Customer Reviews

False Profits: Recovering from the Bubble Economy

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

 

 

I lost my job, modest home, and life's savings and now my family is split because of needing to find work out of state. Two jobs, working weekends, no vacations for what?

I had paid over 200k in interest payments to the banks and wanted to understand what the hell happened to the economy. This book did a great job of clarifying the causes of disaster. The housing bubble began in 1995 and will continue to decline.

A generation of people have been financially wiped out. If you are one of those, this book does a great job of explaining it. It helps to read it with a cocktail.

The author correctly points out that banker financed loans to speculators in the stock,money,and real estate markets were the main cause of the Great Recession.He correctly proposes,as Keynes did in the General Theory (GT;1936) in chapter 12, to tax stock market transactions and shows how England's miniscule 1/2 of 1 % tax brings in the equivalent of $40 billion a year.He correctly demonstrates that Greenspan,Bernanke,Paulsen,Geither,etc.,blundered again and again and again,ad nauseam ,in their policy proposals, recommendations and analysis.However,he fails to explain why they continually blundered .All of these individuals were ,and still are, believers in the Efficient Market Hypothesis(EMH).The EMH was the foundation for the VAR (Value At Risk )models that were supposed to safely allow for the complete and total deregulation of all money,financial ,and stock markets as the banking and finance industries substituted managed risk assessments using VAR in place of financial regulation.Both VAR and EMH are based on the false claim that the time series data in financial and stock markets is normally(log normally)distributed.Mandelbrot demonstrated in 1963 that the time series data followed the Cauchy distribution .He showed that the data was not even remotely normally distributed.Mandelbrot's demonstration means that financial market risk is greatly underestimated by the EMH and VAR models,as well as by the Capital Asset Pricing Model (CAPM),which all use some kind of normal distribution .The banking industry continues to use these models even after their complete failure.

I have deducted one star because the author has erroneously claimed that Keynes was in favor of deficit financing (pp.106-107,119-120).Keynes was opposed to any type of budget deficit aimed at promoting increased short run consumption spending as put forth by both the Bush and Obama administrations.Keynes favored " loan expenditure".Loan expenditure involved having the British Government stop adding to the sinking fund set aside to pay down the national debt and spend the funds on long run infrastructure investment projects.This would require two different budgets-a current account ,which would always have to be balanced, and a capital account which would fund public works projects that would end up paying for themselves over the long run.Only the capital account could run a deficit.Obama's stimulus package was just the kind of short run,pork barrel,consumption approach that Keynes opposed.Obama could have put the entire $780 billion into ,for example, long run transportation projects that would have really ended up creating jobs and improving to some moderate degree the current,slowly collapsing transportation system that in fact needs roughly $12 trillion to effectively modernize.
The author fails to come to grips with the fact that Obama is,and has been, allied with the big Wall Street hedge funds,private equity firms,and commercial banks ,whose speculative behavior has brought down the American economy,all his life.Obama is perhaps the ultimate false prophet.

Dean Baker, co-director of the Center for Economic and Policy Research in Washington, has written a brilliant little book on the cause of the US economic crisis. He contends that it is not a financial crisis or a credit crunch, but that the crisis' `fundamental cause [is] the huge overvaluation of the country's housing stock'.

From 1895 to 1995 house prices rose at the same rate as the prices of other goods. By 2002, they outpaced the overall rate of inflation by 30 per cent, although nothing had changed on the market's supply or demand side. From 1996 to 2006, house prices rose by more than 80 per cent.

The US Federal Reserve Bank (whose Board the banks control, by appointing their own regulators) fostered the growth of this $8 trillion housing bubble, after the $10 trillion stock bubble popped. $8 trillion of wealth, $110,000 per homeowner, vanished.

Baker writes, "The core problem is that the economy developed serious imbalances as a result of the growth of the housing bubble. In the short term, the only way to offset the loss of demand caused by the collapse of the housing bubble is through massive deficit spending. In the longer term, a reduction in the value of the dollar will be necessary to restore more balance to our US trade. However, the political elites, led by the managers of the financial industry, do not want to allow for a discussion that results in a policy prescription of large deficits and a lower valued dollar. Such policies would go directly against their financial interests and indirectly indict the policy agenda they have promoted for more than a decade."

