Customer Reviews

Financial Shock (Updated Edition), (Paperback): Global Panic and Government Bailouts--How We Got Here and What Must Be Done to Fix It

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This is an impressive little book. It is both a comprehensive and accessible analysis of the 2007-9 financial crisis. If you are interested in understanding the genesis of the financial crisis and its structural causation, this is the book to begin with. Zandi's book is the best of its kind.

Zandi does not shy away from describing the structural causes behind the current crisis. This is important, because popular versions attempt to place blame on bad decision making of individuals. Zandi certainly does not deny that speculation fed the unsustainable real estate boom. Speculation, however, was a minor culprit generating the frenzy and structural dynamic of the real estate boom.

Too many homebuyers facing foreclosure internalize their fate. Zandi's book convincing suggests this is an emotional mistake. Numerous forces made homebuyers highly vulnerable. The majority of federal agents (e.g., elective officials, regulators, etc.), quasi-federal agents (i.e., the Federal Reserve board), and private agents (e.g., builders, real estate agents, mortgage brokers, and Wall-Street financers) simply failed to understand how vulnerable homebuyers had become. Consequently they failed to comprehend the fragility of the financial system.

Sincere and innocent homebuyers became the `collateral damage' of a financial system which had rapidly metamorphosed into a structural coordinated Ponzi scheme. Zandi certainly does not put it as strongly. He is painstakingly fair in his explanation of how the modern financial system came into being. There was no conspiracy to enrich mortgage brokers or Wall-Street financiers. Zandi suggests there was a sincere attempt from both federal and quasi-federal agents to simultaneously promote homeownership and stabilize the macroeconomy.

According to Zandi these efforts were understandable, if not justifiable. He fairly represents the benevolent intentions of the Clinton and Bush administrations to promote responsible homeownership. Likewise, in the aftermath of 9/11, a stock market crash, two wars, and a jobless recovery Greenspan's Fed benevolently encouraged a real estate boom for the `health' of the macroeconomy, employment, and growth. Zandi suggests it is only in retrospect we can understand all the structural and institutional dynamics which undermined these attempts.

Zandi laments "there's plenty of blame to go around." But his careful analysis indicates no one individual, group, institution, policy, program, or company bares culpability for the systemic and frenzied real estate boom and collapse. The systemic collapse was strictly systemic in origin according to Zandi's account.

This 2009 edition has been updated from the 2008 edition. The main updates come in the last three chapters (i.e., 12, 13, 14), especially chapter 12, and how the "Timid Policymakers Turn Bold." These updates do not change the thrust of the book.

This book makes high-finance accessible to its readers. This book will be referenced for many years to come. In the end it is too apologetic and its recommendations too optimistic toward the relative instability of financial markets. Zandi makes 10 policy recommendations, all of which are highly surface policy analysis. Worse, even if all 10 recommendations had been in place in 2003-6, it is not at all clear the crisis would have been averted.

The greatest weaknesses of Financial Shock are: (1) Zandi's unwillingness or inability for penetrating and piercing normative analysis; (2) the absence of Behavioral Economic analysis (recently made popular by books such as "Nudge" and "Predictably Irrational"), which would have complemented his analysis and surely changed and strengthened his policy recommendations; and (3) lack of theoretical monetary economics and theories of financial instability. In a fetish-like focus, Zandi aims simply to describe what happened and to take officials and companies at their word regarding their motivation and intent.

In the end Zandi's book is an accessible description of the financial crisis in its genesis and structural dynamic. No other monograph exists that outperforms the analysis. This however, will not be the definitive account of the crisis of 2007-9; it will take several more years for that book to appear. Until then, there is no better book upon which to learn and understand the financial crisis of 2007-9.

Central bankers had opened the money spigots wide after the dot-com bust, 9/11, and the invasion of Iraq combined with the Bush tax cuts. China had forced prices lower for so many manufacturing goods that central bankers also focused on fighting deflation (keeping interest rates low). In addition, there was the ballooning trade and federal deficits. At the same time, deregulatory zeal overtook the federal government - market forces would impose discipline. Rising home prices allowed homeowners to refinance again and again, lenders, investment bankers, and rating agencies got more and more fees.

Meanwhile, securitizing mortgage loans greatly expanded the supply of funding, dicing those loans into tranches allowed selecting the desired risk and return level. When risk premiums shrank, leverage built them back up. Investors could also sell default insurance to each other - default was seen as a remote possibility. Derivatives such as CDOs (bond-like securities whose cash flows are derived from other bonds, which in turn might be backed by mortgages or other loans) became particularly attractive, even though little understood. The Internet also contributed, cutting transaction costs and boosting loan competition. Then, as loans became tougher to obtain, ARMS, IO, and no-down-payment loans (second mortgage avoided mortgage insurance costs) came into vogue.

