The Great Financial Crisis: Causes and Consequences Review

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The Great Financial Crisis: Causes and Consequences ReviewI've been teaching the financialization of the US economy for some years now. It's not been easy to find a clear, thorough and convincing analysis of the tendency of the economy to shift from industrial production to financial speculation and other forms of debt as a source of business profits. The onset of the current financial crisis makes it more urgent to have available to both students and the general public a lucid and detailed explanation of what's happening and why. In my opinion, this book fits the bill. There's nothing else quite like it.
Foster and Magdoff's book makes the economic and political issues crystal clear without undue simplification. So, for those who suffer from "economics anxiety" this book is an oasis in a desert of dry, incomprehensible and often ideologically obfuscating economicspeak. The authors discuss the financialization of what was previously an industrial economy, the explosion of debt and speculation which followed the deindustrialization of America, the household debt bubble and how all this came to a head in the present meltdown.
The book is helpfully divided into two parts, the first discussing the causes of the meltdown, and the second describing and analyzing the consequences. Key terms such as securitization and derivatives are defined, the views of major economists from Milton Friedman to J.M. Keynes and Hyman Minsky are explained and, perhaps most importantly, there is an extensive analysis of the relation between the financial and the real, i.e. tangible-goods-and-services-producing, economies.
The authors demonstrate that the real economy is afflicted with a built-in tendency toward mounting underutilization of its technological and human resources, so that the gap between actual and potential production tends to get wider and wider. This manifests itself as growing unused productive capacity (what economists call "capacity overhang"), unemployment and wasteful production. As this problem grew in severity and profitable industrial investment opportunities withered, investment-seeking capital moved toward financial means of generating "profits." The scare quotes indicate that what this process of financialization produces is phantom, spurious "wealth," which must eventually dissipate in popped bubbles, recession or depression and the liquidation of real wealth as the widget-producing economy disintegrates in escalating unemployment and widespread business failures.
A brief review cannot do justice to this very helpful and insightful book. I have come across no better analysis of what will probably turn out to be the most severe crisis to beset modern capitalism, bar none, including the Great Depression.
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Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy Review

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Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy ReviewThis is a well written book. It begins by telling us laypeople just what the Keynesian Endpoint is and then how we (or any nation) reached this point in our economic history. Then he tells us the ramifications of having reached this KEP and finally some ways individuals can protect themselves from the position in which we have found ourselves. The author seems to be writing from an Austrian school viewpoint and insightfully lays out the causes of our present economic problems and goes further to address some ways out.
Keynes argued essentially that in times of economic downturn that government spending money obtained by borrowing would cause a multiplier effect on the economy thus pulling it out of recession.
Crescenzi sets forth to show us what has happened to our economy and why the Keynes theories won't/ can't work in the future. First he shows how we reach the KEP where there is no longer money on our balance sheets to borrow and spend.
Chapters 2-8 tell us how we have gotten ourselves into this mess at the KEP through such things as Consumption Binging, Public Employee Unions with their profligate demands and excess power, Political dishonesty, Ponzi Schemes like QE I and QEII, and finally Age Warfare and as he calls it Gerontocracy.
Chapter 8 attempts to tell why with all of us having much more disposable income than our parents we all feel like we don't have enough and thus the necessity for govt. to hide the costs of inter-generational debts.
The last 2 chapters give us some pointers on how to deal with our present situation before the worst things like 1979 interest rates or post WWi German inflation happen.
Anyone reading this book can see how Europe is ahead of us in having reached the KEP in Portugal, Ireland, Italy, Greece, and Spain(PIIGS). Their Sovereign Debts are overwhelming them today. There is not enough money for the safer economies like France and Germany to bail all of them out. With our Credit Rating having been lowered and further lowering threatened we are fast on the way to fiscal disaster.
I am not an economist, but Crescenzi lays out his arguments in detailed and concise language without mathematical terminology so that anyone can tell where we are and where we are heading economically if we do not act fast , which will cause some pain for all in places.
This is a must read book. I'm already looking at some of his other books and such books as /Where Keynes Went Wrong/ by H Lewis.Beyond the Keynesian Endpoint: Crushed by Credit and Deceived by Debt — How to Revive the Global Economy Overview

