Charles R. Morris' "The Trillion Dollar Meltdown"

This is one of the first books out that explains the current financial crisis. And, it is an excellent account. First, it puts it into historical context with a description of the 30 year cycles leading up to this latest University of Chicago radical free market era whose deregulation has led to a series of booms and busts dating back to the 1980s. This viewpoint is nicely summarized in the last paragraph of the book:

My personal belief is that the 1980s shift from government-centric style of economic management toward a more markets-driven one was a critical factor in the Americaqn economic recovery of the 1980s and 1990s. But the breadth of the current financial crash suggests that we've reached the point where it is market dogmatism that has become the problem, rather than the solution. And after a quarter-century run, it's time for the pendulum to swing in the other direction.

Here's another quote that summarizes his diagnosis of the problem:

The American regulatory scheme is based on the insight that government can best support financial markets by ensuring that investors get accurate information. ... After a quarter-century of antiregulatory zealotry, however, and a parade of fiascos from the S&L crash through the Enrons and WorldComs, and now the CDO mess, the credibgility of that system, and with it the attractiveness of American markets, is at risk.

Only the most invincible dogmatists could survey the history of financial booms and busts and come away with the notion that markets are always right.

For those who are convinced that this lastest boom & bust came out of nowhere, Morris has a nice bit of history pointing out that CMOs (Collateralized Mortgage Obligations) has a boom & bust cycle in 1983 to 1994. All the issues of tranches and computer models of risk went through a boom & bust cycle back then. You would think the regulators would have used that experience to make sure it didn't happen again. Oh wait... this has been the era of "government is the problem, not the solution" and "deregulation" so no lessons were learned. Instead, that cycle's bust whose losses were $55 billion were not learned, so we've done it again only bigger, so the losses this time are $1 trillion. As Morris points out:

Dogmatic market capitalists hailed the deregulation trend, none more enthusiastically than Alan Greenspan. In 1995, for example, Greenspan argued against margin -- or minimum capital -- rules on derivative positions. He claimed, implausibly, that a lack of margin requirements would "promote the safety and soundess of broker-dealers, by permitting more financing alternatives and, hence, more effective liquidity management." In the week before LTCM imploded, he told Congress, "Market pricing and counterparty surveillance can be expected to do most of the job of sustaining safety and soundness."

But as Morris points out: "... counterparty surveillance works fine, so long as you're willing to accept the occasional crash of "the economies of many natons."

This is an excellent book. It provides the background to interpret and understand the market turmoil of the last 20 years. It provides the history to give you perspective on the current mess and see that historical trends indicate that we will fix the mess and start a new boom under a new paradigm of government rule-making and oversight:

It is a canon of Chicago-school economics that government resource allocations always reduce productivity. As a blanket proposition, that's evidently wrong. The federal government lavished a great deal of money on the semiconductor industry and the Internet, for example, and we're clearly much better off for it. Since the beginning of the republic, public works investments -- canals, railroads, highways, airports -- have generally paid high returns. In the nineteenth century, a British parliamentary commission identified America's greater investment in public education as a major competitive advantage. Government spending, in short, is productive or not, depending on what it's spend on.

But there is substantive truth behind the detestation of public spending. It is that any privileged industry -- and public enterprises are prone to become privileged -- will eventually fatten to the point where it becomes a drag on, or even a threat to, the health of the economy. But that's a general argument about privilege, whether it arises from tax subventions or some other source. The financial meltdown chronicled in this book was to a great extent the consequence of coddling our financial industry, fertilizing it with free money, propping it up with unusual tax advantages for fund partners, and anointing it with fresh funds whenever it stumbled or scraped a knee.

This is an excellent book. But to fully appreciate it, you need a book like Naomi Kline's The Shock Doctrine: The Rise of Disaster Capitalism to understand the social harm that ideological "free market" capitalism has done: tens of thousands killed and hundreds of thousands imprisoned to make the world ready for the joys of a "free market". Or as the Latin American's discovered: people must be imprisoned so that markets can be free.