The Meltdown Years: The Unfolding of the Global Economic Crisis [ハードカバー]

The only financial reality is cash.

I was first taught this elementary wisdom nearly half a century ago, and here it is reinforced although not precisely so phrased. The author gets nearest to saying it when he quotes the source from whom I would most expect economic wisdom, the mighty Galbraith, who states that the financial market is entirely unsuited to innovation. The so-called innovations are almost entirely sleight of hand, and Munchau makes that abundantly and beautifully clear. The whole history of derivatives-gone-doolally is sketched in until we reach his publication date of mid-2009, by which time our own self-inflicted crisis is well and truly on us. And by long before then Munchau is ready to call the whole looking-glass world of Credit Default Swaps, Collateralised Debt Obligations and the rest of such gobbledegook a scam and a Ponzi scheme.

Let me make it clear that this book is a piece of analysis and not a sermon or a political tract. What superb analysis it is too. The bare bones of the matter, all the way from the basic structure of a balance sheet to the essentials of the most outre modern `instruments' are laid out with exemplary clarity. No political or ideological thrust is needed for it to be clear, just from a patient exegesis, that the banks and the money markets were operating a giant Ponzi scheme. As with Madoff, it was all dependent on fair weather conditions. As long as the economic bubble kept expanding people kept being paid out and those few who questioned the whole mad scenario in public were ignored or loftily dismissed, although there must have been many more who were silenced behind the scenes, as is the way of it all. When the bubble burst, or deflated with greater speed or less, it was Madoff all over again - nobody knows you are bathing naked until the tide goes out. When it went out, it was obvious (as it could have been long before if folk had been willing to see the point) that the emperor had no clothes, which is to say that many banks and insurers had no cash.

It is not particularly harmful to Munchau's very clearly presented case, but he gets tied up in his own terminology by looking for the `cause' of the present crisis. Talking about `cause' is a convenient way to talk, even in academic and scientific discussions. However when we try to press the expression to the point of identifying it with precision we find we can't do it, and Munchau can no more do it than any of us can. David Hume proved that for all time in the 18th century. Doing without this unhelpful word, Munchau's lucid reasoning separates the greater from the lesser elements in the vipers' nest of intertwined problems we have landed ourselves in. I'd say to any reader - take M's presentation of the facts and build your own reasoning on it. For instance, how crucial are trade imbalances between countries? I thought he was leaning one way for a while, but then he seemed to succumb to the traditional caricature of economists by leaning the opposite way. Usually he is less equivocal, and although he laudably views bankers claiming lavish bonuses as being of a social status roughly equivalent to that of child molesters, he has the fair-mindedness not to try to identify this phenomenon as a `cause' of the present crisis. At least he may have (if not a British resident) escaped the frequent ordeal of beholding Angela Knight of the woeful countenance lugubriously lecturing the large tranche of the British public struggling with losing their incomes or pensions or having their homes repossessed on how multi-billion bonuses to bank executives, paid out of taxpayers' money, should not be opposed by morally minded citizens.

Munchau bravely offers his own solutions or at least routes to a solution, and I don't feel like trying to assess these beyond saying Beware of the `experts' who will. In the first place the experts are no more free from prejudices and pet theories than anyone else, and in the second place the increasingly-used mathematical models are suspect and demonstrably so. This is not to disparage mathematical modelling, it is only to say that it is inviting disaster to pretend that we can quantify risk when a bit of common sense tells us that we can't, at least not when a Gordian knot of complexity has to be processed. Models of this kind can only be as good as the assumptions fed into them and a few minutes' look at some of the latter should warn us to be careful. There is an additional risk in trusting to processes that we don't understand, and it is an elementary fault of methodology to leave that additional factor out of the risk-assessment overall.

Munchau's own proposals rely rather heavily on international co-operation, and I don't wish to decry this view. I'm all for it but it's not unobvious that even within such a self-righteously trans-national co-operative model as the EU such values have to struggle, at least at our present level of maturity. Try selling the concept in practice to Frau Merkel. Myself, I'm attracted by a cruder plan, consisting of identifying and pillorying Ponzi schemes and any countries which use them. That is my own interpretation of what I have learned from this excellent book. As for the often-heard bleat that we should not deny bankers their bonuses, otherwise the best ones will go elsewhere, Munchau sees it off with magnificent scorn. Best at what? We've seen what they're good at and we don't need it.

