Debt Spiral: How Credit Failed Capitalism [Hardcover]

Martin Lowy (Author)

Book Description

Publication Date: October 15, 2009

In clear and straightforward language, Debt Spiral tells the story of the financial crisis of 2007-2009 for non-expert readers. It is the first book to cover the many aspects of the history of the crisis. It focuses on public policy and the ways the U.S. Government s policies not only failed to prevent the crisis, but actually contributed to it.

Part I covers the history of the markets, the various types of banking institutions, and the governmental authorities. It covers mortgage lending, the ways in which the U.S. subsidizes mortgage lending, the Federal Reserve Board, the mechanics of securitization, the rating agencies, and the boom state conditions that set up the crisis.

Part II is the story of how the crisis unfolded in 2007-2008. It includes background sketches of the major firms that failed and a discussion of the difficulties that the Fed and Treasury faced in dealing with the crisis. It demonstrates that the U.S. Government was behind the curve and did not promptly take the actions that could have significantly reduced the eventual size of the problem.

Part III, called Taming the Debt Spiral, analyzes the events of 2007-2008 in the light of history. It includes a discussion of other writings in the field, which enables the reader to place the author's conclusions in the context of what other commentators are saying.

Excessive debt and financial leverage caused the crisis, as they have caused many financial crises in the past. Debt Spiral shows how this excessive debt and leverage are encouraged by U.S. Government policies and subsidies. Author Martin Lowy concludes that if Americans want to avoid recurrent booms and busts, the Government will have to stop subsidizing debt and, by encouraging debt, in effect encouraging excessive financial leverage throughout the economy.

Banks receive many of the subsidies that encourage debt. Some of these subsidies may have been appropriate in the past, but with 21st century technology, they are no longer needed. Eliminating these subsidies would be an important part of reforming the banking system.

Capitalism was not on trial, author Lowy concludes, but the crisis shows how the failure to regulate properly can lead to excesses. Competitive markets confer the benefits of capitalism, but competitive markets need government help to thrive. In particular, two natural tendencies of market participants have to be curbed: the tendency of competitors to collude; and the tendency of agents to pervert the market by acting in their own interests instead of the interests of the principals (and principles) they have agreed to represent. These are old problems, but many people who should have known better forgot about them.

Readers will enjoy a trip through the financial world with Martin Lowy as their guide.

Editorial Reviews

Review

Few thought it would ever happen again, but it has: a financial crisis so large and deep that it nearly brought the world economy to its knees. Since late 2007, the U.S. and global economies have suffered their largest downturns since the Great Depression, with bleak prospects for a rapid recovery.

How could something like this have happened? Wasn t our financial system supposed to be the most sophisticated in the world? Weren t we told that our banks were as well capitalized as they had been in a long time? Weren t the various automatic stabilizers and shock absorbers introduced since the Depression deposit insurance, social security, unemployment insurance, Medicare and Medicaid supposed to keep our economy from ever free-falling again?

Yes, yes, and yes but none of these facts were able to prevent the financial crisis and Great Recession of 2007-09. By now, if course, it is widely recognized that the rapid development and growth of the subprime mortgage market, and the widespread expectation of ever-rising residential real estate prices which it fueled, provided the spark for a major financial explosion when real estate prices in fact quit rising in late 2006. But the financial conflagration that followed would not have been possible without an extraordinary increase in credit, and thus leverage, throughout the financial system. As a result, when losses from securities backed by subprime debt began to mount, too many financial institutions banks included had too little capital to absorb the pain. National firefighters throughout the developed world, central banks, had to step in with unprecedented amounts of financial water cash to keep the financial firestorm from consuming the world economy.

If we are to have any chance of avoiding something like what has just happened from repeating, then we must first understand why why the subprime mortgage got out of control and why Americans and their financial institutions became too highly leveraged.

Martin Lowy comes to the task of providing answers with impressive credentials and much experience. For over 40 years he has studied and written about the nation s financial system, while providing legal counsel to many financial institutions. He has seen too many financial failures up close and personal. He never wants the nation to have to go through what it has experienced in these past few years.

He has brought this passion and experience to you, readers who want answers to the questions I have briefly posed here, and to many others he raises in these pages. Many of Mr. Lowy s conclusions are controversial (even though they are neither far left nor far right) and I do not agree with all of them. But he is right to focus on countercyclical solutions and on creating competitive markets. He also is right to closely examine government subsidies for banks and housing to determine whether they are warranted.

