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The Meltdown Years: The Unfolding of the Global Economic Crisis

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The only financial reality is cash.

I was first taught this elementary wisdom nearly half a century ago, and here it is reinforced although not precisely so phrased. The author gets nearest to saying it when he quotes the source from whom I would most expect economic wisdom, the mighty Galbraith, who states that the financial market is entirely unsuited to innovation. The so-called innovations are almost entirely sleight of hand, and Munchau makes that abundantly and beautifully clear. The whole history of derivatives-gone-doolally is sketched in until we reach his publication date of mid-2009, by which time our own self-inflicted crisis is well and truly on us. And by long before then Munchau is ready to call the whole looking-glass world of Credit Default Swaps, Collateralised Debt Obligations and the rest of such gobbledegook a scam and a Ponzi scheme.

Let me make it clear that this book is a piece of analysis and not a sermon or a political tract. What superb analysis it is too. The bare bones of the matter, all the way from the basic structure of a balance sheet to the essentials of the most outre modern `instruments' are laid out with exemplary clarity. No political or ideological thrust is needed for it to be clear, just from a patient exegesis, that the banks and the money markets were operating a giant Ponzi scheme. As with Madoff, it was all dependent on fair weather conditions. As long as the economic bubble kept expanding people kept being paid out and those few who questioned the whole mad scenario in public were ignored or loftily dismissed, although there must have been many more who were silenced behind the scenes, as is the way of it all. When the bubble burst, or deflated with greater speed or less, it was Madoff all over again - nobody knows you are bathing naked until the tide goes out. When it went out, it was obvious (as it could have been long before if folk had been willing to see the point) that the emperor had no clothes, which is to say that many banks and insurers had no cash.

It is not particularly harmful to Munchau's very clearly presented case, but he gets tied up in his own terminology by looking for the `cause' of the present crisis. Talking about `cause' is a convenient way to talk, even in academic and scientific discussions. However when we try to press the expression to the point of identifying it with precision we find we can't do it, and Munchau can no more do it than any of us can. David Hume proved that for all time in the 18th century. Doing without this unhelpful word, Munchau's lucid reasoning separates the greater from the lesser elements in the vipers' nest of intertwined problems we have landed ourselves in. I'd say to any reader - take M's presentation of the facts and build your own reasoning on it. For instance, how crucial are trade imbalances between countries? I thought he was leaning one way for a while, but then he seemed to succumb to the traditional caricature of economists by leaning the opposite way. Usually he is less equivocal, and although he laudably views bankers claiming lavish bonuses as being of a social status roughly equivalent to that of child molesters, he has the fair-mindedness not to try to identify this phenomenon as a `cause' of the present crisis. At least he may have (if not a British resident) escaped the frequent ordeal of beholding Angela Knight of the woeful countenance lugubriously lecturing the large tranche of the British public struggling with losing their incomes or pensions or having their homes repossessed on how multi-billion bonuses to bank executives, paid out of taxpayers' money, should not be opposed by morally minded citizens.

Munchau bravely offers his own solutions or at least routes to a solution, and I don't feel like trying to assess these beyond saying Beware of the `experts' who will. In the first place the experts are no more free from prejudices and pet theories than anyone else, and in the second place the increasingly-used mathematical models are suspect and demonstrably so. This is not to disparage mathematical modelling, it is only to say that it is inviting disaster to pretend that we can quantify risk when a bit of common sense tells us that we can't, at least not when a Gordian knot of complexity has to be processed. Models of this kind can only be as good as the assumptions fed into them and a few minutes' look at some of the latter should warn us to be careful. There is an additional risk in trusting to processes that we don't understand, and it is an elementary fault of methodology to leave that additional factor out of the risk-assessment overall.

Munchau's own proposals rely rather heavily on international co-operation, and I don't wish to decry this view. I'm all for it but it's not unobvious that even within such a self-righteously trans-national co-operative model as the EU such values have to struggle, at least at our present level of maturity. Try selling the concept in practice to Frau Merkel. Myself, I'm attracted by a cruder plan, consisting of identifying and pillorying Ponzi schemes and any countries which use them. That is my own interpretation of what I have learned from this excellent book. As for the often-heard bleat that we should not deny bankers their bonuses, otherwise the best ones will go elsewhere, Munchau sees it off with magnificent scorn. Best at what? We've seen what they're good at and we don't need it.

