- Phillips, Kevin.
Bad Money.
New York: Viking, 2008.
ISBN 978-0-670-01907-6.
-
I was less than impressed by the author's last book,
American Theocracy
(March 2007), so I was a little hesitant about
picking up this volume—but I'm glad I did. This is,
for its length, the best resource for understanding the
present financial mess I've read. While it doesn't
explain everything, and necessarily skips over much
of the detail, it correctly focuses on the unprecedented
explosion of debt in recent decades; the dominance of
finance (making money by shuffling money around) over
manufacturing (making stuff) in the United States;
the emergence of a parallel, unregulated, fantasy-land
banking system based on arcane financial derivatives;
politicians bent on promoting home ownership
whatever the risk to the financial system; and feckless
regulators and central bankers who abdicated their
responsibility and became “serial bubblers”
instead. The interwoven fate of the dollar and petroleum
prices, the near-term impact of a global peak in oil
production and the need to rein in carbon emissions, and their
potential consequences for an already deteriorating
economic situation are discussed in detail. You will also
learn why government economic statistics (inflation rate,
money supply, etc.) should be treated with great scepticism.
The thing about financial bubbles, and why such events
are perennial in human societies, is that everybody
wins—as long as the bubble continues to inflate
and more suckers jump on board. Asset owners see their wealth
soar, speculators make a fortune, those producing the assets
enjoy ever-increasing demand, lenders earn more and more
financing the purchase of appreciating assets, brokers
earn greater and greater fees, and government tax revenues
from everybody in the loop continue to rise—until the bubble pops.
Then everybody loses, as reality reasserts itself.
That's what we're beginning to see occur in today's
financial markets: a grand-scale
deleveraging
of which events as of this writing (mid-October 2008) are
just the opening act (or maybe the overture).
The author sketches possible scenarios for how the future
may play out. On the whole, he's a bit more optimistic than
I (despite the last chapter's being titled “The Global
Crisis of American Capitalism”), but then that isn't
difficult. The speculations about the future seem plausible to
me, but I can imagine things developing in far different
ways than those envisioned here, many of which would seem
far-fetched today. There are a few errors (for example,
Vladimir Putin never “headed the KGB”
[p. 192]: in fact he retired from the KGB in 1991
after returning from having served as an agent in Dresden),
but none seriously affects the arguments presented.
I continue to believe the author overstates the influence of
the evangelical right in U.S. politics, and understates the
culpability of politicians of both parties in creating the
moral hazard which has now turned into the present peril.
But these quibbles do not detract from this excellent primer
on how the present crisis came to be, and what the future may
hold.
October 2008 