Customer Reviews: Plunder and Blunder: The Rise and Fall of the Bubble Economy
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on January 19, 2009
This is an excellent book.The author traces the problem back to 1980.However,it was the Carter administration that started on the road to deregulation in 1978 and 1979,although it is true that the Reagan administration , the two Bush administrations,and the Clinton-Gore administration increased the tempo of deregulation a 100 fold.A common confusion runs through all of these administrations.The misbelief that speculation is enterprise/entrepreneurship is the common confusion held in all of the administrations named above.Adam Smith spent 80 pages in his The Wealth of Nations carefully demonstrating what the consequences would be if the banks loan to speculators or are allowed to speculate on their own.Smith's conclusion was that the savings of the depositors would be wasted and destroyed.Smith reached these conclusions based on his study of the Mississippi and South Sea bubbles that decimated Europe in the 1719-1721 time period.The author, unknowingly, essentially repeats Smith's analysis but substitutes the bubbles of the 1980's,1990's ,and 2000's in the United States of America as the reference point.

The author correctly shows that the Securities and Exchange Commission (SEC),which is supposed to regulate the now collapsed investment banks ,was packed with appointees who were actually trying NOT to regulate .The same goes for the Federsl Reserve System (FRS).Except for the years 1938-1952,the FRS has been run by the big,giant private commercial banks.Too many FRS board members in Washington viewed themselves as cheer leaders for the speculative practices of the major banks.

Academia provided the intellectual fig leaf with a pseudo scientific theory called the Efficient Market Hypothesis(EMH).This pseudo theory was the brain child of a number of University of Chicago economists from the economics department and business school, such as Milton Friedman,George Stigler,Gary Becker,Robert Lucas,and Eugene Fama.This pseudo theory claims that there can never be a bubble in finacial markets.It assumes that all financial markets can be modeled as being Normally distributed.Benoit Mandelbrot has continuously demonstrated that this is false numerous times since 1958.All goodness of fit tests demonstrate that the distributions are a long way short of close to being normally distributed.In fact,they are all Cauchy distributions,which means that the risk of negative outcomes is a 100-1000 times greater than specified by the Normal Distribution.

Unfortunately,the bubble makers will simply lie low for 10-15 years and then try to start all over again,just as they have successfully been doing for over 400 years.
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on March 2, 2009
Well we are in a serious economic recession. How did we get here? Rush Limbaugh endlessly repeats that it was caused by laws like the Community Redevelopment Act (CRA) and other efforts by Democratic politician to terrorize the banks into making loans to low income people. Of course in reality, any loans made under the CRA were too small to have any impact on the financial crises, even assuming that a large number of them defaulted. In this book, Dr. Baker does not mention the argument about the CRA possibly because this book went to press before the argument about the CRA became prominent and also possibly because there is no empirical evidence to support Limbaugh's argument.

Dr. Baker explains how an increasing share (perhaps 25 percent of corporate profits) of our economy is dominated by finance. Deregulation of finance during the 1970's and beyond allowed lenders to circulate a staggering amount of money throughout the world. American manufacturing began to seriously decline in the 70's and the trade deficit ballooned. Productivity growth in the United States was very low in the 70's, through the Reagan-Bush Sr. years and Clinton's first term. Then, for unknown reasons, productivity started to pick up substantially. Investors began to speculate in the stock of emergent companies involved in the internet and related fields, which drove the stock prices of these companies into the stratosphere, even as few of the companies were actually registering any profit. The impressive stock market performance of these companies versus their poor performance in the real economy was reflected in the Price to Earnings (PE) ratio. In the past, according to Baker, the PE was around 14 to 1. But in 2000, it reached 30 to 1. In spite of the obvious fact that the stock market could not be sustained on such a wide PE ratio, market analysts, economists and politicians of both political parties kept insisting that the stock market bubble would never go away. According to Baker, it was the very questionable foundation of the stock market bubble, provided by capital gains tax revenue increases, that allowed Clinton to balance his budget. Idiotically accepting the assumption that the stock market bubble would continue to bring in revenue, politicians suggested that the US national debt could be paid off in ten years. Alan Greenspan refused to publicly warn against the irrational exuberance of the bubble. He bailed out the Long Term Capital Management hedge fund in 1998 so many investors probably thought they could continue to gamble in financial markets and Greenspan would bail them out. Greenspan accepted the assumption that the economy would provide enough revenue for balanced budgets for years to come, arguing that Bush's tax cuts in 2001 were necessary so that the US would not have to pay off its debt too quickly and so have to invest in public assets instead of selling its debt. A bunch of CEO's and speculators took 7 or 8 figure incomes from this bubble before stock prices went down. A few executives, like those of Enron, who inflated their company's stock price with accounting fraud, went to jail but not before millions of shareholders were looted of their investments. Baker writes that the CEO earnings to worker income ratio went from 24 to 1 in 1965 to 300 to 1 in 2000.

