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Charles Morris, author of The Trillion Dollar Meltdown, isn’t one for sugarcoating. His analysis is dour and grim, but certainly not dull. And when read against a backdrop of an ever-weaker economy, increasingly anxious economists and a stream of gloomy predictions, it can be downright scary.
Morris, a lawyer and former banker who has written 10 books, argues that the subprime mortgage crisis is only a taste of the mayhem that will play out across an array of financial assets.
He lays out the likely course of write-downs and defaults on a whole gamut of assets — residential mortgages, commercial mortgages, high-yield bonds, leveraged loans, credit cards and the complex bond structures that sit atop them. It comes to about $1 trillion, according to Morris. “The sad truth, however, is that subprime (losses he estimates as high as $500 billion) is just the first big boulder in an avalanche of asset write-downs that will rattle on through much of 2008,” he predicts.
He doubts it will be an orderly deleveraging. “There will inevitably be margin calls, panicked selling, clamors from shareholders, and the flight from all risky assets that could double or triple the damage.”
The subject is complex. But for the most part, Morris serves up a sharp, thought-provoking historical wrap-up of the U.S. economy and its markets, along with clear scrutiny of today’s economic woes.
His account runs from the 1950s to the great inflation of the 1970s and traces the financial boom through three critical developments of the 1980s and 1990s — the birth of “structured finance,” the expansion of derivatives markets and the mathematization of trading. All of them flowed together to create the great credit bubble that is now imploding around us, according to Morris.
How did we get to such a place? “The current conservative, free-market cycle that commenced with the Reagan presidency, with all its achievements, seems to have long since foundered in the oily seas of gross excess,” he writes.
But a few years ago, it lurked beneath the surface. “The early 2000s were a nervous, quarrelsome time — terrorism, airport check-in lines, a discouraging war, energy disruption, nasty politics. But to be a banker, or a high-rolling investor was very heaven,” he writes.
He compares the popping of the Japanese asset bubble of the 1980s to events in the USA today. “In proportional scale and market mechanics, it is quite similar to the crisis we are facing now. But the tight network of Japanese government and finance executives chose instead to deny and to conceal, and almost 20 years later Japan still has not recovered,” Morris asserts.
To restore credibility, he declares, “American officials and financial leaders must forthrightly admit the scale of the problem and proceed to purge the absurd valuations, the phony triple-A ratings, the inflated balance sheets, and the hidden liabilities that are marbled through financial balance sheets.”
The cost of not doing so? “The loss of faith in American markets will be far greater than a one-time trillion-dollar asset write-down.”
The sad fact is there isn’t much the Federal Reserve can do now, he contends. He lays blame on former Fed chairman Alan Greenspan. He describes the term “Greenspan put” as commonplace on Wall Street in the early 2000s. “A ‘put’ is an option that allows the owner to sell an asset to some third party at a fixed price, no matter what.” In this case, “no matter what goes wrong, the Fed will rescue you by creating enough cheap money to buy you out of your troubles.”
It’s not a pretty picture. “The ‘wall of money’ that has kept American markets afloat also created a global dollar tsunami that has left a waterlogged world in its wake,” Morris writes.
From his vantage point, those days are kaput. The Fed will have to keep interest rates higher than we would like to avert a currency rout. And with America heading into a recession and a continued collapse in the dollar, that will inevitably trigger price increases in imported goods, much as it is doing in oil, he writes. The credit crunch will have to march its way though the financial markets over the next year or so without “soothing fountains of new dollars coming out of Washington,” he contends.
Morris believes that the 1980s change from a “government-centric style of economic management toward a more markets-driven one” was vital in the American economic upturn of the 1980s and 1990s. But the “breadth of the current financial crash suggests that we’ve reached the point where it is market dogmatism that has become the problem, rather than the solution. And after a quarter-century run, it’s time for the pendulum to swing in the other direction.”
His fundamental solution: After we’ve dug out of our financial markets debacle, “The very first priority will be to restore effective oversight over the finance industry.” Bankers and high rollers take note.
The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris; Public Affairs, 194 pages, $22.95.