My summer reading list: Debt, deflation & democracy

Aug 12, 2011 20:14 UTC

For those of you with the good sense to ignore the financial markets and enjoy the waning days of summer, below are some of the books — new and old — sitting on my table:

1. “Reckless Endangerment: How outsized ambition, greed, and corruption led to economic Armageddon”
This excellent volume by Gretchen Morgenson and Josh Rosner tells the back story of the housing crisis and its sponsors in Washington, many of whom remain in positions of power today.

2. “Chairman of the Fed: William McChesney Martin Jr., and the Creation of the Modern American Financial System
This book by Robert P. Bremner is a fascinating look at the man who guided the US central bank in the years after WWII. Chairman Martin spanned the terms of Presidents Truman through Nixon, a story Bremner tells well and with great attention to detail. We described the book in a recent post, “Are U.S. regulators worsening E.U. credit squeeze?”

3. “Inside the Nixon Administration: The Secret Diary of Arthur Burns, 1969-1974
When I ordered the Bremner book, another volume by Arthur F. Burns and Robert H. Ferrell caught my eye. For Americans to understand the origins of the current economic malaise, a study of the Nixon years, when growth slowed and housing became the national obsession, is critical.

This gem of a memoir covers the years 1969 through 1974 and provides a very thoughtful and human account of the Burns era at the Fed. Henry Kissinger, John Connally and many other key political figures of the day are scattered throughout its pages. Burns tells the insider story of Washington in a way you don’t see or hear today.

The Burns memoir also shows how different the concerns and priorities in Washington were four decades ago, but also how little has changed. “My efforts to prevent the closing of the gold window,” Burns wrote, “working through Connally, [Paul] Volcker, and [George] Schultz — do not seem to have succeeded. The gold window may have to be closed tomorrow because we now have a government that seems incapable, not only of constructive leadership, but of any action at all. What a tragedy for mankind.”

Sound familiar?

4. “The Modern Corporation and Private Property”
This is probably the most important book ever written on the behavior of large corporations. The authors, Adolph Berle and Gardiner Means, document the anti-democratic, anti-capitalist bias of large enterprises and describe why big banks and companies eventually seek to subvert the rule of law and democracy itself. Reading this classic 1932 book is essential to understanding the socialist tendencies of the managers of large corporations and how American corporate law has deprived shareholders of their most basic property rights. The authors write:

The property owner who invests in a modern corporation so far surrenders his wealth to those in control of the corporation that he has exchanged the position of independent owner for one in which he may become merely recipient of the wages of capital… [Such owners] have surrendered the right that the corporation should be operated in their sole interest …

Indeed, the last 70 pages of this book could have been written yesterday.

5. “The Debt-Deflation Theory of Great Depressions”
Finally, a key piece of reading for all people interested in economics and finance is this essay by the great American economist Irving Fisher. His writing was published by the journal Econometrica in 1933 and is available from the Federal Reserve Bank of St Louis. Fisher’s essay is something I like to talk about because he understood the role of money and credit in the American system.

As we noted this week in The Institutional Risk Analyst:

The prospective deal by Barack Obama and his counterparts in the fascist states of Europe to float the western economies on a sea of new monopoly money issued by the IMF is the final betrayal of American values. In place of the fiat dollar, Washington will instead worship the golden calf of the SDR and declare the jubilee. But no such expedients will change the basic fact that the problem facing BAC, EU banks and the G-20 nations is the same, namely debt deflation and a lack of demand that stems from it. Irving Fisher was right in 1933 and he is only reaffirmed by today’s events. Until we restructure insolvent banks and markets, and thereby create the conditions for credit expansion, there will be no economic growth in the US or EU.




My reading list is now running a deficit.
Finishing 13 Bankers, and hope to start Reinhart & Rogoff; This Time Is Different.
Would really like to skip and start your No.1 recommendation.

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“Reckless Endangerment” and the unwritten history of Washington

Jul 14, 2011 15:45 UTC

Some disclosures: I review the new book, “Reckless Endangerment: How outsized ambition, greed, and corruption led to economic Armageddon”, by Gretchen Morgenson and Josh Rosner, not because both authors are my friends. They are.  Nor do I review this book because it concisely summarizes the confluence of public policy and private avarice we all know as the subprime mortgage crisis. It does, and more.

No, I review this book because it names names. Names and more names, one after another, in that prosecutorial serial fashion readers of Morgenson know very well. The kind of relentless recitation of the facts and names meant to allow readers to follow the logical chain of a criminal act to an indictment.

