Book Review: The Two Trillion Dollar Meltdown

Charles R. Morris explains the complicated financial products that led to the credit crisis.

CDS, CDO and MBS are just some of the more complex acronyms in the financial world, and all the more reason to understand them, according to Charles R. Morris, a lawyer, former banker and author of The Two Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash. In his book, he discusses exactly how the world got into its fiscal mess and options for the future.

Morris sets the stage by running through the changes in economic theory over the years. He recalls the decade between 1973 and 1982 when the economic recession was so terrible that the U.S. Misery Index, an economic indicator calculated by adding the unemployment rate and the inflation rate, was created. He describes a period when “Japanese companies humiliated American standard-bearers in one flagship industry after another” and when layoffs, protests, crime and corruption were rampant.

From that grim introduction, he transitions to the modern economy. Politically minded, Morris is very aware of what people in high places can do. He blames the decisions of the Nixon, Ford, Carter and Clinton administrations for creating economic problems, and discusses the shift from Liberalism/Keynesianism to the Chicago-school free market mentality. Calling it a religion, Morris said that the Chicago school of economics has “mutated from a style of analysis into a Theory of Everything” and fed into the greed on Wall Street.

As well, he points out some of the problems with Federal Reserve Board Chairmen Arthur Burns, Paul Volcker, Alan Greenspan, Ben Bernanke.

The book, completed in late 2007, argues that hedge funds, investment firms and financial institutions had so much leverage they could put the entire global economy at risk. In a new foreward to the 2009 paperback edition, Morris writes that “in October 2008, the markets finally got it.”  Financial institutions were so interconnected that they took on huge, devastating losses that then threatened the global financial system.

In addition, Morris argues that the “rational lenders” of mortgages didn’t know when to stop. He calls this “cheap money,” and the policies that came with this cheap money led to an explosion in sub-prime mortgages. Essentially, lenders were so exuberant about handing out loans that proper credit was put on the back burner.

Morris explains that complicated financial products and the investors behind these products are to blame for much of the grief and confusion. He discusses matters of liquidity, the implications of mortgage-backed securities and the understanding behind toxic assets. He argues that these complex products have little or no value in the real economy, yet have become so important to investors.  

As a response to the credit crisis, Morris offers practical solutions. He warns investors about large universal banks that seem to boast lower leverage and tighter regulation, but may end up gaining more entitlement. He also argues the need to prioritize certain needs in society, such as building infrastructure and efficiency in health care. Finally, he says governments need to limit financial institutions from being too interconnected or wielding too much power. With these solutions, Morris suggests that the economy can be managed properly.

In his words, “after a quarter-century run, it’s time for the pendulum to swing in the other direction.”

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