Customer Reviews

Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street

5 star:		(20)
4 star:		(10)
3 star:		(4)
2 star:		(1)
1 star:		(0)

 

 

The best books about the financial crisis share three characteristics: thorough research, stylish writing and a unique slant. The story is too big and complicated for a straightforward history, at least until we have a few decades of perspective. In The Big Short, Michael Lewis focuses on a few offbeat portfolio managers, Justin Fox in The Myth of the Rational Markets goes deep into intellectual history and interviews many of the people who invented the theories. The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It by Scott Patterson worked from the equations out. Glenn Yago and Franklin Allen's Financing the Future traces the story from prehistory into the future and emphasizes the positive side of financial innovation as much as the negative side.

Capital Offense joins this select group. It's a pleasure to read, the writing is smooth and clear with occasional touches of poetry ("a vast demimonde of massage parlors and escort services honeycombs mid- to lower Manhattan") to savor. The extensive interviews with the major movers and shakers during the crisis are interwoven with the skill of a documentary filmmaker, letting the participants tell the story in their own words, yet providing the framework so it's as seamless as reading a novel. It differs from other accounts from reporting exclusively from the perspective of Washington. When other accounts go there, as in Hank Paulson's On the Brink or Simon Johnson's 13 Bankers, it is as tourists reporting an exotic foreign locale. Michael Hirsh writes like an experienced insider.

The book is the best popular account we have of the destructive power of the crony capitalist financial-regulatory complex. The one glaring flaw is that the author consistently describes this as free market capitalism. Ironically, he even quotes Raghuram Rajan and Luigi Zingales (Saving Capitalism from the Capitalists) as saying free market capitalism's enemy are hypocrites "extolling the virtues of competitive markets with every breath while trying to extinguish them with every action." The simple fact is that every major regulated financial institution in the world either failed or would have failed without massive and unprecedented government bailout, a bailout which exceeded the financial capacity of some governments, and severely strained the rest. It was the bond salesmen and investment bankers, working with lawyers, lobbyists and regulators, who created the monster, not to mention the pieces like Fannie and Freddie created directly by politicians. Unregulated institutions, like hedge funds, mostly did fine and when they didn't, they quietly liquidated and returned remaining funds to their investors, without asking for bailouts or imperiling anyone else. How promoting the same regulators and giving them more powers over the same cronies who needed bailouts, while extending regulations to the entities that caused no harm, is going to make things better is something you have to live in Washington to understand.

Hirsh refers repeatedly to lobbyists for free markets. People who want free markets incorporate offshore, they don't pay lobbyists. Lobbyists claim they want "deregulation" (or if it's more popular at the moment, "regulation") but it always comes down to the same thing. More freedom for their employers to do what they want and reams of cumbersome regulation to quash competitors with fresh ideas or lower prices. Sure the big banks could do more things with less capital in 2005 than 1995, but there were more pages of regulation, stricter rules, more expensive compliance, greater restrictions on competition, more guaranteed profit for politically-favored institutions and more rules for small and independent companies. And, of course, more regulators with more powers.

On several occasions Capital Offense tries to be even-handed by showing the good done, say by venture capitalists, to offset some of the harm from big bank failures. But venture capitalists didn't need bailouts, and they didn't hire armies of lobbyists to lock in profits and lock out competitors. Venture capitalists are part of the free market, crony capitalists have no taste for the innovation and risk required for successful venture investing.

The book even blames the Great Depression on "laissez faire thinking". But it was a worldwide phenomenon, hitting communist, socialist, absolutist and medieval economies as well as capitalist. Or "Americans' insatiable spending habits" are blamed for siphoning savings from the rest of the world. In fact it was mostly Chinese and oil producer government restrictions on allowing their own citizens to save or invest export profits that pushed the savings out. American consumers were willing to borrow a portion of it, but nowhere near enough to satisfy demand. That's precisely the reason people created complicated structures to make long-term risky assets, like subprime mortgages and leveraged loans, look like the short-term low risk assets foreign investors wanted. If American consumers had really been insatiable, and willing to supply short-term credit card debt, there would have been no securitization crisis (there might have been a different crisis, but generally overspending resolves itself painfully and smoothly).