The US Treasury lent banks $700 billion, with no conditions, like cutting bonuses, dividends or evictions. The Fed lent the banks another $1.6 trillion; the Federal Deposit Insurance Corporation lent another $350 billion, and the Fed another $150 billion through the bankrupt insurer AIG (including $13 billion to Goldman Sachs).

Obama let AIG executives get $165 million in bonuses: their contracts were sacred. Yet he told General Motors and Chrysler workers to give up health benefits they had worked 30 years for, and which they were guaranteed under union contracts.

Obama's $800 billion stimulus package, although a step in the right direction, was far too small, when the shortfall was $1.3 trillion. GDP must rise by 2 per cent to cut unemployment by 1 per cent.

Baker exposes Wall Street's scare stories about inflation and debt. He notes, "The well-being of future generations will depend on the health of the economy and the society that we pass on to them. If we maintain and improve the physical capital stock, ensure that our children get a good education, and act to protect the environment, they will be prosperous even if the United States has a large public debt. This country's period of greatest prosperity was in the three decades following World War II, when the ratio of debt to GDP began at 120 percent. Such a ratio translates into a national debt of $18 trillion given the size of the economy in 2009." Total US debt now is less than $11 trillion.

10 per cent unemployment equals a 20 per cent loss of GDP. He points out, "The country having to endure long periods of high unemployment is wholly unnecessary for the simple reason that we know how to prevent it. Ever since Keynes, we understood that high unemployment, as occurred in the Great Depression or what we are experiencing in the housing crash recession, is caused by a lack of demand in the economy. The way to address high unemployment is to create demand. In other words, the answer was and still is to throw money at the problem. ... Nothing is more harmful to the economy presenting a downturn than government spending cuts and tax increases that amplify the downturn's impact."

He argues that the USA needs more funding for national and local government programmes, universal health coverage, publicly-funded clinical drug trials, subsidies for public transport, support for creative and artistic work to be made freely available on the Internet, and funds for developing open source software. He proposes giving employers a tax credit to give their workers paid time off (tens of millions of US workers get no paid time off at all, no paid holiday, no paid family leave or paid sick days). Firms could cut working hours, without cutting pay.

The brevity of Mr Baker's books, for me, are indisputable proof of the depth of his knowledge and understanding.

We've all been led to believe that the great banking crash was due to 'miscalculations', and is far too 'complex' for us laypeople to grasp. Hardly. Since when is fraud & theft too 'complex' for us to fully comprehend.

Mr Baker, an imminently qualified economist, spells it out, in simple terms, what happened to everybody's money. For those of you who would like to understand what happened, & therefore be better able to see, and perhaps act to defeat, the continuing political hackery enabling this criminal activity, read this book. A small investment in time will yield a great profit of understanding.

This is an excellent book that makes it easy to understand these complicated issues. I learned a lot and can now explain it to other people. I highly recommend it to anyone who wants to understand our economy today and how we got here. The author also offers creative solutions to bring us out of this mess.

Dr. Baker's book offers a clear simple and compelling analysis of the source of the 2008 economic crisis - the unchecked development of a housing bubble from 1995-2008, and lays blame for failing to diagnose and correct the problem squarely where it belongs - on the economist profession in general and, in particular, on the Federal Reserve Board. As Dr. Baker demonstrates, there was sufficient evidence as early as 2002 that housing prices were inexplicably rising well beyond their historical pattern in the years 1895-1995. Dr. Baker helpfully demonstrates this point by citing us to his own article written in 2002 identifying a housing bubble and correctly predicting that it would inevitably burst. The Fed, he quite reasonably charges, had more than sufficient intellectual resources to do the same and, had it recognized the problem, had numerous tools at its disposal to deflate the bubble including warning the public that housing was overpriced, regulating the mortgage industry (which Congress gave it the authority to do in 1999, but it failed to exercise until 2008) or increasing interest rates. Instead Chairman Greenspan ignored the problem, and even famously denied that asset bubbles could be identified at all before they popped, since the price of an asset was, per him, whatever the market set upon it. Dr. Baker demonstrates convincingly that virtually all of the economic damage of the 2008 crisis can be clearly laid upon this failure of the economic profession and the Fed to recognize and correct the housing bubble. Bizarrely however, his cure for this problem is to punish the evil banks.

