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Executive Times |
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2008 Book Reviews |
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The
Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit
Crash by Charles R. Morris |
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Rating: |
**** |
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(Highly Recommended) |
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Click
on title or picture to buy from amazon.com |
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Leverage
For
a well-reasoned and thoughtful viewpoint and perspective on the credit
environment, read Charles R. Morris’ new book, The
Trillion Dollar Meltdown. Published in March, this book was not a rush
job to explain the current environment with superficial specificity. Instead,
Morris describes the policies and practices that swung the pendulum in one
direction, and how likely it is that the pendulum will swing back. He presents
the consequences of some dogmatic approaches to free markets, and what
happens when leverage becomes too extreme. Here’s an excerpt, from
the end of Chapter 8, “Recovering Balance,” pp. 167-169: The Limits of Markets It is a canon of Chicago-school
economics that government resource allocations always reduce productivity. As
a blanket proposition, that's evidently wrong. The federal government
lavished a great deal of money on the semiconductor industry and the
Internet, for example, and we're clearly much better off for it. Since the
beginning of the republic, public works investments canals, railroads, highways,
airports have generally paid high returns. In the nineteenth century, a
British parliamentary commission identified America's greater investment in
public education as a major competitive advantage. Government spending, in
short, is productive or not, depending on what it's spent on. But there is substantive truth
behind the detestation of public spending. It is that any privileged
industry-and public enterprises are prone to become privileged—will eventually
fatten to the point where it becomes a drag on, or even a threat to, the
health of the economy. But that's a general argument about privilege,
whether it arises from tax subventions or some other source. The financial
meltdown chronicled in this book was to a great extent the consequence of
coddling our financial industry, fertilizing it with free money, propping it
up with unusual tax advantages for fund partners, and anointing it with fresh
funds whenever it stumbled or scraped a knee. The real premise of the
Chicago-school argument for shrinking the public sector is the much shakier
one that free markets always achieve the best outcomes. That claim, however,
presupposes that economists can identify best outcomes. Market economists
typically use the standard of Pareto optimality. (Vilfredo Pareto was a
famous nineteenth-century economist.) A distribution such that no group
member could be made better off without making someone else worse off is
Pareto-optimal. The problem is that there are always many possible
Pareto-optimal outcomes, most of them not very attractive. A society where
everyone has equal wealth is Pareto-optimal, but so is a society where one
person has half of everything and everybody else has equal shares. In both
cases, no one could be made better off without making someone else worse off. Ever since Pareto, some of the
world's greatest economists have tackled the distribution problem and have
produced many interesting ways of framing the issues. But no one has come up
with much that is of practical use. The data are intractable, analytic
results are often self-contradictory, and even believers in the quest concede
that the models make sense only in perfect markets, which is no place where
people live. The fallback among free-market economists, therefore, is usually
to adopt a total output measure, like GDP growth or national productivity, as
a best-outcome proxy. But that reduces competitions among social systems to
the principle that the country with the most toys wins, which is ridiculous. France,
for example, has had lower economic growth than the United States for a
number of years, even though hourly output per worker is roughly the same—it
was a hair behind America's in the last competitive survey and was a hair
ahead in the previous one. The French middle classes have smaller houses and
cars than their American peers, but better diets, considerably more leisure
time, and much more economic security, while the distance between the top and
the middle is not nearly so wide as here. France is hardly a perfect country.
Its unions and public sectors seem much too privileged, and racial issues are
becoming much more intractable. But all in all, a lot of Americans,
especially those who are not on top of the food chain, might think it's a
pretty good trade. In other words, it comes down
to taste, and balance, and judgment. My personal belief is that the 1980s
shift from a government-centric style of economic management toward a more
markets-driven one was a critical factor in the American economic recovery of
the 1980s and 1990s. But the breadth of the current financial crash suggests
that we've reached the point where it is market dogmatism that has become the
problem, rather than the solution. And after a quarter-century run, it's time
for the pendulum to swing in the other direction. Any reader who has been
confused by what happened in the credit markets in 2007 and 2008 will learn
something useful on the pages of The Trillion
Dollar Meltdown. Steve
Hopkins, September 20, 2008 |
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Go to Executive Times Archives |
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The recommendation rating for
this book appeared in the October 2008 issue of Executive Times URL for this review: http://www.hopkinsandcompany.com/Books/The Trillion Dollar
Meltdown.htm For Reprint Permission,
Contact: Hopkins & Company, LLC • E-mail: books@hopkinsandcompany.com |
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