It was the real estate market that financial capital turned to after the collapse of the tech bubble. Mortgage companies (including Freddie Mac and Fannie Mae but all their private sector competitors heavily invested in the enterprise too) made money issuing mortgages to be sold in secondary markets. Banking CEO's pursued the short term profit that got them bigger compensation and bonuses. So they issued mortgages left and right and bought and sold them. Since appraisers were paid by the banks, they could be expected to assign greatly inflated prices to real estate the banks had invested in. It was a similar case with bond rating agencies, which were paid by the banks to certify the soundness of securitized questionable loans. New dangerous financial instruments were created to sustain the housing bubble. As the savings rate of disposable income for average Americans continued its decline from the 1980's, the Bush administration encouraged the home buying frenzy. Meanwhile, Baker shows that many signs that the housing bubble was going to end up in disaster were plainly visible but neither economists nor politicians nor Fed officials were willing to risk their favor with the rich and powerful by pointing these out. As with the earlier tech bubble, a small number of people ran off with tens of millions of dollars while many other people lost all their wealth. Then Democrats and Republicans joined together to throw trillions of taxpayer dollars at the bankers to try to save them from the mess they caused.

AT the end of the book, Baker throws around some suggestions for making sure financial bubbles don't happen again. Greater regulation is certainly necessary. Speculation needs to be reduced and the Tobin tax is certainly a good start. Baker observes that in periods where financial markets were more tightly regulated, such as the postwar 1945-73 era, there were no financial bubbles and the wealth of the country was more evenly distributed than it is today. Another course of action would be to weaken the value of the dollar so as to increase manufacturing exports and somewhat lessen the dominance of our financial industry. Our trade deficit is a problem that is in desperate need of being addressed, Baker notes.

Baker, by the standards of economists, at least in this book, writes in a very clear and simple manner. He obviously makes an effort in this book to make economic issues understandable to persons not well versed in economics. Obscure economic terms are defined in a glossary in the back of the book.
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VINE VOICEon February 25, 2009
The title of this book captures perfectly and succinctly the nature and performance of the high-flying US economy over the last fifteen years and its painful, yet very preventable, financial nosedive that has taken tens of millions of average people with it. As the author states, the stock market bubble in the late 90s and the grossly inflated housing market of the mid-2000s and the attendant investment bank meltdown were not inevitable. The cast of characters that failed to recognize the situations - or so many of them allege - and/or to perform professional regulatory functions to deflate the bubbles is many: the head of the Fed Alan Greenspan, the entire Fed Reserve Board, the SEC, virtually every economist in the country, the business media, home appraisers, bond-rating agencies, the Treasury Dept and other administration bodies - the list is quite long.

And then there is the greed aspect - the plunder element. Investment and commercial bank executives knew - or if they didn't, their incompetence defies belief - that they were raking huge fees off the sale of asset bubbles, based on bogus securities. Or in the case of AIG, based on the sale of credit default swaps, a form of securities insurance, that they had no intention of making good on. Households, pension funds, and the like have lost trillions in the real wealth that they invested in now deflated assets, only to see that wealth now held by those executives, who in the author's words, are borderline criminals. Who can disagree with the author's call for accountability, although there is no chance of that occurring?

The financial sector has become an increasingly huge component of our economy. Thirty percent of corporate profits in the US were attributed to that sector in 2004, a huge increase over bygone eras. By its very nature, that sector is subject to speculation: it swaps paper. Yet, it has become far too important to simply let free-run, as free-market ideologues regard as imperative. The author points out the numerous measures that could have been taken by the aforementioned to deflate the two bubbles before they became serious problems.