Did you ever wonder why it was necessary for the government to bail out AIG? And what all those investment bankers did to deserve those huge bonuses? This is a book that will answer most if not all your questions about what happened and why.

The Meltdown Years, written by Wolfgang Munchau, a Financial Times journalist, is a very in-depth look at how close we came to a total financial meltdown. The book is not about placing blame for all that went wrong but for trying to understand the reasons for the crisis and more importantly what steps need to be taken to prevent future such events.

The book is divided into three major parts. Part one discusses the policies and events prior to the meltdown. This section contains many side-bars that explain how banks operate, the functions of the central banks and many of the more exotic credit instruments that were contributing factors in the financial meltdown.

Part two goes into great detail about the actual meltdown. While we all lived through it, for many of us the magnitude and implications of what was happening did not register. The author does a good job of detailing the events and how close we came to a total global collapse.

The theme of part three is why did it happen and what now. The author looks at the most popular suspected causes and discusses them in detail. They are: greedy bankers, hedge funds and tax havens, faulty risk models, financial deregulation and lax supervision, monetary policy and global imbalances.

He then discusses each suspected cause in great detail. The case of greedy bankers and their excessive bonus system "...was an important factor in this crisis. There is a strong case to tax these bonuses out of existence. But alas, the bonus system did not cause the financial crisis."

Wolfgang then goes on to explore the other suspected causes and develop reasons he thinks are the root cause of the crisis.

Although the book deals with concepts and terms that are totally foreign to most of us - such as CDS (credit default swaps) or CDO (collateralized debt obligations) - Wolfgang explains these terms and gives understandable examples. The book is arranged so that those familiar with these terms and concepts can easily skip the side-bar explanations.

The book was written in the spring of 2009 and although the author does not have the advantage of historical perspective, it is still a very important work. We need to understand that we live in a global society and what happens in China affects us. A large part of the crisis was because in America we were consuming on a level that was not sustainable.

You will come away with a much better understanding of what caused the crisis, you will be frightened about how close we came to total financial meltdown and you should have a better view of how to protect yourself in the future. We need to learn to see the signs and take action to protect ourselves.

We must learn from this crisis and begin to hold our leaders accountable. We cannot afford to have such a concentration of risk - such as in AIG or the other large financial institutions and hedge funds. We cannot afford to let financial institutions get too big to fail.

The book is easy to read and understand - but it is sobering. We need to be better educated and concerned about our financial institutions. This book is a great start.

I was provided a complimentary copy of this book by the publisher.

Wolfgang Münchau is considered one of the world's foremost experts on the Eurozone. He writes the European economic column of the Financial Times. He wrote in the Prologue to this 2010 book, "[The book] takes the reader on a journey starting in the early 1970s and ends in 2009, in the hope of presenting a broader picture of our crisis... [it] aims to furnish the reader with sufficient background knowledge to understand what happened, and to follow the present debate about the economic recovery, how to rescue the banking sector, and what consequences to draw for the future of financial capitalism." (Pg. 2-3)

He notes, "The buyers of these loans are the Special Purpose Vehicles (SPVs) mentioned earlier... The important thing is that the SPV does not appear on the bank's balance sheet. An SPV is therefore a nonbank, but part of the shadow banking sector. An SPV performs the function of a bank, and yet it is not regulated as a bank." (Pg. 67)

He observes, "Most economists, central bankers, and finance professionals looked the other way. And as for the general public, they had no idea that the credit market even existed. They certainly had no idea that it would soon blow up and so greatly affect their lives." (Pg. 94) He adds, "After the collapse of the credit markets in 2007, the blame game began... The rating system was completely discredited... the question arises as to whether a system that consists of the ratings and valuations of a small group of private companies is optimal." (Pg. 113-114)

He states, "When the big banks and insurance companies got bailed out by their governments... the top executives nevertheless insisted on their bonus payments... Bankers were so incompetent that they had to be bailed out by the government, and then they rewarded themselves for their failure. It is no surprise that this outrageous behavior has greatly contributed to what I call regulatory outrage." (Pg. 170)

He concludes, "the really good news is that the best talent of the next generation will no longer be devoted to moving wealth from one corner of the globe to another. There are more important things to do in the twenty-first century. Nobler tasks will emerge." (Pg. 222-223)

This "european" perspective on the fiscal crisis is very interesting, and will be of great value to anyone studying the crisis of 2008-2009.