Executive Times






2008 Book Reviews


The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles R. Morris




(Highly Recommended)




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For a well-reasoned and thoughtful viewpoint and perspective on the credit environment, read Charles R. Morris’ new book, The Trillion Dollar Meltdown. Published in March, this book was not a rush job to explain the current environment with superficial specificity. Instead, Morris describes the policies and practices that swung the pendulum in one direction, and how likely it is that the pendulum will swing back. He presents the consequences of some dogmatic approaches to free markets, and what happens when leverage becomes too extreme. Here’s an excerpt, from the end of Chapter 8, “Recovering Balance,” pp. 167-169:

The Limits of Markets

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 spent 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.

The real premise of the Chicago-school argument for shrinking the public sector is the much shakier one that free markets always achieve the best outcomes. That claim, however, presupposes that economists can identify best outcomes. Market economists typically use the standard of Pareto opti­mality. (Vilfredo Pareto was a famous nineteenth-century economist.) A distribution such that no group member could be made better off without making someone else worse off is Pareto-optimal. The problem is that there are always many possible Pareto-optimal outcomes, most of them not very at­tractive. A society where everyone has equal wealth is Pareto-­optimal, but so is a society where one person has half of everything and everybody else has equal shares. In both cases, no one could be made better off without making someone else worse off.

Ever since Pareto, some of the world's greatest economists have tackled the distribution problem and have produced many interesting ways of framing the issues. But no one has come up with much that is of practical use. The data are in­tractable, analytic results are often self-contradictory, and even believers in the quest concede that the models make sense only in perfect markets, which is no place where people live. The fallback among free-market economists, therefore, is usually to adopt a total output measure, like GDP growth or national productivity, as a best-outcome proxy. But that re­duces competitions among social systems to the principle that the country with the most toys wins, which is ridiculous.

France, for example, has had lower economic growth than the United States for a number of years, even though hourly output per worker is roughly the same—it was a hair behind America's in the last competitive survey and was a hair ahead in the previous one. The French middle classes have smaller houses and cars than their American peers, but better diets, considerably more leisure time, and much more economic security, while the distance between the top and the middle is not nearly so wide as here. France is hardly a perfect country. Its unions and public sectors seem much too privileged, and racial issues are becoming much more intractable. But all in all, a lot of Americans, especially those who are not on top of the food chain, might think it's a pretty good trade.

In other words, it comes down to taste, and balance, and judgment. My personal belief is that the 1980s shift from a government-centric style of economic management toward a more markets-driven one was a critical factor in the American 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.


Any reader who has been confused by what happened in the credit markets in 2007 and 2008 will learn something useful on the pages of The Trillion Dollar Meltdown.


Steve Hopkins, September 20, 2008



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The recommendation rating for this book appeared

 in the October 2008 issue of Executive Times


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