Book Review : The Trillion Dollar Meltdown

I just finished Charles Morris's The Trillion Dollar Meltdown which was published in January 2008. Since the book is based on an area of professional interest, I think it deserves a detailed review and not just an update.

Morris' book was one of the first texts on financial crisis to come to the market. In less than 200 pages the book covers a huge breadth of topics. Starting from the precedents and history of the recessions during the Lyndon & Reagan presidencies, it goes on to talk about the previous market crashes caused by portfolio insurance & the failure of Long Term Capital Management. He describes the current crisis starting of course from the usual CDO's and derivatives, predatory lending practices including the NINJNA (No Income, No Job, No Asset) loans, the cascading effects of high leverage at hedge funds and other financial institutions and the roles of  the raters, insurers and government bond market. He reconfirms my view that loose monetary policy at the time of Alan Greenspan was one of the leading causes of the crises. (Read my previous post here). Morris strongly approves Paul Volker's handling of the problem in 80's. But what really impressed me about the book is that it covers to the global distribution of money, trade deficits &surpluses and also reserves in countries like China, Russia & in the middle-east. By including the power of sovereign wealth fund of these countries and the recent academic debate about China's savings rate & currency valuations, the authors covers the issue from both domestic & international angles. Any review of the book must take into account that Morris was forecasting the future & not analyzing events.

But there are some drawbacks of packing too much into so few pages and shipping the first book and at some places it misses depth. But for a bird's eye of how thing went wrong and where, The Trillion Dollar Meltdown is great book. In fact I definitely recommend it for any bookshelf. Coming from the other side of the table, Morris sees huge limitations of free markets in cleaning up the current mess. According to him the only immediate option America had was to deleverage (and hopefully in an orderly fashion or things would turn really bad). With the benefit of hindsight, here is a passage from the book

The recent woes of the dollar are important for our story because they effectively take the Fed off the board. As credit crunch works its way through banks and investment funds over the next year or so, there will be no soothing fountains of new dollars coming out of Washington. The days of a universal put to the Federal Reserve are finally over.

Clearly even the best of people did not anticipate how many dollars the Federal Reserve and the government would be willing to print. Here are author's views about the $800 TARP in an interview in October 2008.

Book Update: Right now am reading 'The World is Flat' and 'Eat, Love Pray'.