21 Jul And then the Roof Caved in by David Faber
The early narrative as to what events led to the massive global economic crisis of 2008 is this: Real estate prices begin to ascend in the late 1990’s led by favorable supply/demand conditions, tax policy that waived capital gain taxes and maintained a sizable mortgage interest deduction, and a healthy economy with low unemployment and tremendous advance in the technology space. This increase in real estate prices was accelerated in the early 2000’s by low interest rates. An exploding global economy demanded a place to put cash, yet interest rates were so low that they demanded high quality alternatives to the low yields easily available. Wall Street met this demand by massively increasing their securitization of home mortgages, packaging products and selling them all over the world to a system flooding with liquidity. This abundant access to capital (high supply) was greater than the demand for mortgages (constrained by nuisances like income verification, good credit requirements, and down payments), so to push demand into equilibrium with capital supply, banks abandoned all pretense of mortgage underwriting requirements. This decision was made all the easier by the fact that the risk was immediately transferred to a third party, primarily the unknown investors around the world who were buying these mortgage securities. Politically, a massive mandate existed to increase home ownership (particularly with minorities). Low interest rates. Ascending real estate values. Deteriorating underwriting requirements. Abundant access to capital. Oblivious rating agencies. A global economy that soaked all this up. The dominoes were perfectly lined up for the greatest bubble the world has ever seen.
David Faber’s new book does an admirable job at capturing this rough narrative, and sequentially breaking out what it meant to the financial crisis of 2008. Faber is a 20+ year financial journalist at CNBC, and does not write with any clear political bias. My impression of the book is that his biases are less ideological, and more personal (people who give him a scoop or an interview are given more favorable treatment; people who don’t, are not). The book does not portend to be a heavyweight analysis or deep evaluation of the complex economic factors involved in this crisis. It is written for laymen, and it does a good job putting into laymen’s terms the events that largely caused this mess.
My three minor criticisms of the book are:
(1) It is far, far too easy on Alan Greenspan
(2) It fails to connect the dots between the financial instruments causing the problem and the specific freeze-up of credit that took place last fall, AND
(3) It is far, far, far, far too easy on an American public that lost its freaking mind
To be fair to Faber, he does not give Greenspan a pass, and does specifically lay some degree of responsibility with the former Fed chief. However, any book that does not say this exact sentence is coming up short: “The lowering of the Federal Funds rate to 1% in early 2002 and subsequent maintaining of that rate at 1% for well over a year was the most irresponsible act by any central banker in history”. Greenspan is in bounds to defend his not knowing how severe the subprime crisis had gotten. What he can not defend is a monetary policy that screamed for – begged for – bubble-like behavior. He poured gasoline all over the fire that was the 2000-2002 real estate bubble, causing the 2003-2005 bubble to blow up perversely. Faber is far kinder to Greenspan than history will be, but he is at least not as kind to Greenspan as Greenspan is to Greenspan, who still to this day denies that the monetary policy of the Fed in 2002 and 2003 had anything to do with the crisis.
I do not envy Faber in trying to explain how CDO instruments work, let alone how Wall Street’s packaging of them and collateralizing of them led to the credit crisis we suffered last year. It is not an easy task. Still, I feel that he failed to help laymen understand just exactly what the connection was between the housing blow-up and the Wall Street/credit market blow-up. More attention could have been focused here.
Finally, and this is my biggest criticism, Faber felt no need in describing the affairs of his various “regular people examples” to ascribe any moral or financial culpability to them. He described for us the cases of people who bought above their means, did not understand their mortgages, and subsequently defaulted. He mentions the fact that some people walked away from their houses, not afraid of foreclosure, once they realized that they were upside down in value. But he exerts virtually no energy in ostracizing these people as major accomplices in the crime of 2008. Washington D.C. has fingerprints all over the scene of the crime. Fannie and Freddie are blamed as they should be. Banks and mortgage brokers are villainized where appropriate. Wall Street is crucified for its complicity. But the one participant in the events that led to this disaster, speculative people who blatantly lied on their mortgage applications, committed fraud, and defaulted on obligations (often when they had the absolute ability to continue meeting them), are never discussed as anything other than “victims”. It is disingenuous, and dishonest.
History will record that the “roof caved in” in 2008, and my ongoing series of book reviews at this topic will explore much of this further. Faber has done a good job here. But let’s hope that the comprehensive analysis of this book does not fear populist rage as much as it fears condoning irresponsible behavior. Excessive leverage and foolish impulsiveness caused this mess – in Washington D.C., on Wall Street, and especially, on Main Street.