Customer Reviews

Financial Fiasco: How America's Infatuation with Home Ownership and Easy Money Created the Economic Crisis

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Having read the Swedish version of this book I have to say that it is one of the most complete and convincing books on the financial crisis that I have read.

It covers the role that both the state and the market play in this crisis.

On the behalf of the state in the form of the Federal Reserve pumping out liquidity at an incredibly low interest rate as well as in the form of the failed mortgage institutes Fannie Mae and Freddie Mac issuing loans to people with doubtful payment ability.

And on the behalf of the market in the form of the investmenk banks such as Bear Sterns, Lehman Brothers and Merrill Lynch in investing tremendous sums of money in complex products based on these mortgages that turned foul.

The book argues that it is the short-termism of both the politicians as well as that of the investment bankers that have played a major role in creating this crisis. It also argues that many of the actions implemented by american politicians to save the banks are short-term, have a rather small effect on the economy, costs a lot of money and send the wrong signals to investors in the future.

The book covers a lot more than what I have been able to summarize here, and feel free to add further information on this book, but all in all it is an entertaining and enlightening read that I advice everyone wanting to understand this financial crisis to read.

Just finished this book and cannot describe how good it is...truly fantastic. I have been in the bank regulatory, banking and investment management fields for 25+ years and this book summarizes where we stand in the US and global economies. The insights provided should shock most readers but I can attest to the fact that Mr. Norberg is spot on. He outlines the formation of the current "crisis" starting with the Hoover administration and ties in CRA, Basel I/II, MTM accounting, quant risk management, and most importantly, the regulatory environment that spawned this mess. Would give it 6 stars if I could...it's that good!!

This book includes some of the best writing on the financial crisis I have seen yet. It is less than 200 pages, yet I feel I have gained the knowledge of a 1,000 page book. Despite its short length it manages to cover all angles. A major focus is the role of federal reserve policy in creating the artificial boom. Also covered are developments in international accounting standards, explanations of derivatives, discussion of the global savings glut, analysis of US housing policy, and critiques of the bailout and stimulus packages. One bonus is that this book offers a much more international perspective than many American authors provide (the author is Swedish). This book is a must read and a great resource to own. I'm sure I will be referring back to it many times in the future. I couldn't recommend it more.

There is much confusion over the Subprime Boom and Crash. Politicians and pundits alike blame the recent crisis on greedy bankers and investors, who were set loose by deregulation. Norberg exposes a critical weakness in the aforementioned 'blame deregulation' mantra: it is more mythological than factual.

Norberg makes it easy to fathom fairly complicated issues. This book goes into a fair amount of detail, without being dry or ponderous. More importantly, it makes it the role of Federal policies in creating this boom-bust cycle clear. This book focuses heavily on how various regulations drove the Subprime Boom and Bust. Federal Authorities set targets for mortgage lending, regulated accounting procedures, and influenced credit rating. Local authorities set restrictions on new home construction. The Federal Reserve provided financing. It all ended in disaster.

I would have liked to have seen a little more explained on how the Fed financed the Subprime Boom. There was also little mention of Federal Deficits in the past decade. However, its explanation of micro-regulation in the Subprime Boom is excellent.

Norberg does not let private industry off the hook. Mistakes were made, especially by greedy persons at AIG, Bear Sterns, and Lehman. Yet we must realize that Federal Authorities stoked this greed with easy money channeled through regulations. The sad truth is that many people simply accept the 'blame deregulation' mythology advanced by persons like Naomi Klein, Michael Moore, and Barack Obama. Financial Fiasco is a good antidote to all the misinformation in circulation. Unfortunately, too few people will read this book.

Norberg provides a concise summary of the drivers for the most recent economic collapse. I recommend it to everyone, but especially to those who seek to establish better regulation for the financial sector.

My favorite quote: "Capitalism without bankruptcy is like Christianity without hell - it loses it's ability to motivate humans through their prudence and fears."

This is a fantastic book. Very readable. Norberg explains the background and details of the meltdown extremely well. Here is my take: I have read a number of books on the meltdown and I feel the reason it happened: mixing socialism with capitalism. The politicians really pushed mortgages for low income people through the Community Investment Act and Fannie and Freddie. Fannie and Freddie guaranteed and/or securitized nearly half of the mortgages in the country by 2005. Everyone wants to blame Wall Street; however, I feel it played a secondary or smaller role. After all there is nothing inherently wrong with securitizing mortgages (in fact it is something very desirable). Also, there is nothing inherently wrong with credit default swaps which are just insurance and play a very useful role. The main underlying culprit is the fact that banks were issuing mortgages without down payments, without income verifications, interest only, etc. And this happened with millions of mortgages, not thousands. Add to this the fiasco of the rating agencies and even a 10 year kid can figure out that something like this will create disaster. However, no one seems to be talking about the real reasons for the meltdown. It is always those horrible, greedy Wall Street bankers. For some reason these people don't even know how to defend themselves.

