In yesterday’s post I mentioned that I was about ready to review Charles R. Morris’s The Trillion Dollar Meltdown. However, since the book is such a dense compendium of financial analysis and covers a period of over 100 years of financial doings, I have decided to spread this review of the book’s eight chapters over the whole week. To be frank, most of the terminology and a lot of the accountant like thinking it takes to read this book are outside my ken. But the style of writing and the to-the-point examples helped me to overcome this mild but distracting short-coming.
It wasn’t so long ago that numbers like a million were the ones we used to think about the very rich. But I can’t be the only one to notice that nowadays, being rich seems to start with a billion. And when we are talking about the national budget the numbers are now in the trillions. Hence, the title of this book, The Trillion Dollar Meltdown not only makes sense but seems somehow inevitable.
The sad truth, however, is that subprime is just the first big boulder in an avalanche of asset writedowns that will rattle on through much of 2008. An overhang of subprime-like assets at least as large , is sitting in corporate debt, commercial mortgages, credit cards, and other portfolios. Even municipal bonds may be at risk. Loss estimates of $400 billion to $500 billion barely get you halfway there.
With a preface like that, it isn’t very difficult to see that Morris is on the track of some very serious financial mis-doings. So let us begin our journey.
Chapter One: The Death of Liberalism
In his preface, Morris states that “all successful financial innovations must experience a crash cycle to discover their limits and risks, tighten documentation, and identify the proper role of regulation.” So it makes sense that he would pick a period in our history when such an event, “the ten years from 1973 through 1982” took place as the place to start. Things were so bad that
Economists even came up with a measure of how awful it felt. In 1980, the Misery Index, the sum of the inflation rate and the unemployment rate, was the highest ever. An ugly new word, “stagflation,” entered the political vocabulary.
In Morris’s short history though this all began at the beginning of the 20th century with the President of U.S. Steel, Elbert Gary, who pioneered the corportate strategy of market sharing and price-management agreements with his competition. As this stragegy took hold in American business, Morris points out that “The locus of innovation in steel-making shifted to Europe and Japan.” A fact that later played a great part in the American automobile manufacturer’s failures of the 70’s. Speaking of cars, General Motors comes into the story during this same early period as the leader in setting up relations with the unions as GM set the standard for tying wages to productivity and bonuses and raises to the rate of inflation. Morris is here concerned with the configuration of the businesses not with the economic fallouts of the Depression nor the New Deal. I think this is primarily because though these two events were major in their social and economic effects they did not change the way that companies did business or that economists thought about it.
So quickly, Morris brings us to the age of affluence of post WW11 America, when jobs were plentiful, everyone could afford a house, and the only war was a Cold One. Again, he slides through these times without pause because his aim is to set the stage for his analysis of why it all wound down in the 70’s. As a student of social history, I can appreciate how the golden age of the 50’s could lead to a baby boom and the student unrest of the 60’s. And how that could in fact lead to the parents of those students becoming more conservative. Thus Nixon, who according to Morris,
by contemporary definitions, … was among the most liberal of presidents. As the war wound down, he cut military spending sharply, pushed through the greatest expansion in Social Security benefits since the program’s inception, and created the federal affirmative action programs that quickly spread throughmost major corporations and public institutions.
The dawn lights as I read this section. In political terms, liberal means top-down directive control not freedom from control as my uneducated politcal mind has long thought. It meant more government to make the decisions and control the outcome. A Keynesian approach through and through. So when Nixon called his economic summit in 1971, and then announced the dollar would no longer be redeemed by gold, and that he was instituting price and wage controls, a tax on imports, and a cut in taxes it appeared that the “stag” had been deflated. Unfortunately, for Nixon, Ford, and Carter floating the dollar led directly to OPEC tripling the price of oil in 1973 and again in 1979 while the price controls which were only supposed to last 90 days weren’t removed until 1974. The removed controls “triggered double-digit inflation and the nasty recessions of 1974 and 1975.”
I know, as usual with things political what you see isn’t what you get. Because when we think Nixon these days it’s usually through the lens of Watergate. So instead me trying to lead you through to understanding what I am just now coming to see, I’ll let Morris do the talking:
In its modern sense, liberalism is a theory of government posing as a branch of economics. Adam Smith and David Ricardo called their discipline political economy, a useful term. The “political” was dropped when the twentieth-century marriage of economics and advanced mathematics fostered the illusion that economics is a science.
A science that became the field of study in most major universities and helped to foster our current connection of elitism with the liberal frame of mind.
It is hard to exaggerate the faith of 1970s- and 1980s- vintage liberals in the power of a puppet-master government, especially in academia.
Morris goes on to say “Intellectuals are reliable lagging indicators, near-infallible guides to what used to be.” and so as the economy continued to wither so did the reputation of those who had advised the present course.
With the eclipse of Keynesian liberalism, the day had finally dawned for an alternative paradigm that had been waiting patiently in the wings – Milton Friedman’s “monetarism.”
Tomorrow, Chapter Two: Wall Street Finds Religion