But regardless of whether you will agree with Mr. Lowy s conclusions, his presentation of the history of this crisis should be read by anyone who wants to understand what happened. He writes clearly, with humor, and in a manner that ordinarily intelligent readers can understand and enjoy. He focuses on and explains the main points about what happened: (1) the changes in the mortgage market and the rise of the originate to sell model, (2) the pivotal role played by the rating agencies, and (3) the importance of the leverage in the banking system and financial system more generally in transforming a mortgage market event into a worldwide systemic crisis.

The financial world is a complicated place, even after the meltdown just experienced. It helps to have a guiding hand explain it to us. Martin Lowy is an excellent guide, and this is his and your guidebook. Robert E. Litan The Kauffman Foundation The Brookings Institution --Preface to Debt Spiral

What a handsome and symbolically appropriate cover. The writing is vivid and clear (so rare these days), and the argument certainly persuades me. I hope this book gets the wide audience it deserves, especially among policy makers. Rosalind Rosenberg Professor of History Barnard College --Email from Prof. Rosenberg

About the Author

Martin Lowy, author of Debt Spiral and High Rollers, the acclaimed book on the S&L debacle, has worked in the banking field for over 40 years, as an adviser to banks, bank directors and regulators, as a senior bank officer, as a bank director, and as a commentator. Debt Spiral is his fifth book. His other books include Corporate Governance for Public Company Directors and the Practical Handbook for Bank Directors.

Mr. Lowy practiced corporate, securities and banking law in international law firms for twenty years before becoming a banker, economic commentator, and entrepreneur. He has served as Vice Chairman of a regional bank and as CEO of a high-tech startup.

Mr. Lowy not only knows the technical side of the banking and legal issues; he also has the practical experience of running private companies. He is an innovator and an independent thinker, and those characteristics make Debt Spiral the best book on the financial crisis.

Mr. Lowy is a graduate of Amherst College and Yale Law School, where he was Managing Editor of The Yale Law Journal.

Product Details

• Hardcover: 357 pages
• Publisher: Public Policy Press; First edition (October 15, 2009)
• Language: English
• ISBN-10: 0615318290
• ISBN-13: 978-0615318295
• Product Dimensions: 6.1 x 1.2 x 9.1 inches
• Shipping Weight: 1.5 pounds (View shipping rates and policies)
• Average Customer Review: 5.0 out of 5 stars  See all reviews (1 customer review)
• Amazon Best Sellers Rank: #5,729,650 in Books (See Top 100 in Books)

More About the Author

Martin Lowy, a native New Yorker, was educated at Amherst College and Yale School, where he was managing editor of the Yale Law Journal.

He spent the first 20 years of his career as a corporate lawyer, practicing as a partner at Hughes Hubbard & Reed and Gibson, Dunn & Crutcher. His main fields of practice were banking a securities law, with an emphasis on regulated institutions. In addition to representing banks, mutual funds, a major accounting firm and a large auto company, Mr. Lowy represented the New York State Superintendent of Banks in problem bank situations and represented the Federal Deposit Insurance Corporation in the liquidation of Franklin National Bank, at the time the largest bank failure in American history.

Mr. Lowy served on the staffs of several commissions to reform the banking laws in New York and nationally, and taught in the graduate banking program at Boston University Law School. He has served on the boards of directors of banks and corporations.

Mr. Lowy left the practice of law to become a senior bank executive. He served as vice chairman of a regional bank for three years.

After that tenure, the savings & loan debacle story attracted him. He found that the books being written on the subject were trying to sensationalize the story; the facts, he felt, were sensational enough. So he wrote High Rollers: Inside the S&L Debacle, a New York Times Notable Book of the Year in 1991. The U.S. Supreme Court cited High Rollers as the authority on the subject.

During the 1990s, Mr. Lowy founded a high-tech sports simulation company, which he ran for seven years, creating state-of-the-art games and making sales throughout the world.

Mr. Lowy's books include the Practical Handbook for Bank Directors (published in 1995), an acclaimed "how-to" book that is used in over 200 bank boardrooms, Corporate Governance for Public Company Directors (published in 2003), and Think Better Golf (also published in 2003).

He took a few years off, having such a good time playing golf and enjoying the Florida sunshine that he wrote no books for five years. But at the end of 2008, the financial crisis subject grabbed him, and he dove into Debt Spiral: How Credit Failed Capitalism full-time, resolved to bring to the economic crisis of 2007-2009 the same professional and direct approach that he took successfully in High Rollers.

