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Friday, October 17, 2008

Reading List: Bad Money

Phillips, Kevin. Bad Money. New York: Viking, 2008. ISBN 978-0-670-01907-6.
I was less than impressed by the author's last book, American Theocracy (March 2007), so I was a little hesitant about picking up this volume—but I'm glad I did. This is, for its length, the best resource for understanding the present financial mess I've read. While it doesn't explain everything, and necessarily skips over much of the detail, it correctly focuses on the unprecedented explosion of debt in recent decades; the dominance of finance (making money by shuffling money around) over manufacturing (making stuff) in the United States; the emergence of a parallel, unregulated, fantasy-land banking system based on arcane financial derivatives; politicians bent on promoting home ownership whatever the risk to the financial system; and feckless regulators and central bankers who abdicated their responsibility and became “serial bubblers” instead. The interwoven fate of the dollar and petroleum prices, the near-term impact of a global peak in oil production and the need to rein in carbon emissions, and their potential consequences for an already deteriorating economic situation are discussed in detail. You will also learn why government economic statistics (inflation rate, money supply, etc.) should be treated with great scepticism.

The thing about financial bubbles, and why such events are perennial in human societies, is that everybody wins—as long as the bubble continues to inflate and more suckers jump on board. Asset owners see their wealth soar, speculators make a fortune, those producing the assets enjoy ever-increasing demand, lenders earn more and more financing the purchase of appreciating assets, brokers earn greater and greater fees, and government tax revenues from everybody in the loop continue to rise—until the bubble pops. Then everybody loses, as reality reasserts itself. That's what we're beginning to see occur in today's financial markets: a grand-scale deleveraging of which events as of this writing (mid-October 2008) are just the opening act (or maybe the overture).

The author sketches possible scenarios for how the future may play out. On the whole, he's a bit more optimistic than I (despite the last chapter's being titled “The Global Crisis of American Capitalism”), but then that isn't difficult. The speculations about the future seem plausible to me, but I can imagine things developing in far different ways than those envisioned here, many of which would seem far-fetched today. There are a few errors (for example, Vladimir Putin never “headed the KGB” [p. 192]: in fact he retired from the KGB in 1991 after returning from having served as an agent in Dresden), but none seriously affects the arguments presented.

I continue to believe the author overstates the influence of the evangelical right in U.S. politics, and understates the culpability of politicians of both parties in creating the moral hazard which has now turned into the present peril. But these quibbles do not detract from this excellent primer on how the present crisis came to be, and what the future may hold.

Posted at October 17, 2008 21:50