‘The Trillion Dollar Meltdown’ – review

Here is a book review for this great book….and this appeared in BSENSEX – BSE-SENSEX – it is a magazine which goes to the CEOs of companies listed on the BSE  and to all its members.

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash” by Charles R. Morris

One of the earliest books that I spotted on the sub-prime it is written in a racy and un-put-down-able style!

In crisp, gripping prose, “The Trillion Dollar Melt down’ explains the arcane financial instruments, the policy misjudgments, and the delusions that created the greatest credit bubble in world history.

A persistent reader should be able to make sense of all that Morris, a lawyer, former banker, and financial journalist, says in this book because he explains them in clear, non-technical language.

The Economist called it “the first big book on the credit crunch ….a provocative book ..well aimed opening shot….”

Paul Steiger Ex – The Wall Street Journal called it “an absolutely excellent narrative …”

It was a long time coming – reduction of “own” money to buy a house – right from 40% in post WW-II to about 3% today! Governments have been able to say “we are helping the common man buy a house” non-sense to expensive tax breaks. However, in this case the government has gone over-board and made a big mess by almost abdicating the responsibility to monitor lending to “sub-prime”.

Then the typical American habit of putting everything on the credit card! When Bush had no money to fight the war, he just put the expenses on a credit card. Now the time for payment is up – and Bush has transferred the problem to Obama!

The war in Iraq and Afghanistan costs billions of dollars with no end in sight–a war that already has cost more than World War II- and Morris’s view that the restructuring needed will be at least as painful as the “difficult period of 1979-1983.”

Things that he says in the early part of the book are quite clear and unambiguous to all non-American readers. America has for far too long assumed its supremacy. Even now, they may not accept Morris’s statement “ Like flightless birds on a predator-free island, American companies had no defenses when hungry competitors came”.

In fact he starts the book with the statement “For connoisseurs of misery, the ten years from 1973 through 1982 are a feast of low points”.

The second chapter titled “Wall street finds religion” – traces America’s recent history – talking about the contribution of Nixon, Carter, and Reagan. He also talks of how measures which looked good on paper – like Nixon’s “price controls” damaged the economy no end. The biggest losers in most of these cases have been the people holding the green back as a “safe heaven”. In the 1970s it was the Japs who lost, this time it is the Chinese and the Japs!

The author describes the arcane financial instruments, the chicanery, the policy misjudgments, the dogmas and the delusions that have created the greatest credit bubble in world history. The worries about a credit bubble is it goes into every market – thus affecting the credit cards, car loans, home mortgages, – the works. He warns early on that we are used to thinking of bubbles based on overpriced assets as resembling poison mushrooms. “You eat them, you get sick, you learn to avoid them.” But, alas, “a credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.”
Morris goes back in time to explain how US got into this state. Apart from the greed theory, the slack in supervision, Chicago School hands-off economic policy and Federal Reserve laxity under Alan Greenspan. Together they took the police off the beat and let financial malefactors treat America the way the looters treated Baghdad. To quote Moriss, “Alan Greenspan deserves full blame for his feckless money creation through most of the 2000s, but he would have been subject to a huge undertow of pressure in that direction from his friends on Wall Street. Alan Greenspan has of course now gone on record admitting that he may have made a mistake, but Morris’s book was already one year in publication by the time the “Me culpa” came!
His hero is Paul Volcker, the Fed chairman (1979-87) who treated a less dire emergency with much stronger medicine. His prescription is thorough regulatory reform, a return to sound-balance-sheet business practices, an end to crony capitalism and an expanded role for government in protecting the public from predation and in doing those things in the public interest that free enterprise can’t adequately handle. Paul Volcker is slew the inflation dragon in the early 1980s, and set the stage for a high performance economy of the 1980s and 1990s.

Morris calculates that $1.1 trillion dollars is the figure that will be required for rescuing the American economy…money that will be borrowed from the Chinese, the Japanese, and the Middle East! It will destroy wealth, hammer investors and the working man alike, tank many economies and take years to recover from. If mishandled, it could be much worse. Already it has undermined the position of the dollar in what The Economist magazine has called “the biggest default in history.” How long will the foreigners continue to lend is difficult to say. The situation is scary because Global confidence in American securities has been shattered, the dollar debased, and the crown jewels of American industry put on auction to foreigners!

The new American President will perhaps preside on a new economic order where the Sovereign funds will play a more active management role.

It is almost stupid to ignore Moriss’s predictions – he has been accurate far more than what his detractors may like to believe. He has to say “ The American financial sector today is far more powerful than it was in the 1970s. And to date, its response to the looming crisis has been, overwhelmingly, to downplay and to conceal.”

Moriss rounds this off by saying “this will be a path to a decade – long tragedy.” For people hoping to see a V shaped recovery in the world economy, this is not great news.

He then criticizes the private equity players quite squarely when he says “ the rewards, in other words, flowed to people who excelled at raising funds and executing deals, not to down and dirty turnaround specialists”.

He continues his attack on the financial services industry – “in financial services industry, although the high profits accrue to managers and shareholders, their losses are usually partly socialized”. We have seen this happening in US and parts of Europe already and more may be underway. Even in India we can see the media hysteria over a 0.5% change in the lending rates of banks by RBI! Steel, cement, shipping, agriculture are all industries who do not even realize change of such a small magnitude! However, the media (almost wholly) driven by the broking industry can create full day programs on insignificant rate changes!

“American health care is also extremely wasteful …and the problem stems from the insistence that health care is just like any other consumer market. It is not!”

He kicks at the very base of the American economy (and we should remember that Indians love to copy the Americans!) when he says “ France has a hourly rate comparable to America…but the French middle classes have smaller houses and cars then their American peers, but better diets, considerably more leisure time,….”

Some of his suggestions towards the end of the book in a chapter titled “Recovering Balance” are:

“Congress should seriously consider restoring some version of the old Glass-Steagall separation of commercial and investment banking. …..implicitly using depositors’ money to drive investment banking fees and is the kind of abuse to be targeted by an updated version of the Glass-Steagall…page 163 of the book.

He also criticizes the health care industry…and calls for an over haul.

Though the book looks at the American industry – especially the financial services industry, this book will also help us look at the Indian industry. There are pockets of the Indian industry which have surprisingly not benefited the Indian consumer. The number of new banks, bank branches, etc. have not improved the customer service no brought down the costs. Mutual funds, life insurance companies are all operating in a world of their own. The Indian financial industry will also go through a grind during this “slowdown” in the world economy. Perhaps our valuations had also run ahead of its time – we will all take healthy steps towards a more sober economy and more cash flow based valuations.

“The Trillion Dollar Meltdown” is an important book and an indispensable read that should be read by everyone concerned with the world’s economy. This brief book should be required reading for anyone with a hand in policy making or handling the risk of a financial institution.

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