The book is best at demonstrating the sheer incompetence of those who should have seen the bubbles. If there is any luster left on Alan Greenspan, at one time referred to as the greatest central banker ever, it would have to be on the part of those who insist on keeping their heads buried neck-deep in sand. In addition, the business sections of the leading media come under withering attack by the author for their cheerleading and failure to analyze and investigate. And there is more than a hint that the economics profession, as a whole, was extremely negligent.

The author notes that the US economy operated quite well without being under the influence of bubbles for the thirty years after WWII. In that era workers with the influence of union contracts obtained increasing wages based on increased productivity that permitted the purchasing of a middle-class standard of living without resort to massive amounts of credit. But that virtuous circle of increasing wages, consumption, and investment didn't continue. Cracks in the economy began to appear with workers taking the brunt of it with the Reagan era assault on unions and the competition of offshore low-wage workers. Inequality rose, with more wealth based on stock market valuations due to such developments as leveraged buyouts and the proliferation of dot-com startups. The stock market bubble was underway.

The book is short and fairly light on explanations, some of which are inadequate or confusing. The author's explanations of budget deficits, interest rates, and the valuation of the dollar and their interactions are at best insufficient. While, it is beyond the author's control, books written within a few months of the onset of the current financial crisis lose currency very quickly. Many painful chapters involving bailouts, bankruptcies, takeovers, and economic stimulation are left to be written over the next few months. Nonetheless, the book is a concise and scathing look at the causes and fallout of this economic crisis through Oct, 2008.
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on March 31, 2009
Plunder and Blunder is a fair,tough, and impressive book. Although an economist, Baker savages his profession for completely missing the coming bubbles in the stock and housing market. All of the major players-President Bush, Alan Greenspan, Henry Paulson, etc., look like colossal fools. Dr.Baker explains why the bubbles were bound to occur and what we can do to avoid them in the future. I hate to use the word "best", but I think it can be said this is the best book written on the bubble economy.
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on May 28, 2010
Getting screwed is one thing, but not being able to understand how it happened makes it worse, as much of the American public knows after living through the financial scandals of the 2000s. If you're among those who keep hearing about "credit default swaps" but has not heard an explanation of what they are; or if you don't have a grip on what's cost so many their homes, jobs, or both; pick up the book PLUNDER AND BLUNDER: THE RISE AND FALL OF THE BUBBLE ECONOMY.

PLUNDER AND BLUNDER is written by economist Dean Baker, who predicted America's financial house of cards would fall when the breeze finally picked up. As Baker explains, his correct prediction hardly makes him the Amazing Kreskin but the trouble is, Wall Street, Washington, D.C., and the corporate news media preferred the Amazing Kreskin, as long as he said they could keep getting away with robbing the commons. For crying out loud, I can barely spell "economy" but throughout the 2000s, even I asked how housing prices continued increasing despite three decades of wages that actually declined when you adjust for inflation. Who was buying these homes, and how were they paying for them?

The regular person-friendly PLUNDER AND BLUNDER walks you through the rhyming and stealing of the con artists, their stooges in government and their flacks in the news media, even printing the mumbo-jumbo economic terms in bold type so the reader knows to flip to the glossary for definitions. A short (145 pages) volume, PLUNDER AND BLUNDER takes you to the scene of the crime that is America's second great depression, explaining how it happened, who did it, and how they are getting away with it (if we let them).

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on August 17, 2009
Dean Baker is co-director of the Center for Economic and Policy Research in Washington DC. He shows how Clinton's high-dollar policy blew up the $10 trillion stock bubble and also started the $8 trillion housing bubble. The government pushed people to build assets, as if you could buy yourself rich.

The bankers banked on the bubble, governments and media pushed it, regulators didn't regulate it, and economists denied that it existed. The bull markets were a huge con. And it's really still all bull. For example, the Washington Post editorialised on 11 January 2008, "Nor is there any consensus that a recession, if one comes, will be severe; Goldman Sachs thinks it's likely to be short and mild."