Say what? Why is the housing bubble and consequential economic crisis a "direct result of their (the bankers) greed and incompetence" if it was the economists and the Fed which failed to recognize the bubble or do anything about it? Why should bankers be supposed to know more about economics than the economists do? Is this not like blaming an airline pilot for flying on the day of a hurricane after the weatherman tells him it will be clear and sunny? And why exactly is it greedy of a businessman to want to make money? After all, I notice that Dr. Baker is not offering his book for free on Amazon.

Of course I recognize it is much more satisfying to treat the Great Recession as some kind of great moral failure of American business or better still as an indictment of capitalism in general. It is not nearly as fun to recognize it as simply a technical error by some very bright academics who nevertheless fell asleep at the switch, the solution to which need not be a wholesale reorganization of the financial industry so much as the appointment of Fed Chairman who can and will identify asset bubbles, and take steps to deflate them in a timely and orderly manner.

Europe had its lords and serfs, Russia had its peasants and czars, third world countries have their corrupt dictators, and the U.S. has the blue collar working class and c.e.o.s.

Dean Baker is correct in his analysis of the bubble economy. However, Baker is using the aftermath of the bubble to promote an even worse agenda than those who created the bubble.

Baker is an advocate of hyperinflation as economic policy. The government should print money. Its the old idea that savings are "greed" and that hyperinflation brings about wealth equality. But he never quite comes out and says it in that way.

The truth is that bubbles are created in the economy when government attempts to prevent an inevitable recession through FED policy and when government launches initiatives like the Iraq/Afghan wars without raising the necessary taxes to pay for them. What was true under Lyndon Johnson in the 1960s was true under Bush in the 2000s.

The only solution that will work in the long run is (a) putting an end to the wars (b) putting the US financial house in order, (c) cleaning house at the FED getting rid of all of the Greenspan cronies, (d) Getting economic policy out of the hands of wall street where it has been since the first time of Bill Clinton, (e) stop using stock market price levels to determine economic success and (f) time.

Is any of that possible? Probably not. The Obama Administration's entire economic team is from wall street. When the chance existed to get rid of Bernanke, he was kept. The Iraq war will continue for several more years and the Afghan war will continue forever expanded in direct proportion to the draw-down in Iraq.

The parts of the book that deal with how we got into the crisis are useful. However, Dean Baker has nothing useful to contribute on how to solve the current problems of the country. He is simply taking advantage of events to push an agenda worse than that of the "false prophets".

You'd better read this book right away because it will be out of date in three months. In fact, now that Congress has passed Wall Street reform legislation, it already IS out of date -- so don't read it at all.

"False Profits" is not a survey of the financial crisis and recession. It is a series of semi-stand-alone essays on the housing bubble, the bank bailout, and the stimulus package. Dean Baker grinds many axes. He ridicules mainstream economists for not seeing the bubble taking shape. He despises politicians for selling out to elites. He hates bankers (including central bankers) for obvious reasons. He dumps on the Obama administration for not pushing a stimulus package big enough to restart demand after the bubble burst. Accusations of bad faith abound.

"False Profits" is not a book you'll ever return to. (Just imagine articles from an opinion magazine cobbled into a book, and you'll get the idea.) Eighty percent of the economics is sound, but the snarky I-told-you-so tone is offputting, and the whole thing was clearly rushed into print to feed the market for books on the financial crisis. I read it on a plane flight. Even by the standards of airplane reading, it was lightweight.

That said, the title IS great. Anyone who wants my copy can find it at the Burlingame (CA) Public Library book sale. The price: $.50. That's just about right.