Did you ever wonder why it was necessary for the government to bail out AIG? And what all those investment bankers did to deserve those huge bonuses? This is a book that will answer most if not all your questions about what happened and why.

The Meltdown Years, written by Wolfgang Munchau, a Financial Times journalist, is a very in-depth look at how close we came to a total financial meltdown. The book is not about placing blame for all that went wrong but for trying to understand the reasons for the crisis and more importantly what steps need to be taken to prevent future such events.

The book is divided into three major parts. Part one discusses the policies and events prior to the meltdown. This section contains many side-bars that explain how banks operate, the functions of the central banks and many of the more exotic credit instruments that were contributing factors in the financial meltdown.

Part two goes into great detail about the actual meltdown. While we all lived through it, for many of us the magnitude and implications of what was happening did not register. The author does a good job of detailing the events and how close we came to a total global collapse.

The theme of part three is why did it happen and what now. The author looks at the most popular suspected causes and discusses them in detail. They are: greedy bankers, hedge funds and tax havens, faulty risk models, financial deregulation and lax supervision, monetary policy and global imbalances.

He then discusses each suspected cause in great detail. The case of greedy bankers and their excessive bonus system "...was an important factor in this crisis. There is a strong case to tax these bonuses out of existence. But alas, the bonus system did not cause the financial crisis."

Wolfgang then goes on to explore the other suspected causes and develop reasons he thinks are the root cause of the crisis.

Although the book deals with concepts and terms that are totally foreign to most of us - such as CDS (credit default swaps) or CDO (collateralized debt obligations) - Wolfgang explains these terms and gives understandable examples. The book is arranged so that those familiar with these terms and concepts can easily skip the side-bar explanations.

The book was written in the spring of 2009 and although the author does not have the advantage of historical perspective, it is still a very important work. We need to understand that we live in a global society and what happens in China affects us. A large part of the crisis was because in America we were consuming on a level that was not sustainable.

You will come away with a much better understanding of what caused the crisis, you will be frightened about how close we came to total financial meltdown and you should have a better view of how to protect yourself in the future. We need to learn to see the signs and take action to protect ourselves.

We must learn from this crisis and begin to hold our leaders accountable. We cannot afford to have such a concentration of risk - such as in AIG or the other large financial institutions and hedge funds. We cannot afford to let financial institutions get too big to fail.

The book is easy to read and understand - but it is sobering. We need to be better educated and concerned about our financial institutions. This book is a great start.

I was provided a complimentary copy of this book by the publisher.

Well written. Easy to read and understand explanation of the worldwide events responsible for the current economic downturn. Limited ideas for solutions.

Economists and economic historians will be debating the causes of our near-miss at a global depression far into the future. Muenchhau's book will be an excellent source for future work. Today, it is perhaps one of a half-dozen books on the crisis (which of course may not be over) essential to our current understanding of events leading to the Fall of 2008.

There are two aspects of the crisis which are not addressed: U.S. political influences and the global growth in the inequality of wealth distribution. Perhaps, the reason is simply that both are outside of what he believed his own competence to be and the former must be left to political scientists, while the latter falls into the purview of economists.

Here are a few thoughts on the first.

In 2001, we were in the initial stages of the dot-com recession, yet no one could predict its severity. Co-existant with this were generally accepted projections, based on the Clinton years and a Republican Congress, of government budgetary surpluses, totaling as much as $5.6 trillion over the next ten years. Indeed, this projection was a driving factor in the Bush tax cuts (coupled with the belief of White House economists in Reaganomics). The some $1.7 trillion in tax cuts were based on two assumptions: that the dot-com recession could be corrected and would not be severe and that no unanticipated requirements for increases in government expeditures would be forthcoming. As a "hedge," in this regard, the initial moderate Republican and Democratic suggestions were that the tax cuts could include "triggers" whereby they could be reversed without additional Congressional action if needed. The "temporary nature" of the cuts was a political compromise, between the White House, which favored permenant cuts, and Congress, to obtain the support for passage.

The events of 9/11 changed the projections...effectively throwing them out completely. It both threatened to kill the [...] recovery and promised to mandate additional government spending in going to war and in homeland security.