Published in October 2009, Debt Spiral is, Martin Lowy believes, an important book. It is the first real history of the Crisis. It also extracts from the Crisis the lesson that America and Americans rely too much on debt and that the Government's various subsidies for debt are part of the problem.

At this writing, Debt Spiral has just been published.

Mr. Lowy already is at work on a brief sequel to Debt Spiral that will outline in greater detail the policy recommendations that appear in Part III of Debt Spiral.

Martin Lowy is neither a leftist nor a rightist; nor is he a wishy-washy centrist who advocates a little of this and little of that. He finds that both the left and the right have seriously flawed views of the economic world. His mission is to explain the economic world to the public so that they can see behind the various masks that ideologues adopt.

Most Helpful Customer Reviews

2 of 2 people found the following review helpful

5.0 out of 5 stars Financial crisis explained and analyzed for general audience January 23, 2010

By S. Kealhofer

Format:Hardcover

If you have been looking at books about the recent financial crisis, much of what you need to know about them can be deduced by the category of authors to which they belong. There are three main categories: professional journalists, academic economists and, lastly, all manner of political theorists. The first category has the advantage of having the most readable style, but unfortunately suffers from fairly superficial analysis and a "gotcha" mentality; the latter two, to the extent that they focus on the facts at all, focuses on them selectively and in the service of the authors' already established world views, some of which are pretty far out.

So, if you are looking for entertainment, or for something that supports your own views, these may do just fine. If you are looking for someone who is actually making an honest attempt to understand what is going on, you may be interested in Marty Lowy's book, Debt Spiral. Mr. Lowy is a lawyer, formerly involved in financial regulation, work that brought him into close familiarity with the S&L debacle, about which he wrote a well-reviewed book, High Rollers. However, from my perspective what makes him stand out is that he has a good practical understanding of much of what went wrong in this financial crisis, and that he has no axe to grind, either or for or against the financial system.

His overall conclusion: "The boom and subsequent bust were products of institutionalized fraud and collusion....A high percentage of the loans ... were bad from the start." How that came to pass is the subject of the book.

Mr. Lowy divides the book into three parts. His first part does two things. First, it provides a long historical perspective on a number of the major activities implicated in the current crisis, notably the mortgage market, the Fed and de-regulation. Second, he then turns to a more careful examination of more recent events: the run-up in home prices and the role of sub-prime and alt-a mortgages; securitization and the rating agencies.

The second part then explores events as the crisis began to unfold in 2007. What is distinctive here is that he addresses all the major events of the crisis and attempts to explain what happened and why. In some of these cases, he admits to multiple possible interpretations, but also does a good job of debunking some of the popular perspectives, for instance, that Paulson and Bernanke did not have the authority to rescue Lehman. On the other hand, what he does say reflects his typical common sense approach; "It was a difficult decision made under enormous pressure. I used to sell failed banks for the FDIC overnight. I know how little time there is for reflection." (p230).

The third part explores theories and remedies. He is careful here to include a wide range of views, some of them pretty far out, and he is judicious in his evaluations. This may be disappointing if you were looking for definitive answers to all questions, but helpful if you are really trying to sort out the crisis. A typical conclusion: "The divide between business interests and consumer interests - at least in the financial sector - turns out, I believe, to be a false dichotomy. The financial products that are bad for consumers ended up being bad for lenders time after time."

The book's style is down-to-earth, practical and easy to read. The author covers a lot of ground without being mind-numbing, and does a good job of explaining the jargon and financial details in every-day terms. Some of the things that I found most interesting and useful: (1) He makes a good demonstration that without money from mortgage refinancings, the economy probably would not have grown between 2000 and 2007. (2) He shows how well-intentioned government actions to support home ownership ended up playing a major role in the crisis, by subtly and not so subtly distorting the perception and tolerance for risk. (3) He doesn't pull any punches about bad actors in the system, but he also is careful to not engage in a witch hunt. Overall, the book reflects a lot of practical experience and much common sense. I have been recommending it to everyone who wants to understand what actually happened in the crisis.

It is both a strength and weakness of the book that it is targeted at a general audience. If you are interested in a really detailed or academic analysis of particular aspects of the crisis you won't find it here. The book does not employ much in the way of journalistic story telling, following key individuals at critical moments. No chapter here will be printed in the New Yorker. The closest he comes to that is the chapter on Washington Mutual. On the other hand, if you want to get a straightforward explanation of what an "alt-a" mortgage is, and why it matters, start here.