Since I got my hands on my copy of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, I’ve been devouring it almost non-stop.
Written by Barry Ritholtz, Director of Equity Research at Fusion IQ, and blogger at The Big Picture, it promised to be a definitive guide to the financial mess - and it didn’t disappoint.
In his inimitable colloquial tone Ritholtz sets out to meticulously explain how the stage was set for the historic unraveling of the global economy in 2008. Although we will no doubt have a plethora of similar books, Ritholtz’s book, for its detailed historical approach and its comprehensiveness will probably end up being the encyclopaedia that future historians and traders come back to.
Filled with charts, diagrams, cartoons and highlighted sections, Bailout Nation grabs hold of your attention and never lets you come up for air until the very end. I found very few errors or bumps along the way. Some sections were a bit repetitive. For example, referring to the case of LTCM, he says:
The collapse of that hedge fund in 1998 and its subsequent Fed-orchestrated rescue plan provided one of the greatest — and most terrible — examples of moral hazard ever known.
Then a few paragraphs later:
Contrary to what Greenspan claimed, the Federal Reserve’s involvement did not create “slight” moral hazard. Rather, the 1998 Fed-orchestrated rescue was moral hazard writ humongous.
Yes, we get it Barry! But because the book is so well written and researched, I’m nitpicking here really.
I truly appreciate that Ritholtz comes across as politically agnostic. He excoriates both the Democrats and the Republicans for reckless policies and decisions that have no logic but foster a culture of entitlement, reduce or entirely eliminate regulation and get private enterprises addicted to public funds.
Most Americans are labouring under the patriotic delusion that they live in a free market society. But for all their pro-capitalistic bravado, America’s history is replete with corporate welfare. Both Democratic and Republican governments have lavished public funds on businesses that would have gone extinct in a real free market. To start at the beginning, Ritholtz highlights the precedent setting bailout of Lockheed Martin in 1971. This was the first time the US government had acted to help out a single corporation. He then proceeds to describe the other bailouts, which by now had become the norm.
Ritholtz spies a 10 step pattern of bailouts:
- Risk Event
- First Reactions
- Bigger Reactions
- “Interested Party” Agitation
- Official Concern
- Broader Worry, Deepening Panic
- Major Intervention/Bailout
- Rationalization & Apologies
- Expected Results and Unintended Consequences
It isn’t too hard to spot us at stage 9 - with Greenspan’s sheepish “flaw” apology and Geithner’s haphazard attempts to sell everyone on his ill thought out PPIP proposal.
When it comes to casting blame, Ritholtz doesn’t pull any punches. As you can imagine, with a foreword written by Bill Fleckenstein (author of Greenspan’s Bubbles), Ritholtz doesn’t shy away from criticizing the Maestro. In fact, he puts him front and center, as the primary enabler of this convoluted tragedy. But he also defends what he considers to be “misplaced fault” such as naked shorting, mortgage interest deduction, etc. I don’t totally agree with him on naked short selling. The deregulation that he cites elsewhere was also why naked shorting was allowed to take place - at times on a massive scale, with devastating consequences.
Ritholtz also cites a very clever reason for why Wall St. got greedy in the first place and went into overdrive, taking on fatal amounts of risk. I won’t ruin the aha! moment for you but it is signature Ritholtz to be able to pull together very disparate variables and see a pattern emerge.
I’m often asked by friends and family members to explain why Wall Street just imploded. Bailout Nation is an accessible and fun to read book that explains every question they have - and a few they never even thought of asking.
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