Here’s the thing: financial crashes are nothing new. People have been doing dubious things with other people’s money since….well, since money was invented.
As you know, Washington Mutual was eventually bought by JP Morgan Chase at a bargain-basement price. For a little historical perspective, I’d like to recommend “The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance” by Ron Chernow. Winner of the 1990 National Book Award, this book follows four generations of the J.P. Morgan financial empire. It ends with the crash of 1987, well before the acquisition of Washington Mutual by JPMorgan Chase, but it shows just how deeply the institutions created by the Morgan empire have affected financial policy in this country, and it vividly portrays the ongoing tension between financial instutions and the governments that are supposed to be regulating it.
Moving forward to the crash of 2008, my Seattle Times colleague Drew DeSilver, who frequently reviews books for the paper called the two books I’m about to mention the “clearest, deepest and most lucid, not to mention the most fun to read’ on the crash.
The first is “All the Devils are Here: The Hidden History of the Financial Crisis,” by Bethany McLean and Joe Nocera. The title of this book, published in 2010, comes from a line in the Tempest: “Hell is empty, and all the devils are here. ” There are devils aplenty. You have people floggings subprime sleazy loans, Wall Street bonus kings focused solely on their next bonus, and then, there’s Alan Greenspan, the former head of the Federal Reserve, who stuck to his belief that a free market would somehow check the appalling risk and sleazy tactics that almost brought the country’s financial system to its knees. Mclean actually used to work for Goldman Sachs, the investment firm that helped put together many of WaMu’s deals, so she knows the system from the inside out. . Nocera is a wonderful writer, a business columnist and blogger who writes for the New York Times. I always count on his columns to help me understand things I just couldn’t grasp otherwise. These authors, according to several reviews, are particularly good at showing how two beliefs: that all Americans should be able to own a home, and that housing prices would never fail, fueled the flames of the crisis.
“The Big Short: Inside the Doomsday Machine ” by Michael Lewis. Michael Lewis is a near-genius at explaining arcane subjects in a way a reasonably informed reader can understand, and hugely entertain us in the process. He wrote “Moneyball,” the story about the turnaround of the Oakland A baseball team that was made into a movie starring Brad Pitt, and he made his name with his book “Liar’s Poker,” aboaut Wall Street in the 1980s, written afterhe completed a training program at Salomon Brothers.
This book, also published in 2010, makes the case that the global recession was at least partially the fault of a global, man-made system that was so complicated, very few people really understood it. It shows how Wall Street firms turned subprime mortgages into toxic financial products that they made a fortune laundering and reselling, while the ratings agencies looked the other way. No one seemed to want to acknowledge that the housing bubble was going to pop.
“The Big Short” takes a brilliant counterintuitive perspective – it focuses on a few investors who realized that the whole house of cards was going to fall, and managed to make a fortune off it. Don’t ask me how they did it!
For historical perspective, Drew recommends “This Time is Different: Eight Centuries of Financial Folly,” by Carmen M. Reinhart and Kenneth S. Rogoff. This 2009 book takes the long view, and shows that human beings get suckered time and time again by believing that the laws of financial markets don’t apply to them. The authors show how exceedingly expensive bank crises are for countries that get caught in the middle of them , and it also makes the point that crises on foreign debt recur regularly and all over the world. I don’t know if that’s a comforting thought given what’s going on in Europe at the moment. Everything old is new again!
Finally, I’d like to recommend a couple of novels about financial crises:
“The Way We Live Now” by Anthony Trollope. This 19th century novel about a mysterious investor who fleeces the highborn in London reads like it was written yesterday.
“Capital,” by British novelist John Lanchester. This is the best novel I’ve read so far this year. It follows the lives of a group of Londoners who live on the same street, as they ride the wave of the financial crash of 2007 and 2008. There are lots of threads in this novel, but the one highly entertaining sub plot is that of Roger and Arabella. Roger is a British banker; Arabella is his wife,who believes that it is simply not possible to have enough nice things. Roger’s not exactly an unsympathetic character – it’s just that he does not really understand the banking system any more, even though he’s supposed to be running a big portion of it for his London firm. Complications ensue!