InReview – Issue 64

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism by Kevin Phillips. New York: Viking Press, 2008. 256 pp.

Kevin Phillips has been a political and economic commentator for more than three decades. A former White House strategist and advisor to Richard Nixon, he has been a regular contributor to the Los Angeles Times and NPR as well as writing for Harper’s and Time. He has written 10 books, mostly on politics, economics, and history.

Bad Money extends ideas from Phillips’ previous works American Dynasty and American Theocracy. His specific subject is the economic crisis of 2007 and forward, its causes and historical corollaries.

Phillips points to three major causes of our current economic woes: the rise of the financial services sector, the squeeze caused by impending peak oil production, and the lack of leadership from the U.S. government in addressing hard facts related to either of these issues. As an historian and observer of the U.S. economy for many years, Phillips walks us through the ways in which this house of cards was built, writing with an almost prophetic zeal and a barely controlled anger and disgust that spills out over both major political parties.

One unique aspect of this book that you may not see elsewhere is Phillips’ historical analysis in which he compares the current crisis to the decline of the Spanish, Dutch, and British empires. Phillips documents how each of these countries, while at the height of power fell victim to similar issues, including reliance on a single asynchronous energy source, poor government oversight, and the rise of a financial services industry at the expense of manufacturing (as a percentage of GDP). Call it morbid curiosity, but this book is a page-turner.

My one quibble is that it doesn’t include anything prescriptive. Perhaps Phillips holds out no hope for us as a nation or a culture, but it would have been nice to hear him say that there are, at least, better or worse ways to weather the storm.

Perhaps some of the prescription is in simply reading between the lines. If lax oversight, greed, shortsightedness, and a bipartisan unwillingness to tell the truth created this crisis, perhaps a reasonable amount of regulation, truth-telling, prudence, and long-term strategies that promote the common good can assist us out of it.

Reviewed by Mark Openlander

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The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller; Princeton, NJ: Princeton University Press, 2008. 196 pp.

Robert J. Shiller is the Arthur M. Okun professor of economics at Princeton University. He is the author of numerous books including best-seller Irrational Exuberance.

The book is organized into three parts: what factors led to the worldwide financial crisis that exploded in 2008, how to deal with this in the short term, and some long-term changes needed to address the underlying factors to assure that this does not happen again.

Shiller attributes the financial crisis to the “housing bubble” that began escalating prices rapidly and irrationally in the mid-1990s, fueled by a “social contagion” of boom thinking. When the bubble burst in 2006, prices started coming down as rapidly as they rose, leaving in their wake a spread of financial ruin that will last a long time. Shiller goes to great lengths to show there was no basis for escalating land prices or rapidly increasing construction costs.

In his short-term solution, he focuses on programs to help the most vulnerable who have been hurt in the ensuing crisis. He argues this on the basis of “the underlying, unstated risk management contract that governments around the world have with their citizens and businesses,” p. 94.

For his longer term solutions, Shiller considers technology-based tools dealing with real estate as a market, designed to provide more and better information for those entering the market and a braking system to stop the buildup of future bubbles.

Shiller does a good job outlining the causes of the present crisis, though I believe more emphasis should be placed on the social role of the new mortgage businesses and types that emerged. I also think he does not develop the role insurance played in deepening the crisis.

I struggled with many of Shiller’s long-term solutions for two basic reasons: His solutions did not seem practical for people with minimal education. Further, he does not adequately consider the “bite back” effect that surely follows any complex technical solution.

In spite of these cautions, however, I believe Shiller has done a great service with this book, and I hope it will be widely read and discussed. Putting a proposal on the table can start the discussion, and this is what he has done.

Reviewed by Al Erisman