Book Review: Bailout Nation

I am planning a series of book reviews covering the financial crisis.  While some time has passed, that is helpful in pulling the information together.  We have financial reform legislation on the verge of passage, even before the official Commission has delivered findings.  Economists will be weighing in on this for years.

It is a good time for you to read these books, think about them, and learn the lessons.  My own interest is a bit broader than most of the financial punditry.  I am looking at books by policy makers as well as financial journalists or analysts.

Bailout Nation, by Barry Ritholtz

Barry Ritholtz had the early lead in writing about the financial crisis, despite a setback from his original publisher.  He does not pull any punches, and the first proposed publisher should have realized that.  (There were well-founded criticisms of a subsidiary to the publisher, and the author would not cave in on his content.  Hats off! It must have been a difficult query letter for him to put together because of this but it’s best the publishers knew what his intentions for the book were.)  The author, living, writing, and trading through the crisis, had ample material from his popular blog.  There is a big step from blog content to a book, however, so this was only a starting edge.

Summary:  Read this Book

A great book should be informative, stimulating, and enjoyable to read.  Bailout Nation meets all of these tests.  I have recommended the book to a personal audience that includes academic intellectuals, intelligent neighbors, and my over-achieving son (who often grabs books from my shelf).

Does this mean that I agree with the author on all counts.  Of course not.  If you only read works where you were in complete alignment, you would never learn anything.  My favorite conversations with friends quickly move from the large zone of agreement to the marginal issues of dispute.

With this general conclusion in mind, here are some of my reactions — highly personal, and reflecting my own background.

My Favorite Features

There were many things I liked about this book.  Here are some highlights:

  • There is an excellent intellectual framework — analyzing policy using a concept  called the counter factual.  What would have happened if things had been different?  The author sets this up cleverly and I do not want to spoil it for readers, but it is essential to thinking about “bailout” policy.
  • There is a helpful and authoritative history of past rescues.
  • The author does a nice job of setting up the drift in government interventions.  At first, there was an explicit national policy interest.  Later, the public policy objective became more ambiguous.  This “slippery slope” problem is a classic.  How did the recent moves stack up?
  • The author also highlights the mixed objectives of the many government agencies involved.
  • The narrative is very entertaining.  Ritholtz fans are drawn to his irreverent style, and readers of this book will be as well.
  • There is a lot of “inside baseball.”  The writer is well-informed and well-connected.  This shows in the narrative.
  • When it comes time to assess the blame, the book provides a complete scorecard of the players, and plenty of information.  Even if you disagree with Mr. Ritholtz, you have the information to form your own conclusion.

My Objections

Regular readers of “A Dash” might guess that I disagree with various conclusions reached by the author.  True enough.  Here are a few general observations.

  • The book places most of the blame on former Fed Chair Greenspan and the Fed.  My own scoring of responsibility reflects a much more complex situation.  I’ll discuss this more as I review more books on the crisis.
  • The author seems at first to emphasize the total tab for bailouts, pushing the worst case.  Actually, careful readers will note that he eventually recognizes that the final bill is still unknown.
  • Opinions about economic data.  I found some of these arguments unconvincing, but that reflects my own background and information.  The Boskin Commission, for example, did a tough job in the face of political opposition.  Their work has stood the test of time.  I do not see the significance of the debate over inflation measurement to the main theses.  It seems to be a hobby horse of the author.
  • Moral Hazard.  This also seems a bit overstated.  The “bailout” of Long Term Capital Management, for example, did not encourage future excess.  The partners were wiped out.  It is a complex subject, but the author provides plenty of information for you to decide on a case-by-case basis.

It is not my purpose here to argue these points in detail — mostly because they do not matter for potential readers.  As I noted above, a strength of the book is the underlying information.  You can and should read critically.  Then decide for yourself.  It is a valuable resource for your own analysis.

Bailout Nation is now added to our list of recommended readings.  It is easy and fun to read, so it is even suitable as a vacation book.

Readers should note that a new paperback edition is now available, including comments on financial reform.  My review is based upon my original hardback copy, which I purchased as soon as it came out.

