate” in American real- estate chatter? -- to the now notorious Commodity Futures Modernization Act.
Greenspan Muddle
His verdict on former Fed Chairman Alan Greenspan is as astute as it is merciless. A telling moment comes when Ritholtz shows how Greenspan drew the wrong conclusion from the first crisis during his tenure, the crash of ‘87.
“What the astute student learns from the history of speculative frenzies is that the 1987 crash was a unique aberration,” Ritholtz writes. It was a rare combination of a sizzling equity market, a (dangerously) innovative product called portfolio insurance and some antiquated stock-exchange plumbing that together created a short, brutal drop in an otherwise strong economy, he says.
“Greenspan completely missed this point,” he says. “The 1987 crash was the rare exception, not the rule.”
The upshot: Greenspan would respond to crisis after crisis -- from LTCM to the popping dot-com bubble -- with the same mistaken treatment: more liquidity and lower rates. The Greenspan Put was born.
Ritholtz rocks along with a raucous, sometimes crude voice that transcends his occasional cliches about cowboys and cattle wrestlers. He’s smart, sassy and often amusing. U.S. Treasuries, he says, are “backed by the full faith and credit of the U.S. government (and 86th Airborne, if push really comes to shove).” As for those who would dismantle the Fed, be advised that it would be “the economic equivalent of unilateral disarmament.”
If you’re looking for an all-in-one place explanation of what went wrong and why, this is the book for you (or your confused neighbor).
“Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy” is from Wiley (332 pages, $24.95, 16.99 pounds, 20.80 euros).
(James Pressley writes for Bloomberg News. The opinions expressed are his own.)
To contact the writer on the story: James Pressley in Brussels at
jpressley@bloomberg.net.
Last Updated: May 26, 2009 19:00 EDT