At that point, the Bush Administration was faced with a choice: Call for the repeal of the tax cuts or count on the principles of Reaganomics for the promotion of additional GDP growth, which would maintain the debt to GDP ratio, even as debt increased. Given the experience of Bush Senior's decision to raise taxes, to pay for the expense of Gulf War I and his subsequent loss of a second term, Bush Junior selected the latter approach. However, this of course created enormous political pressure for domestic economic growth. On June 17, 2002, in Atlanta, Bush announced a major Administration program for the increase in "affordable housing" for low-income, minority homeownership by 5.5 million homes over the next ten years. This program had the advantage of bi-partisian appeal (the Democratic support of the CRA), in addition to creating jobs in the construction and financial services industry and stimulating domestic economic growth.

The subprime loan boom followed (2003-2006). In the 2004 Presidential campaign, the largest single Bush contributor was Roland Arnall, CEO and founder of Ameriquest, one of the nation's largest subprime lenders. Additionally, in 2004, Wall Street, which normally gives a slight edge in political contributions to Democrats, contributed to Bush over Kerry by 2:1.

The real estate bubble had the desired effect and it is possible, it could have been "wound down" successfully had not the wars gone on longer and cost substantially more than originally forecast (a White House economic advisor was fired for suggesting that Iraq might cost as much as $200 billion - it cost five time that). As a result, noone wanted to point out the obvious - the unsoundness of the underlying mortgages - and lending standards continued to decline. In 2006, the first sign of collapse occurred with Ameriquest laying off 4,000 employees and closing their nation-wide retail outlets. We had "scrapped the bottom of the barrel" and the process began reversing itself. During 2006, the Administration attempted to reverse course by changing the deck chairs on the Titanic - beginning with Greenspan's retirement, replacing the SEC, FDIC, FHEA heads and bringing in Paulson as Secretary of the Treasury. But, it was too late.

This is a very useful book about the financial crisis. It is written in three parts. The first explains banking, financial products, and financial markets. This is necessary background for understanding what happened. Imagine try to understand WWI without any grounding in European politics and colonial expansion of the late 19th and early 20th century. Can't be done. I've read several books on the financial crisis and they focus mainly on events and personalities. They are fun to read, but in the end I knew very little about how the crisis came to be.

The second part is an account of what happened in the financial crisis. The author is brief and to the point. Little embellishment of personalities or drama. Indeed, he hardly mentions anybody's name; just the facts.

The third part is why did it happen. He lists causes (things that made it happen) and contributing factors (things that made it worse, but did not necessarily cause it). He explains why he selected causes and factors and explains why he thinks some popular scapegoats are not significant. I thought he was balanced and fair.

The book is only 220 pages of large print on small pages plus an epilogue and an appendix. There are parts in the main text that are shaded and explain financial products (e.g. credit default swaps, collateralized debt obligations, etc), financial statements, banking rules, and other technical details. People familiar with banking can skip these explanations making the book even shorter.

Complaints? some of the shaded explanations were not adequate. There were a couple of times that I went to Wikipedia and some things I did not understand until I got someone to explain.

I've read about 5 books on the meltdown. This is the one I plan to keep.

THE MELTDOWN YEARS: THE UNFOLDING OF THE GLOBAL ECONOMIC CRISIS comes from an economic columnist who believes the current meltdown is not so much an American problem requiring an American solution, but the result of the entire global financial system's interactions - requiring an international effort to fix it. His global perspective is a 'must' for any library strong in world economic history and interactions.

I own this book and am looking to re-buy, because it has torn from use for 10 years. I like the way the author explains the object you dreamed has to do with what is going on in your life, then gives brief sane advice.
Example: Toilet; (tolete)you'll save lots of money by consulting a proffecional in regard to your economic problems. Stay away from charlatons that are looking to rip you off.
It always uses proper language, no slang, and is always respectful. Reason for "4" rating is due to the lack of words found easily or at all. For example, mom always said that dreaming poo is a sign that money is comming. I tried to find and figure out the propper or scientific word for [..] matter, and it is not in the book. Other books say it is a sign of good health.
I am fluent in Spanish , having been born in Mexico, but for some of the words in this book, I need a dictionary to underderstand the meaning of certain words like tolete. (I know inodoro, tasa, sanitario, ban~o,).I found it by looking up another word.
For the most part this book for me is right on the money. By the way each dreamed word has numbers on the side of the word that can be combined to come up with lotto numbers.
Good luck!