One last example of the confusion between free markets and cronies is the account of Silver Thursday in 1980. The major Wall Street dealers were all short silver and losing institution-threatening amounts of money. Since dealers control the exchanges, they did what exchanges have done since the Paris Sugar Bourse in 1905, they decided to bankrupt their customers rather than themselves (this is a fact overlooked by people who want to move all trading on to exchanges, there are perils of both over the counter markets and public markets). They passed "Silver Rule 7" forbidding anyone but a short from buying silver, doubling the margin requirement on the long holders and eliminating it for themselves. Their friends in the Commodity Futures Trading Commission reinvented the rules to claim the largest long holders, the Hunt brothers, were engaged in an illegal corner. This was nonsense (although the Hunt brothers did violate another rule, they controlled 6.5% of their broker Bache and did not disclose that fact as required; but this had nothing to do with the silver market). Here we have a case as obvious as an old Soviet show trial of the crony capitalists using political muscle to crush the free market, but Hirsh sides with the victors, calling it "a clear-cut case of manipulation, which was illegal."

None of this detracts from the book, as long as you substitute "crony capitalism" every time you see "free market capitalism" and "financial-regulatory complex" every time you see "Wall Street." This is an excellent account, chilling and damning in the best muckraker tradition, with the best evidence coming from the mouths of the cronies. It also gives some clear ideas for how to make things better in the future. The only problem is the author has been so long in Washington, he can't tell the free market from a cynical slogan used by a paid shill.

Ever wonder how America got into the fine economic mess it's in? "Capital Offense: How Washington's Wise Men Turned America's Future Over to Wall Street" tells you right in the title. Somehow Washington has confused what's good for Wall Street as what's good for the national economy.

Author Michael Hirsh takes us to the root of the problem going back to the fall of the USSR, the charismatic economic guru Milton Friedman and a political climate where both parties dismantled the organizations that policed Wall Street (making the same mistake that occurred just prior to the Great Depression)going as far back as the Reagan Administration. The absurd idea that any company will police itself and that it is in a company's best interest to be honest and produce good products without flaws is at the heart of the deregulation of Wall Street allowing the creation of products that increasingly became so complex that it took people with advanced degrees in mathematics to understand them.

Hirsch creates a breezy surprisingly enjoyable reading experience for a neophyte like myself who wouldn't claim to understand every element of our complex economy but who has enough common sense to recognize if you leave money out without any supervision, someone will steal it. While we had economic gurus like Greenspan and Friedman pushing for less and less regulation, we saw more and more money being put on the table. I won't pretend to understand the complexities of derivatives or how Wall Street packaged high risk commodities without full disclosure but Hirsh's book made me aware of enough of the foolishness in Washington from lobbyists lining the pocket's of those in Washington to folks like Rubin discounting alarms raised by Born because of their sex or simply because THEY didn't come up with it themselves. Ego drives the economy and it also can drive us to disaster.

Hirsh's book gives us the history of how America thrived under Keyesian policies, continuing to thrive under Friedman's philosphy until lobbyists and the government proceeded to dismantle the departments that policed Wall Street. As the products became increasingly complex where Wall Street often didn't understand them and higher risks were taken, America's economy began to fall apart culminating in the collapse of major banking/investing institutions. Often full disclosure as to how high risk the investments were might not be dislcosed (which, for example, caused the investments of an entire city in Ohio to be worth nothing)putting cities, states and investors at risk for major losses.

For example when Brooksley Born the chairwoman of the Commodity Futures and Trading Commission became alarmed by the size and lack of regulation (as well as understanding) of the derivatives market and the big Wall Street firms involved in marketing these to investors, she went to Bob Rubin. She was also concerned tha Congress was going to be passing more resolutions "freeing" the Wall Street giants allowing tehm to play fast and loose with trading derivatives. She found herself attacked by Bob Rubin (and sexism reared its ugly head as part of this attack because she was a "woman" trying to prevent disaster in a "man's market")and found his and other departments in the back pocket of Wall Street (or departments run by former Wall Street CEO's)trying an end run behind her back to prevent her from doing anything from preventing the looming economic disaster she warned her colleagues and superiors about.

It's easy in retrospect for those who prevented Born from doing her job and protecting our national economy to claim they didn't see the disaster coming but the irony is that they were TOLD by someone they discounted without looking into her evidence. They chose to remain ignorant and blindly led the U.S. economy into the worst meltdown in decades by refusing to remove the blinders that industry cheerfully provided them with.

Hirsh makes a compelling argument for the conflict of interest of pulling individuals from industry to oversea our economic policy. He documents how the disaster occurred methodically and with detail. He's also pretty fair balanced in terms of assigning credit where its due to those who helped avert disaster and led us right into its mouth.

