As of the end of spring 2009, I still get carpet bombed with the same question: "How did this financial crisis happen?" No matter how many times I repeat the same two minute recap, apparently people need to see the facts in print (to their credit, the story does have a lot of actors, locations, and other variables). Alas, the savior to your dry mouth and bewildered faces has arrived: Barry Ritholtz's Bailout Nation.
Bailout Nation is the Educated Idiot's Guide to the Financial Crisis. Barry does an excellent job of chronologically tracing through the history of economic cycles, the greedy a*holes who always destroy asset prices, and the ignorant elected/appointed officials who amplify the destruction. He shows us how we started snowboarding down a slippery slope (without a helmet) when the government bailed out the first private corporation, Lockheed Aircraft (NYSE:LMT), ruined by so-called captains of industry. He gently guides us through the creation and mechanisms of the Federal Reserve. He cites speeches in which Fed Reserve Chairmen Alan Greenspan and Ben Bernanke completely contradict themselves. He points out that the Commodity Futures Modernization Act of 2002 "removed derivatives and credit default swaps [the financial weapons of mass destruction that torched the global financial system] from any and all state and federal regulatory oversight." He objectively reveals that "the tragic financial events of 2008 and 2009 are not an unfortunate accident. Rather, they are the results of a conscious SEC decision to allow these firms to legally violate net capital rules that had existed for decades, limiting broker-dealers' debt-to-net-capital ratio to 12-to-1 [and subsequently allowing them to lever up 30, 35, even 40 to 1]." And then, like Great Grand-Pappy who lived through the first Great Depression, he gives it to us with the simplest of common sense:
"There was a reason why some people in the past had been denied credit: They simply could not afford the homes they tried to purchase. Any mortgage structure that ignores the borrower's ability to service the loan is destined for failure."
If you watch too much CNN or FOX news, or you religiously follow one political party, you will need to keep some horse-sized blinders nearby as you are enlightened to the numerous facts that get covered in a dung pile of spin by tabloid imbeciles on the major networks. But if you genuinely want to see the truth in all its naked glory, then prepare for an adventurous trip explained by a master story-teller.
Successful hedge fund manager Bill Fleckenstein's Foreword summarizes the book perfectly:
“This book is the history of how the United States evolved from a rugged, independent nation to a soft Bailout Nation, one in which too few question why we ask the taxpayers ‘to allow financial firms to self-regulate, but then pony up trillions to bail them out.’"
Although I don't want to give too much more summary of Barry's book, I will say he is one of the few who thoroughly show how everyone is to blame. In the media, the politicians blame Wall St., Wall St. blames the public, and the public blames the political party they didn't vote for. The beauty of Barry's book is once we truly understand the causes of our economic problems (which lead to social and household problems), we can start addressing how to prevent this repetitive cycle from perpetuating. Armed with the facts from Bailout Nation, we can prevent crises before they happen rather than waste precious time and money cleaning up after unnecessary shit storms. I am part of a generation that has lived through two bubbles and market crashes since graduating college. If we are to have any faith that the system is worth working for, we must end this pattern. We all know what Pavlov proved.
Barry's keen insights, thorough lawyerly research, and witty explanations make this book a must-read. In fact, I expect college professors to utilize the book as a great tool to educate students in an entertaining way. For example, Barry is full of sweet one-liners such as "If you could fog a mirror, you qualified for a mortgage." Sad, but true.
Although the release of the book was a tad delayed (because original publisher McGraw-Hill didn't want Barry to expose subsidiary Standard & Poor's key role in the crisis), it's the perfect summer read for those who are looking for thought provoking knowledge wrapped in a "who done it" suspense tale. Unfortunately, this comic tragedy has affected real people in the real world.
In the movie The Matrix, the protagonist Neo is offered an existential choice: take a red pill and enter the world of truth, or take the blue pill and return to the ignorant world of lies. If you are ready to jump in to the truth with eyes wide open, read the red book (it's really red) and follow Barry down the rabbit hole. You will be glad you did. Like Morpheus said to Neo in the Matrix: Welcome to the Real World ...