The Financial Crisis and the Free Market Cure

The Financial Crisis and the Free Market Cure The author makes a compelling case for his overall premise, that government policies were the primary driving factors in the financial collapse His experience as CEO of BBT lends additional credibility to the philosophical arguments he makes in the book There is a clear ideological slant toward limited government, individual rights and free markets, but he pulls no punches in terms of political party affiliation of the policy makers he holds responsible He occasionally goes into some depth on technical financial topics, when necessary, but also provides simple analogies to make things understandable I ve read several books on this topic, but somehow missed this one until now 2017 , and would still highly recommend it despite being six years old. It was a decent read but got a little meandering and unfocused at about 2 3 in If you re looking for a great technical analysis of what happened, I recommend Meltdown by Thomas Woods. John A Allison Is The Longest Serving CEO Of A Top Financial Institution, Having Served As Chairman Of BBT For Twenty Years He Currently Serves As President And CEO Of The Cato Institute And As A Distinguished Professor At The Wake Forest University Schools Of Business He Is Also One Of The Lead Spokespersons For Banking And Policy Reform Today, Appearing At Universities And Business Groups Nationwide And Serving On The Board Of Directors Of The Ayn Rand Institute He Received A Lifetime Achievement Award From American Banker And Was Named One Of The Decade S Top Most Successful CEOs By Harvard Business Review This book was written by John Allison, who served as the CEO of BBT Bank for many years, and helped that company to grow into one of the largest and most successful financial institutions in the country His knowledge, insights and years of experience working within the financial industry and with the government agencies, politicians and bureaucrats form a solid basis from which he lays out a clear and compelling case for the causes of the financial crisis and following Great Recession.Although I had a couple of minor issues with the book being not a financial person myself, a little bit better explanation of certain financial terms would have been nice in a couple of places, and there were a number of typos , overall I was extremely impressed with Allison s clear explanations of various aspects of the financial industry, including the use of good, simple metaphors to help concretize complex issues or aspects of the industry that are on a scale too large to easily contemplate without financial expertise Further, he digs very deeply not just into the proximate causes of the financial crisis the housing bubble, a massive misallocation of money encouraged by Federal Reserve monetary policy and political incentives pushing home ownership , but also into the deeper underlying economic problems that government agencies and policies represent such as the impossibility of the sort of currency manipulation that the Federal Reserve attempts to do, the inevitable and damaging inflation that necessarily results, the monopolizing effect of agencies such as Fannie Mae and Freddie Mac, etc Allison shows clearly why it is not just that the current political and bureaucratic actors in these agencies made poor decisions which they did , but that no one in any sort of centralized control position in an economy can ever make correct or good decisions there is simply no way that one person, or one group of people, can make economic and financial decisions which actually need to be made by every single individual who is in any way part of the economy Allison also hits very hard against the idea of any company being too big to fail, pointing out that in fact the bigger a company is, the important it is to allow it to fail if it does poorly, so that the people and resources of that company can be re allocated and reinvested into parts of the economy where they will actually do some good One aspect of the book that I especially liked were his points about incentives and human action While laying blame on both government actors and the management employees of various companies where it is due, he is also careful to point out the reasons why a certain CEO acted in a certain way even though it was harmful to his company in the long term, and why a political appointee or a lifetime bureaucrat are going to have incentives that are necessarily in conflict with individuals trying to act in a market economy He explains, often in detail, how various government regulations that are supposed to make the economy safer and stable in fact have the exact opposite affect by providing a safety net, companies are in fact incentivized to take on risk, rather than less, and it is U.S taxpayers who then have to bear the burden when inevitably that risk taking which would not have happened in a truly free market has negative consequences.Lastly, Allison takes his analysis one level deeper, and looks at the underlying philosophical premises in our culture today that encourage government intervention in the economy despite its proven negative consequences, and the philosophical ideas that we will need to learn or in some cases relearn in order to move towards a freer and stable economy His treatment of these issues is perhaps somewhat brief, but fits well into the context of the book, and he provides clear suggestions of further sources for a in depth look at the connection between philosophical and political economic ideas.I enjoyed this book a great deal, and I definitely learned a lot I would recommend it to anyone interested in the financial crisis and the economic, political and philosophical issues surrounding it, especially if you are