Why has the American capital system run amok, taking so many for a ride? According to four recent books, the complicity reaches high and low: reckless financiers, dishonest mortgage brokers, credulous consumers and home buyers. But the blame starts at the top, where those in charge -- the Bush administration, Congress, the Federal Reserve and financial industry leaders -- closed or averted their eyes as the crisis approached.
THE NEW PARADIGM FOR FINANCIAL MARKETS The Credit Crisis of 2008 and What It Means By George Soros | Public Affairs. 162 pp. $22.95
George Soros is a billionaire speculator whose voice is amplified by real money. His distaste for the Bush administration runs deep: He put millions of dollars into Sen. John Kerry's 2004 presidential campaign. Yet his account of the credit crash is personal and revealing, not mere political bashing. He admits that he didn't recognize that the crisis was about to break and came out of virtual retirement in 2007 to trade again, hoping to limit the damage to his funds.
Soros blames former Federal Reserve chairman Alan Greenspan for not intervening to slow the mad real estate boom that led to the subprime mortgage disaster. Under Greenspan's leadership, the Federal Reserve kept short-term interest rates too low for too long and ignored the spread of impenetrable financial investments, such as complex mortgage-based securities, which expanded risks of default beyond any reckoning. When risk can't be figured out and markets turn down, panic often follows. "The newly invented methods and instruments were so sophisticated that the regulatory authorities lost the ability to calculate the risks involved," Soros writes. He calls this a "shocking abdication of responsibility on the part of the regulators."
FINANCIAL SHOCK A 360 Degree Look at the Subprime Mortgage Implosion, and How to Avoid The Next Financial Crisis By Mark Zandi | FT. 270 pp. $24.99
Financial Shock by economist Mark Zandi is a clear primer on how and why the crisis occurred. Zandi is chief economist and co-founder of Moody's Economy.com, and his even-handed analysis is often sought by journalists (including by me in my former role as a Washington Post business reporter). His lucid book explains the credit default swaps (CDSs); structured investment vehicles (SIVs); collateralized debt obligations (CDOs); CDOs of CDOs, called CDOs-squared; CDOs-cubed; and other instruments of financial jabberwocky that caused the credit contagion. Most notorious, Zandi says, were the CDOs, "essentially just a mutual fund for bonds and loans." These funds filled up with subprime mortgage loans whose risks were unknowable to investors. Financial firms pocketed lucrative fees for selling CDOs, and buyers could get them for 7 percent down, the rest borrowed. Such highly leveraged deals promised rich payoffs, but delivered cataclysmic losses when the bubble burst.
It is no surprise to see someone like Soros urging effective regulation of financial market risk. But it is significant that Zandi, an adviser to Sen. John McCain's presidential campaign, agrees with Soros. The current crisis, at bottom, is about a serious loss of confidence in U.S. financial markets. "Financial markets work on trust," he says. "Without trust, money markets quickly break down."
THE WORLD IS CURVED Hidden Dangers to the Global Economy By David M. Smick | Portfolio. 305 pp. $26.95
A consultant and founder of the International Economy quarterly, David M. Smick takes his title from Thomas J. Friedman's The World Is Flat. "For the financial markets," Smick argues, "the world is curved. We can't see over the horizon. . . . That is why the world has become such a dangerous place."
Smick built his career through the classic Washington practice of networking and advice-giving, and his analysis is sprinkled with stories of encounters with big players in global finance. He describes his sweaty-palmed interview with Singapore's legendary leader Lee Kuan Yew, who blasted Smick for his confidence in U.S. markets, then gave him a consulting contract. It's classic name-dropping, but it enlivens his account.
Smick views the country's economic setbacks from the perspective of a committed globalist who fears that Americans will start demanding barriers to trade and investment, provoking an even greater crisis. His book argues that the United States can and must compete in a world with shrinking boundaries because there really isn't another choice.
BAD MONEY Reckless Finance, Failed Politics, And the Global Crisis of American Capitalism By Kevin Phillips | Viking. 239 pp. $25.95
Kevin Phillips is alarmed by the increasing gap in wealth between the richest Americans and the rest of the population. Other analysts see this trend coming from political choices, the unplanned chaos of global markets and individual avarice. Phillips, author of American Dynasty and American Theocracy, spies the shadowy hand of the financial elite pulling the strings. According to him, since the 1980s, Wall Street and its Washington allies have set out to tie the U.S. economy to the money sector and let manufacturing companies and factory workers fall by the wayside. "The flight of the economy from tangibles to money manipulation is enriching a broad cross section of the upper-echelon institutions and practitioners of U.S. finance," he writes. He blames this nefarious plan for the current economic crisis and argues that it dooms the United States to second-class status, behind China.
The pitch of Phillips's alarms has led one reviewer to call him a modern Thomas Paine. But the sweep of his claims creates a big burden of proof that he doesn't even attempt to meet. Is there a powerful cabal at work to carry out a sinister "financialization" of the U.S. economy? Phillips ducks: "This book will not try to prove or disprove any particular backstage role" by Wall Street and Washington power brokers. He is "not interested in becoming a conspiracy investigator," he insists. But his work edges closer to Dan Brown's than he should want.
Of the four books, Zandi's account of the internal threats to U.S. prosperity is most clinical while Smick provides a global perspective. Soros, who calls himself a "failed philosopher" attempts in his tenth book to put this crisis into a complex theoretical context and asks readers to make one more try to grasp it. All four authors agree on the growing vulnerability of American financial well-being. Alone among the major economies, the United States is critically dependent on countries that sell us oil, electronics and the things that fill our shopping bags. Americans have stopped saving. The Bush administration and Congress have let budget deficits fly. And now the country relies on foreigners to plow dollars back in to keep the economy going. The authors warn that this financial dependence, like our energy dependence, is eroding the nation's choices.
These four experts see the credit shock as a probable turning point toward an even tougher future. Budget deficits will have to be faced. Painful spending decisions on health care and social security must be made. The economy's rewards must flow more fairly. "Henceforth, American consumers . . . have to find ways to live within their means," Zandi says. "Their unlimited freedom to spend, as well as their dominant role in the global economy, [has] reached an end."
Peter Behr is a contributing writer to the C.Q. Global Researcher and a former Washington Post business writer and editor.