Category Archives: Meltdown

Nobel-prize-winning economist Joseph Stiglitz‘s take on the 2008 financial crisis is simple: Free markets are bad; government is good; we need more government. This is, essentially, a reiteration of what is known as the Greenwald-Stiglitz theorem, which states that markets are imperfect, so “government could potentially almost always improve upon the market’s resource allocation.”

A flaw common to both the Greenwald-Stiglitz theorem and Freefall is that, while Stiglitz goes to great efforts to show that markets are imperfect, he makes no effort at all to show that government will do better. His theorem says government could potentially do better, and another one of his theorems says an “ideal government” could do better, but the real question, which he never addresses, is whether a real, not ideal, imperfect government will actually do any better than an imperfect market.

Freefall makes no genuine effort to analyze the causes of the 2008 financial meltdown. Instead, Stiglitz merely uses it as another example in his case for bigger government. The crisis resulted from the failure of American capitalism, he says, and he dismisses any other explanation (if he mentions it at all) as “sheer nonsense” (p. 10).

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As previously noted, the Antiplanner has been reading a lot of books about the financial crisis lately. Some have tried (but failed) to be comprehensive. Most cover just a slice of the crisis, such as Bear Stearns (House of Cards) or Lehman Brothers (A Colossal Failure of Common Sense)

One of the most valuable books of the latter sort is Fool’s Gold, which focuses on J.P. Morgan. Curiously, this book has gone through a series of at least four subtitles:

1. How an Ingenious Tribe of Bankers Rewrote the Rules of Finance, Made a Fortune and Survived a Catastrophe
2. How Unrestrained Greed Corrupted a Dream, Shattered Global Markets, and Unleashed a Catastrophe
3. How the Bold Dream of a Small Tribe at J.P. Morgan was Corrupted by Wall Street Greed and Unleashed a Catastrophe
4. The Inside Story of J.P. Morgan and How Wall St. Greed Corrupted Its Bold Dream and Created a Financial Catastrophe

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The Antiplanner finished reading Too Big to Fail, a 539-page tome describing the events of the financial crisis from the Bear Stearns collapse in March, 2008 to the Treasury’s forced purchase of billions of dollars worth of shares in nine major banks in October, 2008. New York Times reporter Sorkin says the book is based on “more than five hundred hours of interviews with more than two hundred individuals who participated directly in the events surrounding the financial crisis.”

With the exception of an eleven-page epilogue, the author makes no apparent attempt to interject his own opinions about what happened. As such, the book represents the best and worst of modern journalism: the best because it appears to be a frank recitation of events on Wall Street, in the Fed, and the U.S. Treasury; and the worst because the accuracy of that recitation depends on who the author interviewed (whose names he doesn’t specifically reveal).

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The 2008 financial crisis has proven to be a bonanza for at least one industry: Book publishers have issued dozens of tomes about what went wrong and how to fix it. Lately, the Antiplanner has been reading as many of these as possible.

Most of the authors have an axe to grind and many blame the crisis on one chief player: the Federal Reserve, private bankers, the mortgage industry, bond rating companies, politicians trying to increase homeownership, etc. Of course, loyal Antiplanner readers know the real culprit was growth-management planning, a thesis few of the book writers recognize–the main exception being Thomas Sowell in The Housing Boom and Bust.

In reading the other books, my goal has been to sift out the overblown rhetoric about greed and malice to find as many useful facts and insights as possible. Here are a few of the more interesting points.

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The U.S. economy had grown rapidly for more than a decade, and even seemed to absorb a major natural disaster in stride. But then an unpredictable event triggered a panic, and suddenly banks closed, stock prices collapsed, and the entire world economy went into turmoil.

The many parallels between the panic of 1907 and the crash of 2008 suggest that this book — written just before the recent turmoil — deserves a close reading. The authors — two professors at the University of Virginia business school — provide an hour-by-hour account of the collapse and how New York bankers, led by J.P. Morgan, responded. But the book also provides a broad view of the conditions that led to the panic and how policy makers can respond to such panics.

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