The End of Wall Street, by Roger Lowenstein

So this week I'm taking yet another look at the fairly recent economic crisis of 2008 which we're still, eight years later, working on recovering from gradually. In this case the book is from Roger Lowenstein who actually wrote the book on the Federal Reserve that I listened to a while back as well. Of course since this book also talks about similar subject matters as The Divide by Matt Taibbi, including the buyout of Lehman Brothers by Barclay's, there's going to be a certain amount of overlap. I will say however that Lowenstein doesn't dip into the polemics that Taibbi does and certainly doesn't stoop so low as to make fun of Dick Fuld for his name, a point I thought unbecoming of Taibbi.

To explain why the meltdown of 2008, which removed a significant chunk of the world's wealth, brought the world economy to a screeching halt, and almost smashed the entire delicate framework of modern high finance is...complex. Yes, you can blame bad mortgages and a collapsing real estate bubble in the United States for being the catalysts which precipitated a global crisis. But to say that it was only those two things that caused the crisis is to overlook larger systemic issues which allowed such things to happen in the first place. Lowenstein goes into a great amount of detail explaining the variety of factors which created the crisis, as well as explaining its effects and rationalizing why agencies such as the Federal Reserve made the decisions it did.

Did banks and other lending institutions make loans to people they shouldn't have? People who didn't have enough income to ever hope to pay off the mortgage? Of course. There's ample evidence that this happened. And was their political pressure from Congress to extend loans to Americans to promote the ideal of home ownership? Also true. However, despite what certain people believe and as Lowenstein points out, the crisis was not caused by the government forcing banks to loan against their will. Lowenstein explains that the securitization of loans and vehicles such as credit default swaps made mortgage-backed securities seem like the risk-free item to invest in and public demand for mortgage-backed securities helped fuel a race to the bottom among lending institutions to generate more and more mortgages to then package as Triple-A bonds. 

More than any one thing, Lowenstein argues that it was a combination of factors that enabled the crisis to reach the scale that it did. Low interest rates in the United States, a policy pursued by Alan Greenspan, made low interest rate mortgages and home equity lines possible, turning Americans from a culture of savers into a culture of borrowers. Lax regulation of markets, under the belief that markets were ultimately perfect mechanisms, enabled more complex, more opaque, and ultimately riskier financial instruments to proliferate on Wall Street. A lack of oversight from both the government and the main credit rating agencies, who many investors relied upon to provide information about instruments like mortgage-backed securities, meant investors lacked necessary information to fully understand what they were getting into. And of course the culture of Wall Street, emphasizing decadence, multi-million dollar bonuses regardless of actual success at a company, and highly risky behavior which was assumed to be entirely risk free. (Although Lowenstein doesn't attack with the same vitriol that Taibbi does, which I found to be a welcome relief.)

So when the bubble finally collapsed, it created massive sell-offs and formerly stable financial firms such as Lehman Brothers, Merrill Lynch, and Bear Stearns became hopelessly insolvent in a matter of weeks. Which only precipitated greater sell-offs. Suddenly banks weren't willing to lend to anyone because they couldn't be sure an industry would be in business for another week. Lowenstein points out that day-to-day operations of industry in America had become so dependent on credit that General Electric, one of the biggest and most stable companies in the world, was unable to get short-term loans at rates of 25% because people were so unwilling to risk money in the private sector. Instead, money was flung into treasury notes to the point where the government was borrowing money at 0%, and eventually it would technically be able to borrow at negative interest rates. Clearly the myth that human being act rationally can be buried in the wake of such behavior. 

The Federal Reserve and other government agencies were put in an unusual position and in 2008 they engineered several bailouts of massive banks, as well as orchestrating mergers, to keep the financial industry from falling apart. There has been considerable criticism since then, especially considering how much went to executive bonuses, that perhaps the industries should have been allowed to fail. Taibbi certainly took the government and the Federal Reserve to task for such decisions.

Lowenstein, however, argues that the collapse of Lehman Brothers is largely responsible for the decision. Lehman Brothers was an example of a firm that almost certainly deserved to fail, having leveraged its assets to the hilt, and it was decided there would be no bailout for the investment bank. However, as Lehman Brothers went up in smoke, and the surviving assets were gobbled up by Barclay's, among others, markets continued a deep tailspin. The Dow Jones Industrial Average, considered an important marker of the state of the American economy, dropped by hundreds of points in a matter of days, in one case dropping a thousand points in one day. As more Americans saw retirement accounts and other savings invested in stocks completely lose all their value, the government was faced with the option of either bailing out banks that almost certainly deserved to fail, or watching the economy as we know it simply cease to exist. 