With Rosner as the ferret of public and not so public data and Morgenson as the journalistic filter and wordsmith par excellence, the book delivers a readable yet detailed account of the people behind the mortgage debacle. When the show trials begin, the judges will have a copy of “Reckless Endangerment” close at hand.

The tale of how Washington played a crucial enabling role in the mortgage mess is a topic I have discussed with Rosner over many years. Morgenson and her fellow scribes at the New York Times have chronicled the debacle on a national scale, though Morgenson does so with a tenacity and sense of public indignation that probably irks some of her more pro-Wall Street peers on the Times’ business page.

This book soundly repudiates the notion that Wall Street led the subprime parade. Instead, it confirms that government intervention going back to FDR and the New Deal set the stage for a public-private orgy decades later. The book describes how government sponsored entities such as Fannie Mae, banks such as PNC Financial, corporations such as Sears Mortgage and private mortgage insurers  such as MGIC, led the way in the fall of 1993 to redefine the government-backed mortgage market, a market that has been backed by the government since the 1930s.

Recall in the early 1990s, when Citibank started to experiment in private mortgage securities coming out of the S&L crisis. Citi, Chase Manhattan and other large banks nearly failed just years earlier. Thus the move by Fannie Mae and the other members of the affordable housing coalition in 1993 to eventually broaden the definition of “conforming loans” to include loans with inferior credit quality and loans with private mortgage insurance is a key political event in the subprime crisis timeline, and also a sop for the big banks. Think of today’s real estate crisis starting in the 1980s, but delayed and made larger by the affordable housing coalition and Alan Greenspan’s Fed. This book tells that story.

Reckless highlights the relationship between former Fannie Mae CEO James Johnson, a Washington player who was a top adviser to Vice President Walter Mondale and former Countrywide CEO Angelo Mozilo. That fateful pairing of Johnson and Mozilo helped take the changes made in Washington to the legal framework of the government mortgage market and catapult them to the stratosphere on Wall Street.

The authors nicely describe how Johnson was the architect of “the disastrous home ownership strategy promulgated by William Jefferson Clinton in 1994. Johnson, after becoming chief executive of Fannie Mae in 1991 and under the auspices of promoting home ownership, partnered with home builders, lenders, consumer groups, and friends in Congress to transform Fannie Mae into the largest and most influential financial institution in the world.” Today, Fannie Mae is under government control again, after decades of being highjacked by various private agendas set by the affordable housing mafia.

The larger banks on Wall Street were not just copying and perverting the government market for mortgages. They also took example from Countrywide, Bear Stearns and the smaller, more aggressive mortgage firms. Countrywide, a firm that was an insurgent real estate company a decade before, grew to the point where by the end of 2005 it was a $250 billion asset national bank that was turning over its balance sheet three times a year.

Countrywide was selling most of that vast flow of new loan origination to Fannie Mae and Freddie Mac, but also sold a large chunk to private investors. Now Bank of America, which acquired Countrywide in 2008 for just $4 billion, faces tens of billions of dollars in legal claims arising from the Countrywide mortgage securitization franchise. Even today, years after the financial crisis began, Bank of America still faces the possibility of a restructuring because of the legal claims against Countrywide.

This fast moving book follows Johnson and Washington contemporaries such as former Treasury Secretary Robert Rubin through the Clinton years and into the mortgage boom years of 2004 and beyond. By then Johnson was sitting on the board of Goldman Sachs, the authors note, and setting the salary for then-Goldman CEO and later Treasury Secretary Hank Paulson. “Reckless” illustrates that people like Johnson, Rubin and Paulson, even when they reach the limit of their incompetence and fail miserably in positions of public trust, still seem to rise in power and private wealth.

“It is indeed one of the most frustrating aspects of this story — the rise of subprime, the dereliction of duty by so many who participated in the mortgage mess,” the authors note in a harmony that reflects both voices. “The cast of characters that helped create the mess continues to hold high positions or are holding jobs of even greater power.”

Hopefully with books such as “Reckless”, the frustrating fact of the impunity of money and power, graphically illustrated in this book, will change, and public officials will again start to act in the public interest — instead of their own.



I have to disagree. Angelo Mozilo was born in 1938 so he would be unlikely to live long enough for your ideas to inflict suffering commensurate with his lifetime achievements.

He should receive a very speedy trial under RICO that results in the confiscation of all of his assets, even those he has carefully hidden away. Then, he should be incarcerated somewhere nice like the Federal Pen in Sandstone, MN where he can spend the remainder of his life cleaning the latrine.

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