looking for the views of a knowledgeable and qualified insider, and a very non mainstream point of view. The book does a very good job in explaining the advantages of the free market model, as opposed to crony capitalism Goldman, Citi, et al It dispels a lot of myths related to the supposed deregulation of the financial markets On the contrary finance and banking are one of the most regulated industries in Western Europe and the US And indeed it was regulation and state intervention that caused the Great Recession I am giving it 4 5, because the author has the unfortunate tendency to go into long rants against leftist elites , environmentalism , liberal education and the usual scapegoats one usually sees on Drudge Nevertheless, a solid book. I read 90% of the free sample which I think is enough to review the book, based on the author s main idea as stated in the first chapter and what he blatantly left out Based on what I read, very early in the book the author basically blames the entire financial crisis on the US Government I admit that the US Government has done some really stupid and harmful things and is still doing such things, and in fact nearly all of the stupid and harmful federal laws are still on the books I would say that probably half the blame for the financial crisis should be on the US Government, I would say the other half of the blame should be on the banks For a 20 year chairman of a gigantic bank to ignore that is basically self serving nonsense It is beyond the pale I can think of at least four reasons right off the bat why the banks are to blame liar loans, illegal alien loans, subprime mortgages, and ARMs.In case the author is not familiar with the term liar loans, he knows the term no doc loans That was where the bank wanted to make as big a loan as the borrower wanted in order to make as much profit as possible The bank would basically say to the borrower, how much money would you like to borrow, tell us that and what you think your income should be to qualify for that or whatever your income actually is, whichever is higher, and we will pretend that is your income, with a wink and a nod, and without any documentation of your actual income I have spoken to people who took out liar loans so I know they existed and I know many of them defaulted.As for illegal alien loans, whatever you think of illegal aliens, it is probably not a good idea to make a 30 year loan to someone who can be deported at any time No doubt many of those loans defaulted.We all know what happened to subprime mortgages They turned into an unmitigated disaster of course.As for ARMs, the bankers were gung ho to push those onto any borrowers who would take them, without explaining the complex terms They basically had three payment options maximum, minimum, and somewhere in between The in between payment was an interest only payment If you paid that, all your payment options would be the same amount next month The maximum payment was interest and principle If you paid that, all your payment options would be a lower amount next month because the principle decreased The minimum payment was like an interest and negative principle payment and was only supposed to be used for temporary financial emergencies because it would cause next month s payment options to increase in cost The bankers never explained that They just basically said you can make any one of these three payments so of course most people just paid the minimum and their payments increased every month That turned into another unmitigated disaster.Because the bankers just wanted to originate as many loans as possible and then dump i.e sell them, bad loans became the problem of whoever bought them i.e everyone else. John Allison does an impressive job of explaining the complex issues surrounding the United States financial crisis He uses everyday examples to help explain banking, the monetary system, and how politics have come to play such an enormous role in what used to be a free market It s a long book, but it s so worth the effort It really helped me to fill the gaps on my understanding of the financial crisis and where we ought to go from here. Allison s garbled and rambling prose, frequent non sequiturs, and maddening red herrings get pretty grating after about two chapters As someone who isn t all that savvy about intricate financial systems and derivatives and what not, his frustratingly confused and jerky writing style really detracted from my understanding of his arguments I get that Allison is discussing complex issues and is trying to boil these issues down for the layman, but you can t really do that effectively if your writing isn t worth a damn Which is quite sad because the insights of someone directly involved in the financial and banking industries before and during the crisis could be immensely valuable And sure, there are diamond in the rough moments sprinkled throughout the plodding book, but this whole enterprise could have been so much enlightening and forceful with someone articulate at the helm And c mon, I despise pudgy emotionally inflated bureaucrats like any other good person, but I don t think they re quite the same as the Gestapo Something something Godwin s Law something something Allison comes off sounding like yet another crotchety Randian which, if the rumors be true, he is I can t believe anyone over 16 can still be an Objectivist, but that s neither here nor there So much for the financial analysis His prescriptions for our present woes are the same old hat platitudes anyone even tangentially familiar with libertarian ish ideas has heard over and over again End the Fed Lower taxes Deregulate Nothing new here If you don t already know these to be the best prescriptions, Allison certainly won t change your mind after a few pages