By October 2008, the crash had cost US families $5 trillion, $70,000 per homeowner. This is the first postwar recession caused by a fall in investment: nominal investment fell by $50 billion in 2000-01. This slump, unlike earlier ones, is not curable by lower interest rates.

Clinton, to get elected, talked for two opposing policies - public investment and budget deficit cuts (just as Cameron and Brown do now). When elected, he did the latter, as the ruling class demanded. As Baker notes, "There has been extensive research on the economic impacts of reducing the federal budget deficit. The overall conclusion is that deficit reduction provides only a modest boost to economic growth." It would do nothing to increase demand: wages would rise by just 2% in total over the next ten years.

Finance is supposed to steer money from savers to borrowers - which it fails to do - it is not an end in itself. We may want many things, but we don't want yet more financial deals. In the 1960s, the financial sector got less than 10% of all corporate profits, by 2004, more than 30%. But Baker notes, "The fewer people and resources we need to do our banking, to provide insurance, and to meet our other financial needs, the better off we are."

What to do? Baker proposes - cut the value of the dollar, cut the incompetent and corrupt financial sector, hold the incompetents accountable, tax gambling in financial assets, stop the evictions, and increase government investment in industry.
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on May 24, 2009
I worked on Wall Street from 1970 to 1990.......and continued to be a spectutor since 1990.

It was the policies of Greenspan that laid the ground work for the financial mess we are in. I was saying that way back in 1992...Clinton being Clinton gave the green light to bankers and the financial community to do what ever they want. Any thing goes......

What I don't get is why no one is talking about it. Therefore, in Plunder and in Miltdown it as good to see someone say it.....and it felt good for me personally as confirmation that I was right.

Bye the way, I want two copies of "THE GIFT OF THE JEWS" also wanted the new book on Lincoln and Andrew Jackson: Hard Cover Used.

Have a nice day.
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on July 3, 2013
This is another excellent book by Dean Baker. His grasp of economic issues and the ability to go behind the hype is truly outstanding. I continue to look for his books and articles, which are thought provoking and well beyond the general headlines that we get.
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on January 15, 2014
Dean Baker is not in the same league with many of the people who have written about the economic crisis. There are many better books:

Admati, Anat and Martin Hellwig, The Bankers' New Clothes: What's Wrong with Banking and What to Do about It, Princeton University Press; New Preface by the authors edition, 2014

Ahamed, Liaquat, Lords of Finance: The Bankers Who Broke the World, Penguin Books, Reprint edition, 2009

Bair, Sheila, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself, Free Press, 2012

Barofsky, Neil, Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, Free Press, Reprint edition, 2013

Blinder, Alan S., After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead, Penguin Books, 2013

Blyth, Mark, Austerity: The History of a Dangerous Idea, Oxford University Press, USA, 2013

Calomiris, Charles W. and Stephen H. Haber, Fragile by Design: The Political Origins of Banking Crises and Scarce Credit (The Princeton Economic History of the Western World), Princeton University Press, 2014

Fox, Justin, The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street, HarperBusiness, Reprint edition, 2011

Johnson, Simon and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, Vintage, Reprint edition, 2011

Johnson, Simon and James Kwak, White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You, Vintage, Reprint edition, 2013

Kindleberger, Charles P., Manias, Panics and Crashes: A History of Financial Crises, Palgrave Macmillan, Sixth Edition, Revised Edition, 2011

Mian, Atif and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again, University Of Chicago Press, 2014

Minsky, Hyman P., Stabilizing an Unstable Economy, McGraw-Hill, 2008

Ritholtz, Barry, Bill Fleckenstein, Aaron Task, Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, Wiley, 2009

Roubini, Nouriel and Stephen Mihm, Crisis Economics: A Crash Course in the Future of Finance, Penguin Books, 2011

Schiff, Peter D. and Andrew J. Schiff, How an Economy Grows and Why It Crashes, Wiley, 2010

Shiller, Robert J., Irrational Exuberance, Princeton University Press, 2 edition, 2005

Smith, Yves, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, Palgrave Macmillan; Reprint edition, 2011

Sorkin, Andrew Ross, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves, Penguin Books, Updated edition, 2010

Stiglitz, Joseph E., Freefall: America, Free Markets, and the Sinking of the World Economy, W. W. Norton & Company, 2010
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on December 6, 2010
This is a good analysis of recent financial bubbles and a set of
recommendations for the preventing future ones. It's especially
usable because it is concise. If you want to understand more of
the details and more of what went on before, underneath, and behind
these bubbles and are willing to invest more time reading, then a good read is
How Markets Fail: The Logic of Economic Calamities [Paperback],
by John Cassidy.

