Appreciation: Ritholtz on the Late Uproar

So far I've read three overview accounts of the debacle/meltdown/uproar.* Charles Morris' The Two Trillion Dollar Meltdown is the most polished and elegant, with some good detail on the mechanics of particular deals. Mark Zandi's Financial Shock! is perhaps the most thorough, though a bit pedestrian in style. Comes now Barry Ritholtz' Bailout Nation, surely the wise-guy hubba hubba entry in the pack. Short summary: they overlap; they're different; they are all worth the effort.

For all his streetsmart style, Ritholtz has plenty of content, but I'd say his book is a bit misnamed. He does indeed provide a convenient summary of which banks have allowed themselves to be burdened with how many ladles full of taxpayer money--at least so far. But perhaps the most distinctive part of his presentation is his account of the sea change in Federal Reserve policy from its original role as a guarantor of the integrity of money to its modern avatar as protector of asset values (he doesn't have much to say about the intermediate character as facilitator of full employment--somehow, that one seems lost in the shuffle. This is interesting and important, but I'm not persuaded that it quite fits the catchphrase of the title. The "rescue" (sic?) of Long Term Capital Management, for example, was noteworthy in the respect that it did not involve the direct expenditure of taxpayer money, although it certainly did involve a fair amount of Federal bullying arm-twisting, with the intent of getting private parties to act. Even the Fed's frantic, pell-mell rush to restore confidence in markets after the 1987 jolt was not quite the same as a direct stuffing of Federal dollars into private pockets.

Ritholtz begins his account of a "modern bailout era" with the story of Lockheed in the early 70s and Chrysler in the early 80s. This is both too broad and too narrow. Too broad: Ritholtz is right that both Chrysler and Lockheed did involve infusions of taxpayer cash into private entities, although neither one was quite the naked public-to-private wealth transfer that we might envisage. Lockheed, for example, as government contractor, was virtually a ward of the state to begin with. And while a good deal of its problem appears to have arisen from mismanagement of the Tristar project, still a lot of their difficulty could simply be attributed to faulty bidding on government projects.

Chrysler was, of course, not primarily a government contractor. The difficulty with Chrysler is that the company, against almost everybody's expectation, actually paid the money back. We may well say that the government made a colossally risky loan/investment here, of the sort that no sensible private party might have undertaken. Still, it was a kind of success, and recall the answer to the question "who was the best Civil War general"--"Gentlemen, they paid off on Grant."

But Ritholtz is also too narrow, in that forgiveness of the financial failings of private parties is an old American tradition. A natural complememt to Ritholtz' book is David A. Moss, When All Else Fails, about the long history of the government as a guarantor of last resort--including, inter alia, it's role in facilitating the limited liability company and the bankruptcy discharge.

These days Alan Greenspan looks pretty much like a bum for having opened the money sluices duirng the flood of real estate financing. Ritholtz adds his voice to the chorus of critics, but it would have been helpful if he had gone a step further and tried to understand or account for the response of Greenspan and his defenders. For example, Greenspan himself as argued that his manipulation of short-term money can't be held responsible for the real-estate bubble because real estate is long-term and there is no evident coupling between short-term and long-term rates.

Aside from Greenspan, Ritholtz is enthusiastic in general to assign praise and blame. Blame is easy because there is so much to go around; I guess you would say that Ritholtz's prime targets are former Senator Phil Gramm, who worked so hard to exempt derivatives from commodity trading regulation, and the "weasels"--Ritholtz' word--who advise corporate boards to pay their managers such obscene salaries. On the other hand, he does a careful and (I think) thorough job of showing that the meltdown was not the result of the Jimmy Carter Community Reinvestment Act or its progeny. He's also got a soft spot--and so do I--for the Federal Deposit Insurance Corporation, the outfit that really does know how to bankrupt a bank, quickly, cleanly, and with minimal damage to the system. I (and, I think, Ritholtz) can only wish they had a chance to do more of it.

All this is good stuff and it may be niggling to want more. Still, there is one underlying issue so pervasive and so central to his argument that I'd really like to know what he thinks about it. That is: did we need to "save the banking system" and if so, was any "bailout" necessary--and if so, how much (I guess that is three issues but you know what I mean). Is Ritholtz a let-em-all-hang libertarian noninterventionist? If so, I'd be happy to have him say so up front, and to address the (possible) consequences. If not, he's put to the question of deciding what parts of the intervention that he excoriates so much--what parts were actually essential to saving the system.

Obviously no book is going to finish the story of this great calamity--certainly not one written in the calamity itself. Still, all three of these books deserve a place on the shelf. If I had to take just one, it might be Morris', but you can learn a lot from any of them, and you can learn stuff from each that you don't learn from either of the others.
===
Paul Krugman's Return of Depression Economics might count as a fourth, although as I've said before, it bears the scars of a somewhat improvisational effort to rework an earlier book.