The Trillion Dollar Meltdown by Charles R. Morris

The Trillion Dollar Meltdown has been making the rounds at the mutual fund company where I work. It’s not surprising — this is a timely, hard-hitting, and opinionated look at the global financial crisis we find ourselves in. If you want a deeper understanding of what’s going on, but without reading a massive tome, this is the book for you.

That doesn’t mean it makes easy reading, though. Morris has followed Einstein’s advice by making his explanation as simple as possible — but not simpler. He is evenhanded but not wishy-washy. The Republican cult of deregulation comes in for severe criticism, but so does what he sees as the failure of liberal Keynesianism that preceded it. Morris shows in painful detail how much havoc the exotic derivatives created in recent years have caused, but he also believes that some of these were useful and ingenious inventions.

Contrary to those who maintain that the “free market” will magically correct all excesses, Morris thinks that each financial innovation will almost inevitably be pushed to its limit until it crashes. Only then will we know its limitations, and how to regulate it. But in a globalized, computerized world, dangerous financial innovations can spread faster and wider than ever before. Dodgy credit becomes marbled through our institutions like fat in a steak, to use his colorful analogy.

Colorful analogies are, in fact, one of Morris’s strengths. Here’s another:

According to the Financial Times, in October 2007 several big banks were negotiating discounted lending terms to vulture funds, firms that specialize in distressed debt, on the condition that they use the money to buy the banks’ deal-related leveraged loans. This is a snake fighting starvation by eating its tail.

The credit crisis isn’t just about bad mortgages, this books makes plain. It’s not about any single type of asset, and that is what makes it harder to cope with than the bubbles of the past.

Overpriced assets are like poison mushrooms. You eat them, you get sick, you learn to avoid them.

A credit bubble is different. Credit is the air that financial markets breathe, and when the air is poisoned, there’s no place to hide.

Like Paul Krugman and other critics, Morris names former Fed chairman Alan Greenspan as one of the key culprits. It’s ironic that Greenspan is so well known for his warning of “irrational exuberance,” because Morris cites many examples to show that Greenspan was better at inflating bubbles than letting the air out of them. I was pleased to see that Morris singles out an example that struck me at the time. “I’m sure Mr. Greenspan is a very smart guy,” I remember thinking then, “but this makes no sense to me.”

In 2004, when families had a historic chance to lock in long-term fixed-rate mortgages at only 5.5 percent, Greenspan said they were losing “tens of thousands of dollars” by not grabbing one-year ARMs, then at teaser rates of only 3.25 percent. In any scrapbook of bad advice from economic gurus, that should be near the top of the list.