Lost Decades: The Making of America's Debt Crisis and the Long Recovery [Hardcover]

Menzie D. Chinn (Author), Jeffry A. Frieden (Author)

Book Description

Publication Date: September 19, 2011

Two acclaimed political economists explore the origins and long-term effects of the financial crisis in historical and comparative perspective.

Welcome to Argentina: by 2008 the United States had become the biggest international borrower in world history, with almost half of its 6.4 trillion dollar federal debt in foreign hands. The proportion of foreign loans to the size of the economy put the United States in league with Mexico, Pakistan, and other third-world debtor nations. The massive inflow of foreign funds financed the booms in housing prices and consumer spending that fueled the economy until the collapse of late 2008.

The authors explore the political and economic roots of this crisis as well as its long-term effects. They explain the political strategies behind the Bush administration's policy of funding massive deficits with the foreign borrowing that fed the crisis. They see the continuing impact of our huge debt in a slow recovery ahead. Their clear, insightful, and comprehensive account will long be regarded as the standard on the crisis.

Editorial Reviews

Review

Here a leading economist and leading political scientist team up to explain in simple, straightforward terms the political economy of the financial crisis. If you have time to read only one book on the crisis, read this. (Barry Eichengreen, University of California Berkeley)

“Through pointed historical and comparative illustration, the authors show how financiers, politicians, and ideologues ushered in the crisis, and highlight the challenges we must overcome to avoid another lost decade.” (Nouriel Roubini, Stern School of Business, NYU )

“An integrated and compelling account of where our debts came from – and why they won’t go away any time soon. Chinn and Frieden combine the smartest kind of economics with the toughest kind of political science. Read this book for a somewhat disheartening but completely enlightening education – and then send 10 copies to the White House and Capitol Hill.” (Simon Johnson, MIT, co-author of 13 Bankers )

“This wonderful book by two leading political economists identifies the roots of the recent financial crisis and the deep recession that followed, but more important, tells us what awaits us if we do not fix the underlying problems. It is political economy as it was meant to be - accessible and concise, even while deeply troubling.” (Raghuram G. Rajan, Booth School of Business, University of Chicago )

“You will not read a better political-economic synthesis of America’s financial crisis than this book.” (Dani Rodrik, author of The Globalization Paradox )

“An intelligent, vivid, and accessible account of the first great crisis of the 21st century. Drawing on comparisons that will bother recalcitrant believers in American economic exceptionalism, the authors depict a gloomy panorama for the years to come unless policy makers get serious about fiscal reform. This is a must-read for the expert and the layman alike.” (Ernesto Zedillo, Director of the Yale Center for the Study of Globalization Former President of Mexico )

About the Author

Menzie D. Chinn teaches at the University of Wisconsin, Madison, and coauthors the influential blog Econbrowser.

Jeffry A. Frieden is Professor of Government at Harvard University. He specializes in the politics of international monetary and financial relations. Frieden is the author (with Menzie Chinn) of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery. His previous books include Global Capitalism: Its Fall and Rise in the Twentieth Century; Debt, Development, and Democracy: Modern Political Economy and Latin America, 1965–1985; and Banking on the World: The Politics of American International Finance; and he is the co-author or co-editor of many other books on related topics. His articles on the politics of international economic issues have appeared in a wide variety of scholarly and general-interest publications.

Product Details

• Hardcover: 284 pages
• Publisher: W. W. Norton & Company; 1 edition (September 19, 2011)
• Language: English
• ISBN-10: 0393076504
• ISBN-13: 978-0393076509
• Product Dimensions: 6.1 x 1 x 9.5 inches
• Shipping Weight: 1.3 pounds (View shipping rates and policies)
• Average Customer Review: 4.2 out of 5 stars  See all reviews (12 customer reviews)
• Amazon Best Sellers Rank: #608,276 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

18 of 21 people found the following review helpful

4.0 out of 5 stars Good first book on the crisis but missing major component. November 7, 2011

By Law student

Format:Hardcover|Amazon Verified Purchase

I thought this was a pretty clear, well articulated book by two academics [an economist and a political scientist] explaining broadly what caused America to go down a series of wrong turns. It reads quite well for a book written by academics and its easily possible to read it in one sitting if you have 8 or so hours lying around [like on a plane].

But there are a number of problems with the book, that if you have read other 'economic crisis porn', quickly jump at you. First, when discussing the 'shadow banking system' they lump in private equity funds like Blackstone with macro hedge funds like Bridgewater with investment banks. I think in a video symposium [very good by the way and found here [...] Menzie admitted that academic economist didnt usually pay attention to finance and their lumping of all the previously mentioned financial institutions shows this pretty well. Private equity funds may do a lot of fishy things but they generate their income by arbitraging US tax code's preferences of debt over equity and capital gains over income gains. They do not loan out money. And macro hedge funds like Bridgewater may have been involved in some aspects of buying synthetic instruments but since they usually make big bets on broad economic movements its hard to imagine those types of hedge funds buying up a lot of SIV paper.

The second and more glaring mistake was the total absence of 'repos' in the discussion. Repos and the need for increased margin payments on them were one of the principal reasons Bear/Lehman/AIG all went down [repos also just brought down MF Global, the 8th largest bankruptcy in the US....] I think if anyone wants to understand this crisis they have to read up on the repo market, as the the rise of this market was without the doubt one of the key reasons for the crisis turning out the way it did. Bernake, and the book quotes him, has a historically terrible quote from 2007 when he says something like "Subprime is contained, its a tiny market, no big crisis is coming." Now many people view this as a "aha" moment, in the sense that they caught Bernake being incompetent. Rather, I would argue that like other academic economists [like the writers of this book too] Bernake simply didnt care about the repo markets and did not understand how a relatively small, 30 billion dollar market in sub prime mortgages could destroy financial institutions like Lehman, Aig and Bear Sterns.

