Roger Lowenstein, in "The End of Wall Street", has written an accurate and detailed version about a very recent time in American history when the financial markets almost failed. No, we're not talking the Great Depression or the big meltdown of 1987. Instead, his story deals with the momentous and staggering events involving the inner workings of a number of prestigous Wall Street firms as they conspired to take the country to the brink of financial collapse in the second half of 2008. What I found remarkable about this particular account is that the main developments in this unravelling process fit together in a fascinating plot line. No wonder the house of cards analogy is appropriate for describing those grim years of 2008 and 2009. To get there, Lowenstein does a very competent job in filling the reader in on the background to this modern tragic farce. There are a number of culprits out there, take your pick. Investment and commercial banks, lax government oversight, expanding mortgage markets, personal and corporate greed, and plain stupidity. However, most of the blame can be placed at the feet of some key Wall Street brokerages who were just starting to enjoy their new found freedom as investment banks. The Lehmans, Bear Stearns, Goldman Sachs and JP Morgans financial houses were leading the charge into the murky world of dodgy transactions that involved plenty of leveraging and risk but all supposedly covered by the convenient creation of new derivative tools like collateralized debt obligations and credit swaps. Their key operators had the found the perfect system to make mega bucks non-stop. As Lowenstein points out, Wall Street was showing the rest of the world how to repackage debt in order to make profit without risk while passing it on to some other institution to do the same. Driving this whole shell game was the subprime housing market, where a lot of this instant wealth was being generated on the backs of penniless homeowners. When this bubble finally started to burst in early 2008, a whole sequence of troubling and near-terrifying events kicked in that involved the near break-up of the Wall Street establishment. Trillions of dollars were lost as contracts unwound; major firms, including banks, went under; overseas investors were wiped out; and finally Uncle Sam and the US Fed turned in the nick of time to cobble together a rescue plan. These events and more form the highlights of a very effective analysis as to how America got in this pickle in the first place, especially when it had the cautionary lessons of the Great Depression to learn from, and how it is still trying to get out. Plenty attention is focused on the mediating efforts of Bernanke and Paulson to find a deal that would restore confidence to money markets. The concluding chapter I found especially useful in both summarizing the author's points and defining the lessons coming out of this deja vu all-over-again experience. Even as we contemmplate the nature of this financial downturn, economist Paul Krugman warns his readers that the Street is back in the derivative business looking to make good the losses of the last three years. There would appear, as Lowenstein so clearly points out, no shame with this group of financial high-rollers. I recommend this book to anyone who wants to capture the depth of this crisis and how it might continue to play out in the future.
"Know therefore and understand,
That from the going forth of the command
To restore and build Jerusalem
Until Messiah the Prince,
There shall be seven weeks and sixty-two weeks;
The street shall be built again, and the wall,
Even in troublesome times."
-- Daniel 9:25 (NKJV)
"The End of Wall Street" will inevitably be compared to John Kenneth Galbraith's "The Great Crash 1929." To me, Roger Lowenstein's book is the better work, both because it came out hot on the heels of the history being described and because its evaluation of what happened is sounder.
Some will doubt that Wall Street has ended, having just heard even more reports about the vast billions in earnings that Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Citigroup are reporting and the mind-boggling pay their employees take home. Mr. Lowenstein's point is that the remaining banks only survived by being bailed out to the tune of trillions of dollars that have been pumped into the financial markets and the economy by the U.S. and other governments. We can safely assume that there will be another Wall Street crisis (and probably a bigger one) in just a few years as all of this financial liquidity causes other speculative bubbles that are expanded by ridiculously low interest rates and excess borrowing . . . and probably even more negligent and criminal behavior of the sort that led to Triple A bond ratings being given to worthless securities.
I was particularly impressed by the arguments that Mr. Lowenstein makes that it was outmoded ideas based on the 1929 crash and the Great Depression that led to the regulatory mistakes this time. He also doesn't spare those quantitative "geniuses" who produced equations based on wishful-thinking assumptions that blinded most people to the stupidity of promoting home ownership for people who cannot afford the payments. He even challenges that rock-ribbed belief of most people who who went to business school that financial markets can never be wrong. In this case, financial markets failed because unsophisticated investors dominated the market and no one cared to educate them because it was so profitable to defraud them instead. As you can see, one of the interesting aspects of this book is its willingness to challenge conventional wisdom . . . and reputations.
The book avoids polemic while calling a cad a cad, a fool a fool, and an idiot an idiot. That was a nice balancing act.
Mr. Lowenstein is also a very fine writer. Reading his prose is a pleasure.
Consider this tongue-in-cheek section: "Overseas, the notion that central banks should restrain speculation is hardly controversial. In the United States, it was. Both Greenspan and Bernanke devoted many words to rebutting the notion that bubbles should be 'pricked.' Instead, they endorsed a policy of cleaning up the mess afterward."
If you want to get a quick sense of the book's conclusions, start by reading Chapter 20, the last chapter, first. I think you will find the narrative to be more interesting and relevant if you do.
Bravo, Mr. Lowenstein!
on April 18, 2013
"As in all previous booms brought about by credit expansion, it was then believed that the prosperity would last forever, and the warnings of the economists were disregarded."
The Theory of Money and Credit, Ludwig von Mises, Vienna, June 1934, English Edition
This wildly entertaining book full of first hand narrative descriptions of detailed discussions between all the players at the time of the Wall Street shakeout of 2008 and beyond, leaves any Austrian economist perplexed as to why the apocalyptic title would even be used given the fact that credit busts are the end reality of all economic expansions recorded throughout the ages.
In typical American fashion, the ending of financial institutions long held to be indestructible creations of the American industrial complex, the author has chosen such a foreboding title to describe events that has been commonplace for much of the financial history of the American Republic. Indeed American economic history is replete with banking failures that in their time were as equally unthinkable as the events and institutions described by the author in this volume.
As the reader wanders through the pages immersed in the intimate details and discussions one has the sense of being right there alongside the champions of the financial oligopoly as the fall of banking institution after institution begins! Bringing the Republic and world commerce to a screeching halt to the outcries of humanity and central bankers everywhere of this just can't be happening in my lifetime!
So goes the real reality of such a trist of financial history recorded as narrative without any context or recognition that Wall Street still exists and the new firms have continued on in new forms as a triumph of the Schumpeter gale declared years earlier in 1942.
This writing reads more as a novel than as a solid recording of the events surrounding the demise of some of American's banking icons. Such is the narrow focus and short term view of financial turmoil described in this volume.
If history is a dull and boring subject to the reader this "novel" approach to economic history might just awaken an interest in the subject area of financial panics for those more interested in Field and Stream, People or Enquirer sensationalized topics than mundane description of past monetary and credit cycles.
For the more serious student of economic calamity and panics much better writings are available including the masterful writings contained in the above quoted volume.
As it remains, despite the title and proclamation by the author, Wall Street and capitalism live on in large part thanks to the resilience of "human action" and all that is the foible of bankers, money and legislative stupidity. Chalk this book and title as one up for the ages of prematurely declaring Wall Street dead. Long live Schumpeter and his treatise of "creative destruction" within the never ending ebb and flow of the American business cycles. May he rest in peace!