[3]
By
Published: 2008
Category: Money [4]
Early in 2007, Charles R. Morris sent an e-mail to Peter Osnos, the founder of Public Affairs books.
He wrote: "I think we're heading for the mother of all crashes, it will happen in summer of 2008, I think."
Osnos paid attention. Morris had written nine books; he knew how to tell a financial story to civilian readers. He'd been a lawyer. He'd been a banker. And, more recently, he'd headed a company that produced the kind of software favored by the very Wall Streeters he thought were likely to bring on the crash.
Osnos paid attention for one more reason --- that season, Charles R. Morris was in a distinct minority. The Fed saw blue skies ahead. Business commentators on the cable networks were equally enthusiastic. When a smart guy with no dog in the fight says disaster is coming.....
Now it is the summer of '08, and the crash seems to be upon us --- Morris would correct me and say: Only a patch of the sky has fallen, there's much more still to fall --- and Americans are scratching their heads. We know something happened, but what? Was the housing bubble so big that banks and Wall Street firms are toppling and the government must rescue one after another? Subprime mortgages did all this? Wow.
No. It's worse. Much worse. In "The Trillion Dollar Meltdown," Charles R. Morris lays it out briefly --- 175 pages, plus notes --- in terms that a reasonably informed adult could grasp. I did, and I don't balance my check book. And what I didn't understand, I skipped. [I take consolation in this confession, from New York Times business reporter David Leonhardt: “I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, Can you try to explain this to me? When they finished, I often had a highly sophisticated follow-up question: Can you try again?”]
So what does Morris have to say?
--- “Subprime is just the first big boulder in an avalanche of asset write-downs that will rattle on through much of 2008.”
-- “Even municipal bonds may be at risk.”
-- "There will inevitably be margin calls, panicked selling, clamors from shareholders, and the flight from all risky assets that could double or triple the damage."
What's happening, he explains, is the popping of a “credit bubble.” Once we had many assets; now we have massive debt. Too much. “And when large, wobbly objects tumble, they go very fast.” Add up all the anticipated writedowns and defaults --- from mortgages, loans, credit cards and bonds --- and you get about $1 trillion.
And even that is not the worst of it. “That number...assumes an orderly deleveraging. But that's not how large-scale market reversals work.”
This is very upsettling. Smart, high-paid bankers, brilliant economists, government regulators --- no one saw this coming, no one did anything?
Just so, says Morris. In fact, the smarties caused this. And thus begins the history lesson --- with surprising praise for Richard Nixon's economic policies. And then into business theory, like the early '80s admiration for the Japanese. (Morris has contempt for such “intellectual” thinking: “Intellectuals are lagging indicators, near-infallible guides to what used to be true.”)
As you might expect, Morris finds everything going majorly wrong starting with Ronald Reagan's affection for deregulation. (Chapter title: “Wall Street Finds Religion”). Things improved in the '90s, which were about high-tech and the fresh fortunes created there; Morris makes the point, often ignored, that “bubbles are almost always anchored in real developments.”
He takes us through “practice runs” --- the S&L crisis, the '87 crash, Long Term Capital Management --- and notes the common thread: These crises “developed in market pockets that were mostly outside the oversight of financial authorities.” And did the authorities change that? Nope. “By 2006, only about a quarter of all lending occurred in regulated markets, down from about 80 percent twenty years before.”
Toss in a few historical events --- I'll spare you --- and you have a credit bubble. The facts here are shameful:
Subprime lending jumped from an annual volume of $145 billion in 2001 to $625 billion in 2005, more than 20 percent of total issuances. More than a third of subprime loans were for 100 percent of the home value --- even more when the fees were added in. Light-documentation mortgages transmuted into “ninja” loans --- no income, no job, no assets.
So now we must deal with the reality that our debt is owned by foreigners (China at $1.2 trillion, OPEC nations at $600 billion, Russia at $400 billion). And with the reality of the dollar's fall, which The Economist calls the “biggest default in history”. And with this: "The global leader in the efficiency of its markets and the productivity of its businesses and workers [is] hopelessly in hock to some of the world's most unsavory regimes.”
The outlook: Housing prices will continue to fall --- perhaps as much as 30 percent. (Morris notes: “Pessimists have yet to be wrong in this cycle.”) Consumer spending will also fall. We'll shift from a “consumer-driven to an export-driven economy.”
Time out. What about justice? I'm not feeling very charitable, and not just about CEOs of banks who made fortunes. Lobbyists, bankers, regulators, government officials who have added $2 trillion in debt since 2002 --- are they less guilty than minor criminals who are in jail for dealing small amounts of drugs? Morris, interestingly, doesn't look to nail the bad guys. He's more interested in “America's new baronial class”. He writes: “There is no conspiracy against the poor and middle class.” Well, that's a comfort....
Solutions? Unsurprisingly, Morris favors regulation, and a lot of it: “Finance is not supposed to be a casino.” He'd welcome an expansion of programs that cost a little now and save a lot later, like prenatal care. He suggests “an expansion of government” --- “effective” and “efficient” government --- to deal with infrastructure issues. And, of course, he believes the way to pay for all that is higher taxes.
Call his solutions “political” and dismiss them. You'll be in good company. No wealthy person I've talked to recently is willing to pay a dime extra in taxes --- I recently held up our 6-year-old to one of them, and, as the child smiled agreeably, I asked, “Would you prefer that she pay?” I got no answer. I took that as “yes”.
But let me give Charles R. Morris the last words:
American officials and financial leaders must forthrightly admit the scale of the problem and proceed to purge the absurd valuations, the phony triple-A ratings, the inflated balance sheets, and the hidden liabilities that are marbled through financial balance sheets.
And if we don't do that?
The loss of faith in American markets will be far greater than a one-time trillion-dollar asset write-down.