Lowenstein does briefly criticize some of the later bailouts, which seemed to be Ben Bernanke's favored method of rescuing at-risk companies in the United States during this time. But considering how fragile the economy was at the time, I don't know if I can entirely blame them for pursuing that course of action. I do agree with Lowenstein that new and stricter regulations needed to be put into place, rather than the fairly moderate reforms that did get passed.  

Overall I think this is a pretty good book that does a very good job of explaining the Crisis of 2008 and the ensuing depression which is a fairly complex subject. Granted, I pretty much agree with the statement that stricter and better-enforced regulations and oversight need to be in place, so my opinion is probably clouded on the issue.However, Lowenstein definitely avoids the vitriol and polemics that Taibbi all too often falls into so I think this book is a bit of an improvement. But I definitely recommend reading or listening to this book if you get the chance. 

- Kalpar

America's Bank: The Epic Struggle to Create the Federal Reserve, by Roger Lowenstein

This week I'm talking about a book that deals with the creation of the Federal Reserve Bank, an institution that wields a great deal of influence in the United States, ranging from setting interest rates to issuing the money people carry in their pockets, but a lot of Americans probably don't give it terribly much thought. At least on a day to day basis. The Federal Reserve, being today a vastly powerful organization in its own right, has been the focus of numerous conspiracy theories since before its creation in 1913 and remains a popular target of cranks, goldbugs, and various other nuts. (Lowenstein actually uses some of those terms within the text so I feel rather comfortable using them here.) For whatever reason I have a strange fascination with the machinery of high finance, albeit limited by my layman's understanding of how it all works, so this was a topic I was interested in reading.

The book follows the need in America for a centralized, national bank starting in the late nineteenth century to help modernize America's financial systems. Unlike other major economies such as Britain, France, and Germany, America's banking systems were fairly primitive by comparison and lacked a central authority to manage cash reserves, oversee the manufacture and distribution of banknotes, and set short-term interest rates. Although Salmon P. Chase's National Bank system had been an improvement over the ''wildcat banking'' following Andrew Jackson's closure of the Second National Bank in 1836, it was still a rather ad hoc structure and prone to financial panics which happened with distressing regularity in the late 1800's.

Despite the need for a centralized bank, increasingly supported by the banking establishments on Wall Street, there was still strong American opposition to the idea. The Jacksonian tradition in America had a strong distrust of centralized authority in specific and banks in general, so any combination of the two faced particular opposition. However, the near-implosion of the American economy in 1907, saved only through efforts by J.P. Morgan that can only be described as herculean and terrifying in their scope, emphasized the need for a centralized authority. If for nothing else than to help move cash reserves to where they were needed seasonally in accordance with the more agrarian segments of America's economy.

Considering the amount of opposition faced to creating anything that could even be construed as a central bank, it's amazing the Federal Reserve was created at all. Between the fear of government regulation of business, centralization of banking power, and the more oddball theories, it truly was a struggle to get the Federal Reserve created at all. The fact that the structure of the bank was created in absolute secrecy certainly did not allay the fears of the American public. However as Lowenstein puts it, there were two main benefits to the effort. First, there were a series of congressional inquiries in the wake of 1907 which emphasized how weak the existing financial system was and the need for a reserve bank to maintain liquidity in crisis. Secondly, the drafters of the eventual Federal Reserve system made sure to cultivate bipartisan support for banking reform, which proved instrumental when Democrats took over both houses of Congress and the White House in the bitter election of 1912. Despite the Democratic Party's lingering Jacksonian aversion to centralized authority, with the help of Woodrow Wilson and key party members, the Federal Reserve Act managed to get passed in 1913.

Overall I thought this book was pretty interesting. It kind of gets bogged down in the election of 1912, going over the political bargaining and fractionalism, most famously between Roosevelt and Taft. Although I think it might be because, being a Roosevelt fan myself, I've read so much about 1912 it's all very familiar to me at this point. The book kind of ends at 1913 with the signing of the act and with a very, very brief epilogue about how the Federal Reserve has grown beyond its mandate since then. I kind of wish there was more information about the Federal Reserve and how it's changed, but I guess that just simply wasn't within the purview of this book. It's fairly dry subject matter but if you're interested in finance it's a very interesting read.

- Kalpar