Also, there is one thing that I don't seem to understand - perhaps someone can try and explain it to me: why would interest rate cutting lead to irresponsible lending. It is like saying if gas prices are lowered then people will drive more irresponsibly. If the interest rate gets lowered then more people can get mortgages. Now as long as those mortgages are given with responsible lending practices like income verification, proper down payments etc. there shouldn't be any problem - the default rates should be within a normal range.

There is one more point which I feel has not been analyzed in detail: very large players like Fannie and Freddie with their quasi govt. status and implicit guarantee distort the market's risk assessing ability. In perhaps a similar way if the government starts offering health insurance and starts competing with private health insurance companies, it will distort the entire health insurance market with possibly some very bad consequences.

For readers of similar books that chronicle the economic meltdown and the collapse of the investment banks, Norberg treads over some familiar ground. But his handling of it is almost clinical: the actions of the Federal government, its regulators, the investment banks, the ratings agencies, and Fannie/Freddie/FHA made the outcome completely predictable. You're fat because you eat too much and you don't exercise; it's simple. And if the financial system of the entire Western world becomes dependent on the explosive growth of loans to people who can not pay them back -- and if hundreds of thousands of Wall Street executives, mortgage bankers, and ratings agency employees are paid titanic sums of money to keep the wheel turning just one more day -- it will crash. What's remarkable is that it went on as long as it did.

It's a great read, but the best part, for me, is his dismantling of two well-established myths. The first is that Herbert Hoover was merely a spectator in his own fate, leaving market forces to wreak their havoc on an economy that was screaming for intervention that he refused to provide. It is the furthest from the truth, and the fact is that the interventionist policies pursued by Hoover and Roosevelt combined to make the Great Depression last far longer, with effects far deeper, than necessary. Amity Shlaes, a Bloomberg correspondent, wrote a devastating book, "The Forgotten Man"--which is the simply one of the finest economic history books ever written. "Forgotten" lays out the same case, though over a couple of hundred pages.

The second myth is that Bush was a small-government deregulator. Under George Bush's eight years, the size, the cost, and the growth of government exploded, and with it the mission of home ownership at any cost. Die-hard Bush apologists will find some of the reading very painful, particularly the attempt at window-dressing after the fact as the Administration attempts to play the we-told-you-so game on Fannie and Freddie, only to reward the companies with giant, taxpayer funded bailouts, as well as the machinations of Paulson's Treasury Department, which now seem embarrassingly ham-handed and extreme.

Terrific book.

The Financial Crisis of 2007-2008 is manifestly not over, and so it may seem premature to start writing the history of it now. What's more, although the publication date of this book is October 2009, I judge from the date of the Preface that it was actually completed in February of this year. For heaven's sake, the outrages of the Obama "stimulus" legislation and the unlawfully rigged bankruptcy and Federal takeovers of the auto companies hadn't even happened yet! Let alone healthcare!

But if, as the cliché goes, journalism is a first draft of history, then this brief volume can be chalked up as an early second draft. Most of the citations within it are in fact from contemporaneous accounts in the mainstream and business press. And, as 2009 draws to a close, the week by week fumbling of Paulson, Benanke and Geitner in the fall of 2008 does in a way seem like a long time ago.

This is a breezy, often witty, retelling of the forces leading up to the 2008 meltdown, and the highlight must be the chapters (titled "Hurricane Season" and "Madly in All Directions", respectively) that detail the collapse itself and the clumsy, haphazard government reactions. Reading it got my blood boiling all over again, and it became clear to me that the sheer pace of innovation in policy stupidity, illegality and destructiveness that we've endured over the past eighteen months has had a numbing effect. When faced daily with the prospects of a government takeover of the entire healthcare industry, the sinister dishonesty of the Paulson TARP legislation can easily slip from memory (was it really only 13 months ago?).

So no, it is not too early to document these events and this book is a welcome contribution to what I can only hope will be a vast literature of conscientious objection.

The first three chapters trot out the usual suspects to the crime. First, the easy money policy of the Federal Reserve in the wake of 9/11 and the dot com collapse which undoubtedly fueled the speculative boom in residential and commercial real estate. Second, the longstanding and bi-partisan government fetish with encouraging homeownership among people lacking the financial wherewithal, which resulted in the uncontrolled growth of the Federal mortgage monsters Freddie and Fannie. And third, in keeping with the narrative so familiar to us all, the proliferation of the "financial weapons of mass destruction" otherwise known as securitized mortgages in all their various mutations.

