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5.0 out of 5 stars Financial crisis explained and analyzed for general audience, January 23, 2010
This review is from: Debt Spiral: How Credit Failed Capitalism (Hardcover)
If you have been looking at books about the recent financial crisis, much of what you need to know about them can be deduced by the category of authors to which they belong. There are three main categories: professional journalists, academic economists and, lastly, all manner of political theorists. The first category has the advantage of having the most readable style, but unfortunately suffers from fairly superficial analysis and a "gotcha" mentality; the latter two, to the extent that they focus on the facts at all, focuses on them selectively and in the service of the authors' already established world views, some of which are pretty far out.

So, if you are looking for entertainment, or for something that supports your own views, these may do just fine. If you are looking for someone who is actually making an honest attempt to understand what is going on, you may be interested in Marty Lowy's book, Debt Spiral. Mr. Lowy is a lawyer, formerly involved in financial regulation, work that brought him into close familiarity with the S&L debacle, about which he wrote a well-reviewed book, High Rollers. However, from my perspective what makes him stand out is that he has a good practical understanding of much of what went wrong in this financial crisis, and that he has no axe to grind, either or for or against the financial system.

His overall conclusion: "The boom and subsequent bust were products of institutionalized fraud and collusion....A high percentage of the loans ... were bad from the start." How that came to pass is the subject of the book.

Mr. Lowy divides the book into three parts. His first part does two things. First, it provides a long historical perspective on a number of the major activities implicated in the current crisis, notably the mortgage market, the Fed and de-regulation. Second, he then turns to a more careful examination of more recent events: the run-up in home prices and the role of sub-prime and alt-a mortgages; securitization and the rating agencies.

The second part then explores events as the crisis began to unfold in 2007. What is distinctive here is that he addresses all the major events of the crisis and attempts to explain what happened and why. In some of these cases, he admits to multiple possible interpretations, but also does a good job of debunking some of the popular perspectives, for instance, that Paulson and Bernanke did not have the authority to rescue Lehman. On the other hand, what he does say reflects his typical common sense approach; "It was a difficult decision made under enormous pressure. I used to sell failed banks for the FDIC overnight. I know how little time there is for reflection." (p230).

The third part explores theories and remedies. He is careful here to include a wide range of views, some of them pretty far out, and he is judicious in his evaluations. This may be disappointing if you were looking for definitive answers to all questions, but helpful if you are really trying to sort out the crisis. A typical conclusion: "The divide between business interests and consumer interests - at least in the financial sector - turns out, I believe, to be a false dichotomy. The financial products that are bad for consumers ended up being bad for lenders time after time."

The book's style is down-to-earth, practical and easy to read. The author covers a lot of ground without being mind-numbing, and does a good job of explaining the jargon and financial details in every-day terms. Some of the things that I found most interesting and useful: (1) He makes a good demonstration that without money from mortgage refinancings, the economy probably would not have grown between 2000 and 2007. (2) He shows how well-intentioned government actions to support home ownership ended up playing a major role in the crisis, by subtly and not so subtly distorting the perception and tolerance for risk. (3) He doesn't pull any punches about bad actors in the system, but he also is careful to not engage in a witch hunt. Overall, the book reflects a lot of practical experience and much common sense. I have been recommending it to everyone who wants to understand what actually happened in the crisis.

It is both a strength and weakness of the book that it is targeted at a general audience. If you are interested in a really detailed or academic analysis of particular aspects of the crisis you won't find it here. The book does not employ much in the way of journalistic story telling, following key individuals at critical moments. No chapter here will be printed in the New Yorker. The closest he comes to that is the chapter on Washington Mutual. On the other hand, if you want to get a straightforward explanation of what an "alt-a" mortgage is, and why it matters, start here.
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