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4.0 out of 5 stars Excellent single-volume analysis, 29 Nov 2009
This review is from: The Meltdown Years: The Unfolding of the Global Economic Crisis (Hardcover)
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The author has successfully acquitted himself of a difficult task, namely authoring a detailed account of a historical event (the biggest financial crash in 80 years) that is still unfolding while he is writing. He has made sense of a news story that people have up until now only seen facets of due to its size and complexity. This is a challenging task - books on the Bernie Madoff affair are already out of date as the list of prosecutions grows.

This is not the first edition of this book, the first editions were in the authors own language, German.

He describes all the players in the current economic crisis without pointing to a single point of failure, although there are several contenders for the 'accolade'. This is more of a collective failure and he lists them all. He suggests also what should be done to reform the financial system to prevent a continuation or indeed a recurrence of the crash. He shows that this crash took decades to manifest itself as laws created in the wake of the Crash of 1929 were relaxed and repealed.

In summary, the banks overextended themselves by writing financial instruments that were outside the normal rules of accountancy, regulation and taxation. These instruments were sustained by a boom in asset prices which caused people to believe no downside existed until the point it became unsustainable. It appears that new mathematics seemed to indicate that any losses could be successfully insured against. Unfortunately for every person who makes money there has to be someone who loses it (money can't spontaneously appear unless a central bank prints it, as they have to do now) and this was ignored until it started to topple major financial institutions. It was a classic bubble that engulfed the whole world but the US and UK in particular. His clear writing style has resulted in a demystification of a complex topic that news organisations have tried and failed to perform.

Essentially all crashes are the same - money that people thought existed disappears into nothingness due to a change in sentiment or plain hard reality (millions of properties being foreclosed on at prices less than the loans paid out to buy them is a main example) and anything that has this non-existent money as the basis for its existence comes crashing down. The hard fact of a US deficit and a US housing bubble that burst had global repercussions due to the global nature of the financial system.

He views this as a systemic failure - a failure of systems and this is my main criticism of the book. He does not see that the people in these systems were motivated by self-interest and the lack of a personal downside. If you were creating a financial instrument that on the face of it was of high value and everyone who was involved, including asset rating agencies, was well rewarded, then your incentive to take account of risk will be absent. As it is, the major players in this crash have not experienced direct suffering - it has only been the little people, whose taxes (if they have not lost their jobs) are now being used to prop up the ruin.

It is a coincidence that I have been researching the origins of the First World War at the same time as reading this book. Here was a meltdown of the military variety. Although Princip fired the shot that started it all, it was the *will to fight* shown by generals in Germany, Austria-Hungary and Russia that tipped the balance from peace to war. All the decision-makers involved on the side of the Central Powers, who managed to survive the war, made good livings for themselves after Germany's defeat. It is however instructive to note that after the Second World War, with its consequent War Crimes Trials against the aggressor nations, that the number of wars of naked aggression has drastically reduced. The operative term here is 'moral hazard'. Political leaders and their leading soldiers know that if their behaviour goes beyond a certain boundary, there is a likelihood of prosecution at an international level. No such downside exists yet for well-rewarded individuals whose actions cause bank failures and financial crashes. At the very least, there should be legislation to claw back incentives and bonuses earned through demonstrably incompetent or unscrupulous behaviour. And this is being discussed right now.

This story is not yet over, but if you want to understand what went on up to the spring of 2009, then this is the book for you.
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