Housing price gains became increasingly attractive because interest payments of mortgage loans were tax deductible, and since the mid-1990s, even capital gains on most home sales hadn't been taxed. Homeowners also became adept in taking equity out of their homes through home-equity loans and refinancings.

All the makings of a great financial conflagration were there, and the results didn't disappoint.

Lehman's bankruptcy caused one of the oldest and largest money market funds to "break the buck." Investors began taking their money out, and the commercial paper market dried up, as well as re-financing. Bank woes were further acerbated by falling stock prices.

Zandi believes the current stimulus actions are not enough, citing the large and growing number of "underwater" homes.

Zandi believes the next financial crisis will be related to the federal government's fiscal problems reaching record debt levels in proportion to the economy. Preventing another commercial market failure could be accomplished through standardizing and simplifying the foreclosure process, fixing the federal budget, and improving regulation and securitization.

On the negative side, Zandi's material is a bit of "old news" - eg. emphasizing sub-prime mortgages. Stan Liebowitz's 7/3/09 WSJ analysis tells us that the single most important factor in foreclosures is whether the homeowner has negative equity, not the rise of subprime mortages. He found that while only 12% of homes had negative equity, they comprised 47% of all foreclosures (probably conservative, since he lacked second-mortgage data). Interest rate resets did not measurably increase foreclosures until the amount was greater than four percentage points, and only 8% had such. Thus, a significant reduction in foreclosures will happen only when housing prices stop falling and unemployment stops rising. (Liebowitz contends the administration's focus on low interest rates induce refinancings more than home purchases.) Similarly, Mr. Liebowitz found that helping lower the share of income devoted to house payments was not a factor increasing foreclosure rates, and thus not part of the solution either. Finally, Liebowitz suggests instead the government focus on stronger underwriting standards, and strengthening the recourse mortgage lenders have if a borrower defaults.

This is a great book for an overview of the housing bubble and its effects.

It is short and very easy to read. My only problem with it, besides his weak recommendations to avoid another bubble, is that the book is basically the first twenty pages repeated over and over again.

It is worth the read, however.

This is an excellent overview of the Economic Crises of 2007 & 2008. It is accurate, fair and balance. It is well written and easy to read and comprehend. I plan to use it, along with the book AND THEN THE ROOF CAVED IN by David Faber as texts for a seminar class offered in the Fall.

Mark Zandi's book takes you inside the mortgage industry, where the greedy use their creativity to take advantage of the population while the government looks the other way.

Zandi explains the changes in the system over the last few decades that allowed for such a disaster to happen. And, like all things economic, it's complicated. And, like all disasters, hardly anyone could see it coming, because nothing quite like this ever happened before.

If you want a thorough and accurate understanding of what caused The Great Recession, read Financial Shock.

Note to readers: for this review, I read the first chapter, and skimmed the rest of the book. (full disclosure) I usually read the entirety of every book I review, but I did not this time. Why? Chapter 1 is the backbone of the book, and tells the whole story in a nutshell. The remaining chapters flesh out Chapter 1. Most of my writings over the past five years shadow what Mr. Zandi has written, and he has created an integrated description that covers every major area of the crisis, with particular attention to mortgages, and the huge effect that the speculative mania in real estate had on the financial economy.

This is a serious book, one that explains the roots of our crisis. If you haven't understood it in a systematic way from reading my blog, or those that I recommend, this book will give you a coherent explanation of how we got here.

I do have some quibbles with the book. When he describes residential mortgage securitization on page 117, the mezzanine and subordinated tranches are too large, even for subprime. Also, his recommendations in the last chapter -- I can agree with most of them, but not with mark-to-market, and the uptick rule.

This edition of the book takes us up to the first quarter of 2009, allowing Zandi to comment on the initial actions of the Obama administration.

All in all a very good book. If you have a relative that doesn't understand the crisis, this will explain it to him in a simple way.

America could be on its way to becoming a third world country. Now in a newly updated and expanded second edition, "Financial Shock and Government Bailouts - How We Got Here and What Must Be Done to Fix It" is an economic guide explaining the current crisis from many angles to best inform readers about what's really going on in today's economy and what's being done to stop it. In some cases, what's being done might be enough, but in too many, it will not be. "Financial Shock" is of recommended reading to any who want a fuller understanding of one of today's biggest issues.

I had to purchase this book for a college political science class. The professor assured me that even with no background in economics I would be able to understand it, but this is NOT so. Even supplementing it with internet research on things I don't understand I still find this book completely incomprehensible. Zandi uses figures of speech and terminology with the assumption that the reader knows exactly what he's talking about without needing any sort of explanation. I think if you have the background knowledge necessary to comprehend the book this is probably an excellent analysis of what has happened to the economy, however one should avoid falling into the trap that just anyone can pick up this book and get it.