Recommended.

I've tried to slog my way through a few different books about the economy and have always ended up getting lost in the intricacy of the story or the dryness of the storytelling. Capital Offense manages to avoid either one of those failings and excels at telling the story of how we got where we are today.

Hirsh covers the past twenty years in well-researched detail that highlights the key players, the leading beliefs and the major stories that bring us around to today. Some of the characters are familiar, some are not, but they all weave together to create a story that is both interesting to read and startlingly eye-opening. I found myself at times outrage, others saddened and often frustrated, but that is how I can always tell that a story is good - it rings true, it is well documented and it is engaging. I took several weeks to pour through this book so that I could fact-check and cross-reference and I found this book to be, for the most part, incredibly accurate and free of the party-line pandering. Hirsh hands out blame without being accusatory to Republicans and Democrats alike. He paints no one person as the ultimate villain and he evenhandedly deals with some of the worst offenses (maybe sometimes TOO evenhandedly).

Overall I would tell anyone that they must read this book. It is imperative that we understand what happened and what is happening if we are to ever fix it, and Hirsh gives us the knowledge nececssary to make it happen.

I am worker bee in the world that Hirsh discusses. My job is--and long has been --to work out [resolve] non-performing commercial real estate loans..including the securitized loans that are a symptom of the malaise this book dissects. I am not at the top of the profession by any means, but then I am not a processing clerk either. Hirsh's assessment of the last 30 years of the relationship between Wall Street and Washington, and the underpinnings of How We Got Into this Mess reflects some of the things I have watched and thought about for a good number of those years.

Why 4 stars: This is an excellent overview of recent economic history and the immense psychological dimension of the modern economic zeitgeist. We, as a society, tend to take the word of the Man of the Hour, and fail to do the homework --the grind of critical thinking -- that should keep us from the worst excesses. Hirsh describes the move from a regulatory environment to believing that Wall Street's Masters of Universe really are (as they believe they are, I assure you) the best and brightest of us all. American (and, I assume, every other country's) economics cannot be divorced from the personal abilities and flaws of the prime movers: we read the quarterly financials without wondering what, exactly, produced those results. On one level, it is the arguments between the value of macro economics and micro economics. Is the devil in the details (as I believe it is and Hirsh comes to believe)? Specifically, Hirsh describes dominance of the macroeconomic view of Milton Friedman, its influence on Alan Greenspan and Richard Rubin (and his ideological successors Rubin, Sommers and Geitner)versus the more subtle microeconomics of Stiglitz. Better yet, he understands that the best minds in any field come with their own baggage: points of view, personal relationships -- and the willingness and necessity that requires the intellectually capable to bow to power. People like Sommers and Geitner who are more than bright and able changed their avowed beliefs because the corporate results suggested they were wrong--or because their road to personal success required a different intellectual point of view. In other words, did they sell out? (And, to be, fair, wouldn't you do the same?)

On another level, it is the description of how far removed from our (naive) ideas of democracy that the economic activity of the planet really are. We cannot vote away our economic problems.

Mr. Hirsh accurately describes the arc that moved from the regulatory environment born in the Great Depression through the acceptance of 'free market' capitalism that deregulated economic activity throughout the world -- and the dizzying interrelationship of global activity -- that has returned us to the conclusion (70 years later) that regulation must return to the market place. We are in the middle of the Great Recession, he argues, because we refused to admit that we did not, perhaps could not and will not understand the underpinnings of our own markets. It is a very convincing argument.

The current turmoil is not the result of a political affiliation--Democrats and Republicans both bowed to the quants (geeks) of Wall Street because, initially, the results were so spectacular: returns on investment through increasing arcane (and increasingly weak) vehicles fueled belief. We stepped away from the the 'how' of the numbers and believed only in the stats. Our economic wisdom became shallow.

There is nothing wrong with asset or mortgage securitization per se...as in anything else, it is when a good idea is pressed to its extreme (e.g., CDOs) that it fails. Moderation is unattractive because excess --briefly -- is so spectacular. (A principal, I submit, that has so many applications: witness a reasonable sense of conservatism with the excesses of the Tea Party).

Why this book is not 5 stars: I just wanted a few more footnotes. OH! you groan, footnotes!! What could be more dull? What I want to know is the basis for the conclusions--or often just a suggestion of a conclusion -- that Mr. Hirsh reaches. He is an intelligent and cogent writer with a sense of urgency that propels the reader along, and that is fine. But a note or two to ground his conclusions in research or at least an identification of sources, would ease my mind. There is nothing in the book that suggests that Mr. Hirsh has misstated anything but there is a whiff of hyperbole that the well placed explanatory note would go far to resolve.

