The Trillion Dollar Meltdown

The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles R. Morris

As a lawyer and former investment banker, Charles Morris can appreciate the power of free-market capitalism to drive economic growth and financial innovation. Now, however, he believes the era of market fundamentalism has come to an end, just as Keynesian interventionism came to an end in the 1970s. He estimates conservatively that the recent writedowns and defaults of residential mortgages, corporate debt, credit card debt, and bonds will be about $1 trillion. But this book was written before even more recent revelations such as the Bear Sterns insolvency. It is now estimated that the bill could be 3 or 4 times as high.

Morris gives a brief but excellent history of events that led up to the current credit crunch that is paralyzing global financial markets. Disasters have many fathers, but Morris lays much of the blame on bond rating agencies, financial insurance companies and the Federal Reserve under Alan Greenspan. After 9/11 the Federal Reserve lowered the interest rates below the rate of inflation, essentially giving banks free money. Banks then lent money for fees up front and then repackaged the loans - turned them into securitized debt - and sold them to investors. It was basically cost free and risk free, so they lent money as if there was no tomorrow.

These securitized debts or CDOs (collaterilized debt obligations) were sold and resold throughout the global financial system and no longer did anyone know how to measure their value or their risk.

Add to this the fact that homeowners were using the rising equity of their homes as atms and pumping another $4 trillion into the economy.

Also add to the mix $700 billion annual trade deficit that indicates that much more consumption over production. The party was really in full swing.

But the party couldn't last forever. The bubble started to deflate last summer when housing prices began to fall and homeowners began to default on their mortgages. The government initially thought it was just a typical market adjustment, but with the imminent collapse of Bear Stearns they finally took decisive action. Bear Stearns was holding $46 billion worth of securitized mortgages with an estimated value of 30 cents on the dollar.

As the crisis has been unfolding, it has been estimated that the federal government has authorized about $1 trillion in new lending through agencies such as Fannie Mae, Freddie Mac, Federal Housing Finance Board, and the Federal Reserve. This was done solely to keep the economy afloat. But no one knows yet where this will end. Massive infusions of money will lead to a weaker dollar, as we have already seen. A weaker dollar against the background of rising oil and food prices tells us the crisis is far from over.

Morris does not tell us exactly how we will get out of this mess, but he is sure that in the end a new system of financial regulation will be in place.

Many people are not aware that buying a book via online is much cheaper (even after delivery charges) compared to buying the same book in a local bookshop. The cost savings can be as much as 20%.

To buy this book, click on the logo below.