So again, if as Berry Eichengreen says on the back cover of the book "If have only time to read one book on the crisis" make it this one. But if you are a bit more curious you will need to search out other sources to get the full picture. And I mean sources that deal with the technical nature of the financial markets in the developed words, not books like "Too Big To Fail" or the "Big Short" (both excellent by the way but are too much written like morality plays that focus on the really big characters that were in place in 2008.) Read more ›

22 of 27 people found the following review helpful

5.0 out of 5 stars Exceptional; a real service in these complex times September 23, 2011

By W. Tuohy

Format:Hardcover|Amazon Verified Purchase

These authors offer a valuable overview of complex processes surrounding the recent/current/on-going financial crises. The focus is on U.S. conditions and policies, but this (inevtably) includes critical issues of how the U.S. is tied into international lending, trade, finance, etc.

The authors do not focus on minute details of events and personalities, unlike many it not most of the books I have seen (which favor a more thrilling, gossipy approach). Rather, they offer a lucid presentation of basic structures and processes in economics, finance, and politics. Though unavoidably somewhat technical, the presentation is readily comprehensible to the reasonably sophisticated reader - anyone comfortable reading a good newspaper (NY Times, etc.) or news magazine (The Economist, etc).

The authors link economic conditions and practices to politics and government (political economy), as must be done to comprehend these events and processes. They also give valuable historical perspectives on debt crises. The analysis is not partisan. Rather, the most severe criticisms regarding government policies focus on abdication of responsibilies, including disregard of economic and financial best practices in favor of short-term political (electoral) expediency.

The format is gratifying, with reasonably large print nicely spaced. The book is hard to put down (for its content and writing style) and physically easy to read.

As an afterthought, I also recommend Jeffry Frieden's book, Global Capitalism: Its Rise and Fall in the Twentieth Century, for its history and insights about globalization.... For example, this book offers the most succinct, clearest description I have seen about the rise of fascist and other authoritarian states (1920s and 30s), not for their well-publicized brutality, rather as resistance and an economic alternative to discredited forms of globalization/global capitalism. Read more ›

18 of 23 people found the following review helpful

5.0 out of 5 stars Good Perspectives and Background September 18, 2011

By Loyd E. Eskildson HALL OF FAME

Format:Hardcover

The 2001 and 2003 tax cuts during the Bush administration, combined with increased spending for the Iraq and Afghanistan wars and the new Medicare drug benefit, resulted in the largest and fastest fiscal deficit turnaround in 'peacetime' history. (That effort grew out of the 2001 recession and dot-com bubble.) Alan Greenspan, Federal Reserve Chairman at the time, played a very harmful role by supporting the 2001 tax cuts, giving political cover for the Bush administration claims that the tax cuts wold be self-financing (aka Laffer Curve). This borrowing was acerbated by borrowing to finance the housing boom and our merchandise and energy trade deficits. The effects of these combined debt crises are exacerbated by the current U.S. political impasse - fed by short-term expediency, economic demagoguery and ideology instead of fact-based decision-making, China's unlikeliness to support continued borrowing at past levels, and the fact that much of the debt was used to create a speculative bubble instead of raising profitability/productivity.

Federal government spending was also consumption focused - on health care spending that far exceeds that of our strongest competitors, defense spending exceeding that of the rest of the world - combined, and education spending that has increased at all levels without benefit. Meanwhile, our infrastructure was largely ignored - estimates are that we've accrued about $5 trillion in 'deferred maintenance.' That's in addition to the $5 - 7 trillion in new foreign debt incurred just between 2001-07.

We have lost the opportunity to maintain or strengthen our economic position during the first decade of the new millennium; the fear now is that we will lose the second.... Our recovery is lagging, our trade imbalances unabated and unaddressed, and political gridlock over who will bear the burden of adjustment has become the order of the day. Cries of 'class warfare' have become commonplace, bolstered by the fact that unemployment among the top one-third is barely 4%, vs. 4X that for the lowest one-third. (Tax increases, stimulus spending, and increased regulation are blocked.) This is partly facilitated by the fact that borrowing costs are at their lowest levels ever, and as of yet there is no forced adjustment from the outside - as there is in Europe.

The U.S. entered this situation believing it was part of a normal economic cycle that would soon end. The authors, unfortunately, are among the many that believe increased spending on education will pay for itself in the long run - reality is that the U.S. has quadrupled inflation-adjusted per-pupil spending since the early 1970s, with very little, if anything to show for it. Similarly, college/university education costs have risen at rates 4X that of the CPI, for decades. Worse, the long lead times involved in successfully improving education outcomes would likely preclude taking other actions that hopefully would be more useful. The authors conclude that our debts won't go away anytime soon.

The authors' recommendations include regulatory reforms and genuine economic discipline. Unfortunately, most Americans have not experienced austerity since the WWII/Korean War era, and it has proven impossible to-date to unify the nation behind any direction. Stimulus efforts have delayed confronting this new reality. (Standard & Poor's downgrading America's credit rating is symptomatic of the delays.) Other nations' continued willingness to absorb dollars has also helped, but cannot continue in perpetuity - especially with China nervous about its existing dollar holdings (the dollar has lost about 25% of its value over the last 5 years) and jockeying to give its currency a larger role. (This influence is also currently mitigated - by the Greek etc. debt crisis creating a surge of investment in the U.S. as a safe haven.) Read more ›