of pop analysis.This leads me to a fundamental question for whom was this book written, exactly I m sure that were it not for Cato or Allison himself making it required reading for all its interns, this book would have been quickly forgotten if not quietly passing away entirely unnoticed Be that as it may, it will surely be remembered by us lowly interns as a book which confirms the ideological priors of some while convincing no one who isn t already convinced Because really, do you think anyone who isn t already convinced would read a book entitled The Financial Crisis and the Free Market Cure Why Pure Capitalism is the World Economy s Only Hope As Ken Layne wrote somewhere, it s one of those seasonal political books with snappy topical titles that repeat something the few buyers already believe Indeed. rating 3.6 5This book provides a great discussion on the topics of regulation and how politics and naive intentions influence banking It s great to read an insider s view of what went wrong in the banking industry during the crisis Allison was a super successful banker who also studied a lot on the topic of free enterprise and capitalism His criticisms of the industry are very insightful, even if too simplified at times I specially enjoyed the real life examples of how regulation distorted the market and gave a crony advantage to the unhealthy banks.Also, I stand with the author in his claim that the main problem is philosophical This is one of the most important points one has to realize before action can be put in place The main problem with our economy is the lack of self reliance, self esteem and this whole collectivist mentality, the equalitarian mentality Even if I don t agree with all of the author s points, or if I would put them in another way, I must congratulate him for bringing this to the table.I recommend this book to everybody My main upsets were that sometimes it gets a little repetitive and it definitely is a simplified book which can be a good thing for starters, but may get to the nerves of cynical leftists I don t always enjoy his fundamental view of banking, even though I favor free banking I don t always agree with his view of the economy and of economic growth and I don t always agree with his policy recommendations The book gets a little bit too disperse towards the end.Overall, I mostly value it for the real life examples of bad regulation and for the priviledge of reading a former banking CEO who has a pure capitalistic mentality The Financial Crisis and the Free Market Cure How Destructive Banking Reform Is Killing the Economyby John A Allison 2013 McGraw Hill a short book report by Ron HousleyI had the good fortune to hear John Allison deliver a lecture several years ago and I was stunned by the scope and detail he was able to bring together into one unified talk.He establishes his credibility right out of the shute by deftly integrating varying aspects of his subject into a readily understandable whole He has total command of the tiniest detail and he at once has the total concomitant command of all the governing principles He may very well be the Steve Jobs of banking And now he has written a book Stop and catch your breath for a moment An early chapter the one entitled What Happened will give you a great example of Allison s rapid fire but sweepingly comprehensive style of sharing his account He does it with no teleprompter You will witness the perspective of a player Allison himself who is able to assess the contribution to a problem of a vast myriad of input factors Take, for instance, the 2008 financial crisis where the Fannie Freddy story reads like a thriller, with tones from The Big Short at every turn In spite of all the New York Times stories during the housing bust of 2008, an important but obscure and largely unaccepted fact remained Freddy and Fanny had amassed liabilities in excess of 5.5 Trillion they had practically no assets at times they operated at a 1000 to 1 leverage ratio It was 100% a government creation and the NYT blamed free market capitalism for the bust When the Wall Street Reform Act was signed into law in July 2010, we saw a frightening spectacle the authors of the reform bill were the SAME politicians most responsible for the bubble in the first place Dodd and Frank themselves It is a delight to witness how Allison assembles the relevant facts together in support of a point he is a master And one of the primary points that he makes is that systemic failure of the financial markets can occur ONLY as the result of government policy FANNY AND FREDDY Did you know Fanny Freddy got into the subprime business under pressure from the Clinton administration They were created to support the mortgage industry s loan origination business, but wound up taking over that business for themselves It is one story of how an enormous enterprise grew up right under the noses of clueless Americans and ultimately contributed to the destruction of wealth of those many clueless millions from coast to coast Even today, most American voters do not know what happened or is happening to their life savings MARK TO MARKET Did you know Allison s is the only clear explanation I ve ever heard of mark to market accounting which was the subject of endless sound byte reporting back a few years ago Allison s punch line is Fair value accounting is inconsistent with this concept that business be valued as going concerns , because it effectively assumes that the businesses s assets are being liquidated under stress p.104 I had not realized how important the forced accounting methods were in contributing to the 2007 2009 economic downturn the bureaucrats in charge finally relaxed their irrationality in April 2009, allowing the downward spiral to end.Mr Allison s own experiences with BBT are