He would have gotten another star for better explaining some of the financial products. I have a very mild advantage because I have worked with these products. I suspect bright and capable readers without the same background would have more difficulty in understanding Hirsh's descriptions of the products that greased the skids to the recession.

This is nonetheless a very good overview of modern economics and a worthy -- if not always easy -- read. I want to read another book on the same topic by another writer to expand my understanding of the issues, but this one is a worthy addition to the bookshelf that helps to explain us to ourselves.

My conclusion: The issues are complex enough, and insulated enough from the political process, to prove that once again, voting for your favorite candidate has nothing to do with it. Our elected representatives, on the whole, don't or won't understand or address the Really Big Issues either. These are not simple issues and there is no simple solution. But this book helps in our understanding of the problem.

Capital Offense is a book that focuses more on the broad array of personalities than the others I've read in the "how the financial crisis happened" genre - in particular on the leading policy makers of the last couple decades. The authors primary cast of characters includes Milton Friedman, Alan Greenspan, Robert Rubin, Larry Summers, Joseph Stiglitz, with copious biographical information included for all of them.

I will readily admit that I've not been a student of economic history and as such don't really know all that much about the individuals who have shaped it over the years. One of the things I found most interesting about this book was the discussion of how the economic philosophies of Milton Friedman and Alan Greenspan were developed and shaped.

The basic theme of Capital Offense is the growth then dominance of free market thinking in US and global policy making, starting most powerfully in the Reagan era and progressing right through the intervening administrations and into the Obama presidency. Hirsh points to Friedman as the leading initial force of this movement, but seems to be hesitant about actually blaming him for what he calls the free market zeitgeist that created the financial crisis. He is not, however, shy about placing that blame firmly on Alan Greenspan, Robert Rubin, and Larry Summers for their attitudes to regulation and actions to reduce its impact on the markets.

Interestingly, Stiglitz is portrayed as the hero of the period because he had it right in terms of seeing what was to come, but was generally marginalized when it came to actually being a part of the policy mechanism. My one little issue with that is the implication he'd have been able to get the policy right given the opportunity. Maybe he could have done. We just don't know.

The author leaves us with a critical view of the Obama administration in how it features many of the same individuals who were integral in the way the free market mantra was so entrenched during the Clinton administration and how it's missed opportunities to enact needed change to the financial system. He doesn't leave the reader feeling very positive about future prospects.

Overall, I found Capital Offense a very informative and engaging read. I definitely recommend it to anyone looking to get a look at the underlying economic philosophies which brought us to the current point.

Michael Hirsh's "Capital Offense" is a great backgrounder to readers who only just learned of the world financial system as it melted down in 2008.

Hirsh, a veteran Newsweek reporter and Washington insider, tells the story of the financial crisis from the beginning as he sees it: with the emergence of Greenspan as Fed chairman and the 1980s Reagan Revolution timeframe. The writing, sometimes segueing very awkwardly into related topics, carries on through the 1990s as President Clinton tacked ever more rightward politically (and was ever more congenial to the zeitgeist of giving the financial sector everything they wanted) and on to the lost decade of the 2000s, where history was repeated as farce and everything came crashing down.

"Capital Offense" is an engaging and interesting narrative, yet like so many others Hirsh can never quite accurately define what exactly a "derivative" is. He gets around it, near it, but not exactly to the point. The book ends in 2010, and many events recently reported in the news will fit into the larger context of one of the most devastating events to occur in the last seven decades. Hirsh writes with the viewpoint of a Beltway insider but without fully succumbing to the accepted consensus.

I've read at least ten books now on what led to the collapse of the housing market and the credit crisis and this ranks up there both in content and readability. Many writers have tried to straddle the line between providing enough detail and keeping it interesting enough so folks outside economics will read it. Few succeed. This ones does so, along with simplifying complex ideas for laymen.
If you have more than a passing interest or have read other books and want another viewpoint (as I did), this is a great addition to your financial bookshelf.

I am not an economist nor a student of the economy. I got this book because I am always fascinated about the whys and hows of the government and its interplay with the powerful men(and sometimes women)of Wall Street. I also got this book because I have been reading Hirsh's columns and stories in Newsweek for years.

