Tuesday, November 30, 2010

Exit Note on McLean and Nocera

I've finished McLean/Nocera All the Devils are Here (cf. link, link).  I still think highly of it, although I don't think it ended quite as well as it began.  I liked it for the "deep background" on the 80s and 90s; the  corollary is that they are not quite as wonderful for the ticktock of the closing weeks (I suppose for ticktock you go to Andrew Ross Sorkin, whom I haven't read)--at the very end, they are reduced to diary entries.

Something else: they're impressively incomplete in their coverage.  I can't really fault them for this: the story is too protean for one book anyway.  But they do seem to go fishing where the fish are; so, good stuff on Merrill and AIG and Goldman, moderately good on Ameriquest and Countrywide (have they been reading Michael Hudson's Monster?)--more haphazard on Lehman, almost  nothing on B of A, Citi or the Morgans (and why do our chroniclers say so little about WaMu?).

But here's a takeaway:  no surprise to say that the uproar had many components.  My point is that in retrospect I think we saw some coming; others, really not. That is: careful students understood that real estate was an unsustainable bubble; that a savings glut brought trouble in its wake; that trade imbalances posed a long-term threat (still do, IMO).  But I don't think many but outsiders realized just how glow-in-the-dark potentially lethal banking had become.  Yes, yes, we know about the John Paulsons, the Andrew Redleafs, who saw through the mess and profited from it.  But most of us probably thought, as they say of Alan Greenspan, that it just wan't conceivable a big firm would blow itself up.

We know now how cruelly wrong that was: big firms did blow themselves up, and others imbibed billions of our taxpayer dollars to escape it.  The real virtue of books like McLean/Nocera is that they give us a beginning taste of just how Guignol dysfunctional big banking really was.

Or is.  

2 comments:

chrismealy said...

I really enjoy your reviews of all the GFC books. Saves me the trouble of reading them.

Having seen the dotcom bubble up close and from reading the economics left (Dean Baker, etc) I knew the housing bubble was going to pop, but I never imagined that the banks would keep all that garbage on their books. Back in the dotcom days Wall St didn't invest in Pets.com and the like, they just sold to suckers and stood back. I figured they were mostly dumping MBS on foreign investors like China, Germany, and the oil-exporters. For a long time I was shocked that they could be so dumb, but I'm not anymore. Those characters really were a bunch of morons. I think if the dotcom bubble had lasted just a little longer they would have exploded then.

Buce said...

Thanks, Chris. Now I know why nobody clicks through on my Amazon links.

I think there were several differences with dot com. One, there really was some product: the computer decade was one of the most creative in American history. Two, the deals were equity, not debt, so the money center banks didn't have the same involvement. The Page Mill Road VCs would stump up seed money; they'd nurture an honest to god business and then they'd sell it to a waiting multitude. Or should I say a "begging" multitude, who could not get enough of this stuff. A lot of these end buyers got hosed; a fair number did not--but while it may have been a mania, it was not a deception. Personal story: I got a $5,000 buy-in on a "friends and family" offering about 1998; I told the broker to sell it the instant he got it. He could barely compute what I was saying, but he did follow instructions and we go enough for a nice dinner for two with a bottle of bubbly (certainly a better return than any book I ever wrote). The co twisted slowly, slowly, until it expired about a year later.

But for housing, there was no begging multitude: there was a gaggle of snake oil salesmen who hectored a throng of impressionable plain folks into taking on burdens they never knew they wanted. The real product was surplus money that the money center banks had to invest somehow.

Indeed you could have learned it from Dean Baker, etc. It was from Krugman that I first learned how every new job in real estate replaced a dead job in computers. You could also have learned it from the bankruptcy lawyers I hang out with, who had been saying or years "I can't believe the deals we're seeing..."