Some of the analysis:

- Our government panders to consumers. We spend now and worry
about the future later, which leads us to neglect education,
infrastructure, building businesses that provide jobs,
fundamental research, etc. Our political system privileges
short-term benefits over long-term gains.

- The housing bubble was easy to recognize. Some *did* recognize
it and warn us about it. But, we ignored those warnings,
possibly because we were greedy or we did not want to get left
behind by rising home prices etc.

- The housing bubble and the (paper) profits it generated and the
cash we took out of it of our houses via home equity loans helped
us get out of the recession caused by the 2000 stock market
collapse. But, that cure was unsustainable.

- There were a variety of enablers of the housing bubble: (1) home
owner and consumer greed; (2) Fed policies, e.g. pursuing low
interest rates, promoting deregulation, encouraging the use of
ARMs (adjustable rate mortgages); (3) securitization that enabled
banks to continue making risky, bad loans while keeping those
loans off their books; (4) the willingness, even eagerness of
loan originators to grant Alt-A, sub-prime, liar, and NINJA
loans; (5) collaboration of the rating agencies who were willing
to rate packages of individually risky loans and not risky; (6)
loans that were structured so as to enable home owners to delay
payment of both principle and interest; (7) misguided incentives
and compensation in financial industry; and (8) desire by the
U.S. Congress and the U.S. President to please voters by
extending home ownership and to enable home owners to spend more
(through use of home equity loans).

- There were enough rationalizations, even by those inside the U.S.
government and by some in prestigious academic institutions so as
to provide plausibility for the bubble deniers.

And, a few of Baker's recommendations:

- The Fed must have a stronger commitment to fighting asset
bubbles. But, we cannot control the Fed. And, the Fed chairman,
in particular, who is appointed by the U.S. President is likely
to continue to promote policies that encourage bubbles. The
dream for a politically independent Fed, is a dream, really. That
Baker does not take this proposal seriously is shown by the fact
that he addresses it in a single sentence at the very end of a
section and then with a conditional: "If the central bank lacks
the necessary political independence from Wall Street to
effectively manage the economy, then it must be reorganized to do
so." Good luck with that proposal.

- Price the dollar lower. A high dollar makes imports cheap, but
moves manufacturing and jobs out of the U.S. Long-term, it hurts
manufacturing workers and benefits professionals. However, since
the benefits of a higher dollar are short-term, our political
system won't do it.

- In the financial sector, the following would help: (1) correct
incentives; (2) do not allow firms to choose their auditors or
the rating agency for the securitizations; (3) guarantee and
save investment banks *only if* they agree to serious regulation
and promise *not* to save them (but there is really no effective
way to make and keep that promise); (4) impose a tax on gambling
in financial assets.

- More support for renters; less support for home owners. Do less
to encourage those who speculate in home real estate. But, the
political forces are aligned in favor of more support.

- Punish incompetent people in the financial industry; punish the
incompetent, gullible media and reporters; punish incompetent,
ideological economists; punish the over-seers (e.g. Fed, the U.S.
Treasury Department, and the Congressional oversight committees).

The most disappointing aspect of this book, and it's not Baker's
fault, is that his recommendations are not likely to be implemented
and are not even remotely viable politically. That's not a reason
for ignoring this book, and it's true of most, if not all, other
books that have recommendations for fixing our financial markets,
too. But, it is depressing, because it indicates that we have no
real, usable solutions. It also suggests that the problems with
our financial markets and institutions are fundamental to the
system itself, and that they cannot be fixed without changing to an
entirely different system. We'd have to switch to a different
financial system, e.g. one that is not really a capitalist,
market-based system at all. Or, we'd need a a different political
system, in particular, one that does not pander to constituencies,
and is, therefore, not a democracy at all. But, neither of those
changes seem remotely acceptable.
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