Financial Fiasco: How America's Infatuation with Homeownership and Easy Money Created the Economic Crisis

Johan Norberg

Jan 2009 · Cato Institute

About this ebook

""The story of this storm in the global markets is the story of how government intervention to solve previous crises laid the foundation for a new one," writes Johan Norberg in his important new book. Tracing the causes of our current financial crisis with liveliness and clarity, Financial Fiasco shows the mistakes made in Washington, on Wall Street, and in communities across America that led to the economic meltdown. While many analysts have placed the blame solely on Wall Street, Norberg exposes the crucial role government regulation played in creating the opportunities and incentives that led to the financial collapse." "In six concise chapters, Financial Fiasco tells the complex story of the crisis, showing how monetary policy, housing policy, and financial innovations combined to create financial catastrophe. The final two chapters describe the government's mismanagement of the crisis and how we are now dangerously repeating many of the very same mistakes that caused it. An understanding of the roots of the financial crisis is crucial for every American who has felt its effects - and would like to prevent the same disaster from happening again. Financial Fiasco provides that understanding, with great insight, clarity, and wit." "Just as important, the book serves as a profound warning against pursuing the wrong solutions. "After government authorities had helped create the worst financial crisis in generations, the climate of ideas has now shifted dramatically in the direction of bigger and more active government," Norberg writes. Financial Fiasco is the perfect antidote to those ideas, a cautionary tale on how to stop confusing the disease with the cure."--Jacket.

Ratings and reviews

The Financial Crisis of 2007-2008 is manifestly not over, and so it may seem premature to start writing the history of it now. What’s more, although the publication date of this book is October 2009, I judge from the date of the Preface that it was actually completed in February of this year. For heaven’s sake, the outrages of the Obama “stimulus” legislation and the unlawfully rigged bankruptcy and Federal takeovers of the auto companies hadn’t even happened yet! Let alone healthcare! But if, as the cliché goes, journalism is a first draft of history, then this brief volume can be chalked up as an early second draft. Most of the citations within it are in fact from contemporaneous accounts in the mainstream and business press. And, as 2009 draws to a close, the week by week fumbling of Paulson, Benanke and Geitner in the fall of 2008 does in a way seem like a long time ago. This is a breezy, often witty, retelling of the forces leading up to the 2008 meltdown, and the highlight must be the chapters (titled “Hurricane Season” and “Madly in All Directions”, respectively) that detail the collapse itself and the clumsy, haphazard government reactions. Reading it got my blood boiling all over again, and it became clear to me that the sheer pace of innovation in policy stupidity, illegality and destructiveness that we’ve endured over the past eighteen months has had a numbing effect. When faced daily with the prospects of a government takeover of the entire healthcare industry, the sinister dishonesty of the Paulson TARP legislation can easily slip from memory (was it really only 13 months ago?). So no, it is not too early to document these events and this book is a welcome contribution to what I can only hope will be a vast literature of conscientious objection. The first three chapters trot out the usual suspects to the crime. First, the easy money policy of the Federal Reserve in the wake of 9/11 and the dot com collapse which undoubtedly fueled the speculative boom in residential and commercial real estate. Second, the longstanding and bi-partisan government fetish with encouraging homeownership among people lacking the financial wherewithal, which resulted in the uncontrolled growth of the Federal mortgage monsters Freddie and Fannie. And third, in keeping with the narrative so familiar to us all, the proliferation of the “financial weapons of mass destruction” otherwise known as securitized mortgages in all their various mutations. It is with this third chapter that I have the most difficulty. Although Norberg is pretty clear throughout the rest of the book that the blame for the financial fiasco rests with government, the stories about the “greed” and “short-termism” of Wall St. and the incompetence of regulators and credit rating agencies are too easily interpreted in exactly the wrong way: that what the financial sector needed was stronger, more active and insightful regulation. Although a careful reader would see that many of the excesses were unintended results of regulation (e.g., the capital standards that encouraged banks to push assets “off-balance sheet” via exotic securitization techniques, the credit rating cartel created by the SEC, etc.), this type of focus inevitably leads to calls for more and “better” regulation. The mundane fact of course is that bankers (in fact, all businessmen, and probably the vast majority of the human race) seek to make money, and are frequently motivated with a short-term outlook – all the time, not just during speculative bubbles. Rating agencies simply are incompetent a lot of the time (financial economists have long known this – see, for instance, the extensive literature on how bond markets capture and price in credit quality long in advance of rating agencies). None of this is news in good times. And it wouldn’t be news in bad times either but for the much abused notion of “systemic risk” and the dreaded corollary “too big to fail.” There are no third party effects to worry about