Half of the story
By Steven Martinovich
Our ongoing economic difficulty was always guaranteed to produce at least two things: politicians ducking blame and a tide of books ready to lay it. Given the popularity of mushy populism today, it's probably not a surprise that big business bore the brunt of the blame while sainted politicians detailed their impossible claims of jobs saved even while unemployment roles exploded. As hated as politicians are, it seems it's still easier to hate the fat cats of Wall Street.
Bloomberg News bureau chief Mark Gilbert's attitudes towards politicians isn't very clear but his contempt for financial industry executives is apparent in Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable, one-part diatribe and one-part chronicle of how the United States and the rest of the world managed to get themselves into the economic mess that they did. While there is much to glean from his account, there is also a side of the story missing.
As Complicit tells it, the reason for the sub-prime mortgage mess and subsequent economic meltdown was a chain of events that is fairly simple to explain even if the underlying details would make the average person's head spin. Gilbert argues that mortgage lenders would borrow cheap money from other financial institutions and then loan that money to people seeking mortgages. The mortgage industry soon figured out that there was more money to be paid from the bundling and selling of mortgages than the loaning of money.
Given that mindset it should come as no surprise that lenders begin loaning money to almost anyone who showed up and sold it all to investors who thought the high yields would last forever. As with all parties, however, within a few years it all came to an end and credit markets nearly shut down as even those with rock solid reputations couldn't borrow money on the open markets.
Aiding and abetting the process were the credit rating agencies. Where previously they viewed the integrity of their ratings as sacrosanct, the bottom line became all and almost any of the bundles offered to investors earned solid credit ratings. That only fuelled more investor money to plough into the market as they viewed the ratings as absolute truths, failing to understand the extraordinarily risky nature of what they were investing in or whether the ratings were even deserved.
It is a sordid story as Gilbert tells it, with bankers abandoning their relatively safe core businesses to expand into the risky investments that later became known as toxic assets, investors ignoring all common sense to throw money at anything that moved and promised a market-beating yield, and financial industry executives that created new derivative-based vehicles that both hide how risky they were and magnified the chances of their collapse. It was an orgy worthy of Caligula.
And much of the criticism that Gilbert lays at the feet of the financial industry is well-deserved. Experts in their fields, they should have known that they were building a rickety house on an increasingly unstable base. Money was being created at will thanks to the derivatives and cheap credit and it only took an increasing rate of consumer mortgage defaults to trigger the process that eventually froze credit markets. As much blame as the financial industry deserves, however, Complicit seems content to only tell the end of the story.
One must wonder, for example, why his criticisms of government are – to steal a line from Gilbert himself – so gentle as to be non-existent. Though he takes a shot at the federal government for its inconsistency on who to bail out, he never goes back further in history to find out who laid the first brick. Why no mention of the Community Reinvestment Act of 1977 which was passed with the noble goal of helping the poor own their homes but set the stage for mortgages to those who couldn't afford them? Why ignore attempts to reform Fanny Mae and Freddy Mac in the 1990s, a failure that Bill Clinton laments today? Why fail to point out congressional attempts in the 2000s to do the same that were blocked by Barney Frank accusing Republicans of racism?
Any number of people from both sides of the American political divide and outside experts noted the government's housing policies were distorting the market place and yet successive presidents and congresses did nothing or engage in demagoguery. To this day Frank, Christopher Dodd and others have never been called to task for the active roles they played which created the world that encouraged the financial industry to engage in their lunacy. Gilbert's failure to do so is the latest in the long string of insults to history. Complicit closes with a list of reforms that are generally on point and targeted to the financial industry but Gilbert's blind spot remains when it comes to government, offering nothing but more market distorting regulation.
For what it is, a chronicle of the financial meltdown which caused the recent recession, Complicit is an engaging and accessible read. Gilbert is merciful to the reader by choosing not to explain the nuts and bolts of the extraordinarily complex financial instruments which undermined the economy in favour of telling the wider story of why the guardians of our financial system went on a drunken binge of easy credit and irresponsible decisions. Gilbert's failure, however, to spread the blame to all culpable parties ultimately undermines his good work and is the latest effort to miss the opportunity to set the record straight.
Steven Martinovich is the founder and editor in chief of Enter Stage Right.
Buy Complicit at Amazon.com for only $16.47 (34% off)
Get weekly updates about new issues of ESR!