April 27, 2010

Reading Notes on the Meltdown

One of the melancholy consolations of the late economic meltdown is that it has produced some pretty good second-draft journalism: here in a moment, gone in a moment, but helpful and instructive while they last. Over the past year or so I’ve found myself obscurely compelled to try to keep up on this stuff. Of course I can’t really; there aren’t enough hours in the day. But I may have done some successful cherry-picking. Here are some offerings:

If I had to recommend just one book on how we got into this mess, I suppose it would be Barry Ritholz’ Bailout Nation with the saucy subtitle of “How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.” Given the snarky packaging (an enrgaged bull on the cover), you’d think it was a lightweight but Ritholtz is an extraordinarly shrewd student of the market, and he’s not overawed by power and wealth. As the title implies, Ritholtz assigns a lot of blame to the role of the government as guarantor against loss—he goes all back to the first Chrysler bailout a generation ago. He also develops an important structural point I hadn’t thought about until I read him—the shift in the great investment banks from”partnership” to “corporate” form, setting the stage for a heads-I-win, tails-you-lose investment strategy, where it may make sense for the trader to make absolutely bad deals if he gets to keep the gains while someone else suffer the losses.

A variant on the theme is Yves Smith’s ECONned, another book better than its title. Yves saw some of the madness from the inside so she can get gritty and granular than an outsider. She also has a distinctive advantage: she’s a woman, so she can see how much of the mess finds its roots in macho bravado.

Thirteen Bankers by Simon Johnson and James Kwak has received and deserves respectful attention, not least for the insights that Simon can bring from his past experience with the International Monetary Fund. Johnson fears we are beginning to look like a banana republic (“without the bananas,” someone has grumped), and he knows what they look like because he has seen them. It does have the drawback of coming a little late in the game, so it can seem repetitive.

A recent arrival that does not seem repetitive is Gary Gorton’s Slapped by the Invisible Hand. (can’t anybody write good titles any more?). Gorton comes to the table with long experience in the study of financial bubbles: he offers a challenging analysis of the late meltdown as a classic bank panic in modern dress, with the Wall Street repo market playing the role once inhabited by Jimmie Stewart in the Greek Revival edifice down in the center of Bedford Falls.

Remember the housing bust? It almost gets lost in the underbrush of Wall Street, but it was, after all, the triggering event—the shock that sent the larger system into a tailspin. For background on housing, I doubt that there is anything better than Alyssa Katz, Our Lot. She makes a persuasive case that the housing problem was not just one problem but half a dozen. She pulls some of her most interesting examples out of California.

A superb little book with a shelf-life perhaps even shorter than the others is Robert Pozen’s Too Big to Save? which I elsewhere described as CliffNotes for Finance Professors. It’s a marvel of exposition, a point-by-point account of the various (economic) problems that afflict us, with specific action plans for reform. Might be the best economics book I’ve read all year; unhappily, events are already overtaking it.

There’s a lot more. I’ve more or less deliberately sidestepped the memoirs (necessarily self-serving) of the Alan Greenspan, Hank Paulson, and their ilk: I figure they would only send my blood pressure up. I’ve mostly sidestepped the journalism of people such as Andrew Sorkin, figuring the chances are they’ve already said what they know in the papers. I’ve read only a few of the ticktocks of day-to-day life in the midst of calamity (though I did enjoy Willliam D. Cohan’s House of Cards about the fall of Bear Stearns).

Oh, I could go on and on. But let me end with one item, not strictly on point but related, and likely to outlive the current uproar. That would be Liaquat Ahmed’s Lords of Finance, subtitled “The Bankers who Broke the World,” about the calamities of misjudgment that went so far to aggravate the Stock Market Crash of 1929 into the Great Depression of the 1930s. Ahmed just won a Pulitzer Prize and no wonder: this is a book that will stand solidly on the shelf. It’s perhaps a consolation to know that our betters have not led us quite so deep into the swamps this time. Or at least, not yet.