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9 comments

  • Paul Nunes in kansas City July 10, 2010  

    i will have to read Jeff. I just finished the annotated “Reminiscences of a Stock Marlet Operator” and Jon Markman really did an excellent job adding background to the story. Reading histories of Wall Street and the key individuals of the time (Carnegie, Rockerfeller, JP Morgan, etc) has helped me to recognize there is nothing new on Wall Street (from Reminiscenses) and as Paul Tudor Jones stated in the interview provided in the book; it goes back to King Solomon “There is nothing new beneath the sun”. I loved this line in particular from the interview; “Remember, he was known as King Solomon the Wise, not King Solomon the Clueless.” For all the handwringing (justified given current conditions) cycles of fear and greed drive humanity and there is nothing we can do about it. At A Dash has been extremely helpful to look at facts in a logic and consistent manner and is a great resource. Thanks as always for efforts here jeff.

  • Jeff Miller July 10, 2010  

    Paul – – I guess I’ll have to add the annotated version to my wish list. Come to think of it, someone may have borrowed my copy.
    Nice to hear from you, and thanks for your observations.
    Jeff

  • Keith Piccirillo July 10, 2010  

    I really enjoyed last year’s reading of “Bailout Nation”, one in which AIG’s Cassano took a lot of criticism.
    I have recently read “Reminiscences” followed by Rogoff’s “It’s Different This Time”.
    Vacation next week and I will have to hit the local library to find the latest book on finance.

  • Jason C July 11, 2010  

    Moral hazard is related to counter party risk. The banks who were counter parties with LTCM or invested in LTCM didn’t loose any money. The banks lent to LTCM with no haircuts which enabled LTCM, but the banks weren’t punished for this decision. There was moral hazard in the banks willingness to lend money to or enter OTC contracts with someone who might blow up. There are 2 ways to trades assets: on an exchange with clearinghouses and mark-to-market or OTC with bailouts. With LTCM we decide to adopt the latter for derivatives. Going back to your moral hazard argument and applying it to the financial crisis, is there no moral hazard issue because AIG was essentially wiped out like LTCM?

  • James July 11, 2010  

    The book is a complete waste of money and time (unless you like one-sided politically opinionated propaganda).
    I am surprised you are not embarrassed endorsing such one sided opinionated garbage.

  • Sleeping With Bieniemy July 12, 2010  

    I have read this book and When Genius Failed (on LTCM) as well and tend to agree with Jason C’s comments on the Moral Hazard point. I think it’s less about the fact that LTCM partners/principals/investors suffered losses but that a lot of their counterparties/lenders that allowed them to get so leveraged got to walk away intact (scared perhaps, but intact). It seemed to falsely reinforce the idea that the current system could handle systemic risk.

  • Jeff Miller July 13, 2010  

    Sleeping — I also read that book. Two things to consider:
    1) The banks involved (except for Bear) were the ones financing the “bailout” and reaping the rewards from the rebounds. It was a private market deal, albeit strong-armed by the NY Fed.
    2) The ongoing question is whether we want institutions to have confidence in such lending or not.
    Maybe it should go to an exchange, but the question is not an easy one. That is why I will consider it over the course of several book reviews.
    Good comment!
    Thanks,
    Jeff

  • Sleeping With Bieniemy July 13, 2010  

    Yeah,
    I think I was about 22 when I read When Genius Failed, so likely I didn’t have a good handle on the nuances anyway. I see your point. Ritholtz works that bailout nicely into his broader narrative of the history of bailouts though…and since his broader narrative is so convincing, I guess it just struck me as being a fair example.
    I don’t think “moral hazard” is necessarily overrated but I do think the more malicious characteristics assigned to it are overrated. It’s not that everyone is lending/betting with the explicit knowledge that they can take advantage of the gov’t and taxpayers if things go badly. I just think people generally have no idea how risky the loans they are making really are or how incapable they are of managing the risk.

  • Jason C July 13, 2010  

    Is whether derivatives should be on an exchange a difficult question? Do you have a good reference for why not? When I look back to the CFMA of 2000 the arguments I see are: 1) derivative are making a lot of money don’t end the party and 2) it will move to a different country if regulated. I don’t see how a US company that wants a derivative on a US asset could allow the jurisdiction of the derivative contract to be a foreign country. And large OTC derivative contracts have had the implicit guarantee of the US government since LTCM fell. This implicit guarantee wouldn’t exist in a foreign contract. Am I missing a good reason for keeping derivatives OTC? Do you discuss this in any earlier entries?