It is with this third chapter that I have the most difficulty. Although Norberg is pretty clear throughout the rest of the book that the blame for the financial fiasco rests with government, the stories about the "greed" and "short-termism" of Wall St. and the incompetence of regulators and credit rating agencies are too easily interpreted in exactly the wrong way: that what the financial sector needed was stronger, more active and insightful regulation. Although a careful reader would see that many of the excesses were unintended results of regulation (e.g., the capital standards that encouraged banks to push assets "off-balance sheet" via exotic securitization techniques, the credit rating cartel created by the SEC, etc.), this type of focus inevitably leads to calls for more and "better" regulation.

The mundane fact of course is that bankers (in fact, all businessmen, and probably the vast majority of the human race) seek to make money, and are frequently motivated with a short-term outlook - all the time, not just during speculative bubbles. Rating agencies simply are incompetent a lot of the time (financial economists have long known this - see, for instance, the extensive literature on how bond markets capture and price in credit quality long in advance of rating agencies). None of this is news in good times. And it wouldn't be news in bad times either but for the much abused notion of "systemic risk" and the dreaded corollary "too big to fail." There are no third party effects to worry about as long as risk, profit and loss are borne by the parties to the transaction. The outrages of the current financial crisis all stem from third party effects created by government, whether in the form of implicit (and ultimately explicit) Federal guarantees of Fan and Fred, ludicrously high levels of Federal deposit insurance for banks (now extended to money market mutual funds), or the pernicious bailouts of "too big to fail" institutions. All of these practices to a greater or lesser degree create the clear appearance of a game rigged by insiders for the benefit of insiders. Alas, the appearance in this case is not deceiving - taxpayers are on the hook for private errors on a mind-boggling scale. But again, this is not the fault of the private actors; it is a direct and clearly foreseeable consequence of a government and regulatory apparatus that allows, even encourages, private gain with socialized risk. There is a strong case for less not better regulation - starting with abolition of the moral hazard inducing "too big to fail" doctrine itself.

Norberg concludes his book with a chapter ("Tomorrow Capitalism?") devoted to pointing out some sensible approaches to undoing the current mess and avoiding future ones. Unfortunately, from where we sit today it all seems rather like wishful thinking. Not only are we still in the depths of the crisis, with a zero percent Fed funds rate, an engorged Fed balance that will almost certainly lead to a monetary disaster down the road, double-digit unemployment, and staggeringly large government deficits (state and Federal) that threaten to turn America into a banana republic. We are also governed by a legislature and administration that are profoundly ignorant of and antagonistic toward freedom and enterprise.
But the battle of ideas must be joined, and this early contribution to the policy mistakes and consequences of our current crisis is a helpful start.

Paul McMahon
December 2009

Norberg's book is an early attempt to explain the history behind the financial crisis of 2007 which has since then spread throughout the world. Taking into account that this book came out only 2 years after the events, it is surprisingly well documented and very informative of the background which resulted into the crisis.

Norberg argues that government regulation and intervention in the financial market and the housing market, together with actions of the Federal Reserve System on interest rates, contributed to the housing bubble and created the environment in which financial institutions and banks could take extensive risks for the pursue of short term profits. Norberg criticizes both the government as well as the private sector for creating the housing bubble and an unsound financial market, although his argument lays on the fact that intervention and regulation in the markets allowed the private sector to take extreme risks and irresponsible decisions. He concludes that the huge bailouts further contribute to this phenomenon, as banks have no fear of bankruptcy in the cases that they take wrong and unsound decisions. In a sense, it is like rewarding failure.

"Financial Fiasco" is currently the best work on the financial crisis, and I would suggest that everyone should read it. However, consider that it is only a first attempt at explaining the crisis, therefore, some factors considered may have a larger or smaller significance than they are currently thought to have. With newer evidence coming up, we certainly will have a clearer and more complete picture of the crisis in the future.
Until then, "Financial Fiasco" is an essential read for an understanding of the crisis.

I think it's fair to say that readers should have some knowledge of basic economy and some terminology before reading this book. Then again, anybody actually looking to buy this book probably has that covered.

Essentially, this book tackles the crisis from all angles that it should be tackled from. US housing policy, the FED and the financial instruments that eventually made us all a bit poorer. It does so in a pedagogical way that most people will be able to understand.

While the author is a libertarian (well, really just a liberal in the most true sense of the word) and does well to argue that government intervention had a lot to do with this crisis, all he does is really just to lay out the facts. If you find something wrong with the arguments put forth, by all means publish that in a review on these boards. Regardless of ideology, anybody can appreciate an informative, honest work that doesn't try, nor does it want to, lie to you.