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The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust Review

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The High-Beta Rich: How the Manic Wealthy Will Take Us to the Next Boom, Bubble, and Bust ReviewThis is an excellent book about a little known subject: Plutonomy. The Plutonomy theory was advanced in 2005 by three Citigroup stock analysts, including Ajay Kapur mentioned in the book. Their research report was called "Plutonomy: Buying Luxury, Explaining Global Imbalances." This theory was so controversial that Citigroup removed it from its website. The main point is that the rich (typically defined as the top 1% of earners) control a very large and rising share of national consumer spending. Mark Zandi, the chief economist for Moody's Analytics uncovered that the top 5% of American earners account for 37% of consumer spending (up from 25% in 1990). This same group has also the lowest savings rate at 1.4% vs 8% for the rest of Americans. Therefore, their spending habits have a disproportionate impact on the overall economy including our savings rate and related Current Account Deficit.
Robert Frank advances the Plutonomy theory further by tying Ajay Kapur's work with the working paper of two Northwestern University economists, Jonathan A. Parker and Annette Vissing-Jorgensen titled "The Increase in Income Cyclicality of High-Income Households..." Fusing those two works, Robert Frank states that since 1982 the rich have become risk takers and gamblers. This is because starting in 1982 government policies have favored risk taking by lowering interest rates, inflation, and taxes, and deregulating the financial markets. The combination of those policies contributed to an excessive extension of real estate credit and a succession of real estate and stock market bubbles caused in part by the High-Beta Rich exploiting the mentioned government policies.
One of the most powerful insights from this book is that the High-Beta Rich are very vulnerable and associated with a rapid turnover among their ranks. Among the top 1% of American earners (income > $380,000), only half made the cut more than once over a ten-year period (pg. 217). Frank also shows two charts early in the book that compare the gains and losses in income of the top 1% in the U.S. vs all taxpayers. Before 1982, the fate of both groups was similar. Then, after 1982 the two groups diverged radically. Whether up or down, the changes for the top 1% became a high multiple vs the norm. The top 1% boosted their income a lot more during expansions. But, their loss was also far greater during contractions. This is because the High-Beta Rich have a surprisingly low savings rate and are very leveraged. Their leverage does multiply both their gains and their losses. The mentioned economists uncovered that before 1982, the top 1% had a Beta of less than 1 (meaning they took less risk than the general population and their fortune was less volatile). But, after 1982 their Beta jumped to between 2 and 3 as they took on far more risk than the general population. Their high Beta is due to a greater concentration of their wealth in volatile assets such as stocks and real estate and a greater leverage.

The High-Beta Rich volatile income causes chronic Budget Deficits at all levels. In California the top 1% of earners were paying 41% of taxes during the dot.com boom in the late 90s. Capital gains taxes accounted for a large share of tax receipts. When the dot.com Bubble burst California tax revenues tanked and it experienced chronic State Budget deficit crises in the early 2000s. However, by 2007 the top 1% of earners were accounting for an even greater share of CA State tax receipts at 48% (nearly half!). This was due to a recovery in the stock market (capital gains tax) and the housing boom (property tax). The ensuing financial crisis caused the rich income to drop by three times as much as the general population (Beta of 3). By 2011 California tax revenues cratered associated with a $26 billion budget hole. The same is true for New Jersey, New York, and Connecticut with many High-Beta Rich. It is true at the Federal level as the top 1% earners pay more than 38% of federal income taxes.
Frank states that the financial behavior of the High-Beta Rich contributes to exacerbating business cycles with more bubbles and ensuing crashes of greater magnitude and greater frequency than otherwise. Large concentration of wealth may be both a cause and effect of bubbles. Speculative asset bubbles correspond to periods of highest inequality. By 2007, the US top 1% controlled 34% of the nation's residential real estate. Between 1989 and 2007, they increased their relative exposure to real estate by 50% by quadrupling their mortgage debt level over the same period.
If you want to further study the impact of deleveraging, the best book on the subject is Irving Fisher The Debt-Deflation Theory of Great Depressions. Originally published in 1933, it also better explains the current financial crisis than most current books.
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