This is not an easy book to read if the reader has little understanding of how the economy works. It does a very good job of explaining the market especially derivatives but it is heady at times. The book goes all the way back to early 20th century and gives background on the economists and their philosphies and how they shaped our current economic system. Suffer through this and get to the meat of the crisis. It spends a great deal of pages on the past twenty years starting with the end of Bush 41's presidency and going through mid 2010.

The author does an excellent job explaining how we got to where we are now with the housing crisis, the bail-outs, the global crisis, and the stagnant economy. It is a book that will make you angry and more than a little concerned that we can go down this path again because we are repeating some of the same mistakes that got us where we are today economically and politically.

It is difficult for this reader to know what has been embellished and what is pure fact because of my lack of knowledge of the workings of the economy and the market, but this is the perfect book to begin that education.

I had high hopes for this book but low expectations. While the subject matter seemed fascinating, it also seemed like the kind of thing that would make for a turgid, uninteresting read.
Michael Hirsh's career as a journalist gives him the tools to create a really, truly, compelling story that is dramatic without resorting to drama: Really.

I'm sure other reviewers will go into great detail about the contents of the book. Suffice it to say, on my part, that the author successfully attempts to create a coherent storyline about the triumph of Wall Street finance or 'new economy' over the industrial old beginning with the presidency of Ronald Reagan (although the seeds were planted earlier by M. Friedman) continuing through to the present day.

He uses the recent financial crisis as the backdrop to this story (yes, I know, some would say that this book is actually all about the recent financial crisis -trust me it is not-as he paints a picture of the mechanisms and agents by which Wall Street trading houses were able to gain primacy over our entire financial apparatus. The author masterfully creates a story filled with unlikely heroes and villains as he recounts the incremental steps necessarily made that resulted in the full blown financial meltdown that was George Bush's grand finale in a series of very spectacular cock ups that have arguably cost our nation's singular place at the apex of the world (some would argue it, anyway, I'm not so sure), and which has colored and is going a long way toward defining Barack Obama's present administration.
Some of the stuff revealed in this book is absolutely toe-curling, and causes one to gnash one's teeth in anger and frustration, and when it is not stirring up one's emotions it is certainly keeping one's interest by its interesting and lively narrative.

I think this book is a must-read, even though it causes one to feel frustration and anger, and ultimately sadness because of the conclusions it draws and one would be hard put to disagree with.
Interestingly, Mr. Hirsh seems to have captured that ironic sense of ennui which Obama's administration manages to generate two years in to his term. Funnily enough, George Bush gets very little coverage which is nevertheless just the right amount; it is as if his two terms in office speak volumes all on their own.

As a footnote, it was gratifying that Mr. Hirsh mentioned a personal hero of mine, Paul Volcker, I wish he'd written a bit more about him in the hope that Mr. Obama could read it.

An important and timely look at how Washington and Wall Street, over the course of several administrations, lifted the Depression-era safeguards on our economy and watched as our public and private financial sectors ran into deeper and deeper trouble. This book is written in laypeoples' language but it shows just how the banking, securities and government communities made key decisions, by key players who moved back and forth between those communities, from the Reagan years on. We watch the personalities, vividly sketched -- Milton Friedman, Alan Greenspan, Brooksley Born, Robert Rubin, Paul O'Neill, Joseph Stiglitz, Timothy Geithner, Hank Paulson, Larry Summers, Ben Bernanke, even Ayn Rand -- the theorists, the participants and the Cassandras. Many of these players are still trying to cope with this mess; here, we learn how they came to this.

Above all, it showed how capital became distorted, and undermined, rather than drove, the U.S. economy. The author summarizes it brilliantly. "Finance had once been a means to an end: the growth of the real economy. Banking had once served industry and services. Even in the robber-baron era ... they had sought to add value; they had created growth and jobs. Now finance had become the end, and the real economy was subservient to financial services . . ."

The book was written before the latest fiasco in mortgages and foreclosures, but having read this book, that fiasco is something the reader can understand. What the author did know when he wrote the book was that the Obama administration, whether or not it inherited these problems, is already in an unequal fight. It's due in no small part, as the author shows, that Wall Street and Washington are badly intertwined -- and discredited.

A readable and important summary of how we got in this fix. One day, a masterly study like J. K. Galbraith's The Great Crash: 1929 might put a more-nuanced view, but that will require more hindsight -- and a comfortable distance from this uncomfortable time.

Highly recommend.