sprinkled in for us, a common theme turning out to be How could we know what random and destructive policy actions government policy makers would take next pertinent at nearly every level of economic decision making.As a corollary to the mark to market accounting debacle, there is the story of how it came to be that stock optons were expensed, even though they never represented an expense at all It is on par with the attempt of the Indiana State Legislature in the 1930s to legislate pi to be an even 3 point zero 3.0 When politicians attempt to trump reality, reality always wins THE SHADOW BANKING SYSTEM Did you know Now comes the fascinating chapter about derivitives and what is known as the shadow banking system The MainStreet Media has treated this subject with the same superficiality and misapprehension as they did when reporting on mark to market accounting Among the points entirely evaded are these funding left the commercial banking system due to government rules and regulations that made commercial banking less competitive The Fed bailed out the money funds, creating the illusion that they are not a risky investment Freddy and Fanny basically drove commercial banks out of the traditional prime home mortgage business Derivitives, which the MainStreet Media loves to decry, are mostly instruments to reduce risk and their use as speculation is seen only on the fringes when a company prepares itself for bankruptcy, the process can be handled without crashing the financial system but Lehman Brothers did not so plan, because it expected to be bailed out those in charge of bailouts were mostly from Goldman e.g., Sec Treas Hank Paulson is a large Goldman shareholder and they hated Lehman Brothers an organized bankruptcy of e.g., AIG parent company could proceed without disrupting financial markets the AIG bailout was essentially a redistribution of wealth from taxpayers to holders of Credit Default Swaps, essentially Goldman Sachs the contribution to the crisis of Bernanke inverting the yield curve is almost never discussed by the MainStreet Media instead, the media keep telling us that Bernanke is an expert BAILOUTS Did you know In the end, Allison asks Was saving Goldman and AIG about SYSTEMIC risk or about crony capitalism p129 I don t recall the Wall Street Journal or the New York Times framing the question quite that way at the time Instead, they kept telling us that our government had to infuse billions in order to prevent total economic catastrophe and so, Americans swallowed hard and accepted it, but they did not understand it.Allison laments that Goldman is an advocate of special deals from Washington and is not an advocate of free markets If the U.S.Constitution were enforced, crony capitalism would not work because the politicians and bureaucrats would hot have the authority to hand out favors to their friends p129 REGULATION Did you know The consequences of the Dodd Frank bill are clear a it makes US firms less competitive b it drives resources out of the US c it reduces job creation d it lowers US standard of living Nowhere in the press do we see any such analysis Again, Americans swallowed hard and accepted it, but they have not understood it In his final lament about the bailouts, Allison shares with us The reward for running a good business is to have your worst competitors bailed out by the U.S government and then to have massive new regulations that punish your company for sins it did not commit p130 Mr Allison uncovers the MYTH that deregulation caused the financial crisis that myth is put to bed once and for all MARKET CORRECTION Did you know Often, an UNDERSTANDING comes about as the specific result of how an explanation is framed In his discussion of MARKET CORRECTIONS, Allison frames another view of what happened in 2007 09 He says p159 that instead of accumulating capital to invest in technology or manufacturing, that the US was CONSUMING residential real estate on a grand scale At the same time the massive federal Stimulus spending allocated on consumption vs production While citizens tried to save, the politicians dramatically reduced savings for investment by spending on consumption This is said to be the real tragedy of the 16 trillion debt WHAT HAPPENED Did you know We are treated to a devastating indictment of Bernanke and Paulson their decisions were random and dishonest p 164 Even a 60 Minutes expos would be hard pressed to design a presentation capable of engaging the average American citizen the average American appears to have issues with basic thinking skills on far less complex issues Their verdict on Bernanke and Paulson should have been they are incompetent and dishonest, a perfect storm for a financial crisis It seems that a nearly total absence of honesty and objectivity lay behind the financial crisis but since an underlying understanding is several abstraction layers deep, most people e.g., the Average American voter do not take the trouble to grasp what happened Instead, they have been taught to go along with what the authority figures say, with the pronouncements of regulators and politicians This is an IMPORTANT book which answers ALL of the false and misleading rationalizations that we hear to justify what the government policy makers have done to us It is a treasure trove.How many Americans believed Bush Bernanke Paulson when they asserted that not passing TARP would lead to another Great Depression They injected fear, and the masses went along with it But what really happened TARP Did you know Or, take a peak at an insider s view of the TARP scandal TARP, as with Dodd Frank, proves harmful to healthy banks than to companies that should have failed TARP was a curse for the healthy companies because it kept irrational competition in business A notable example Citigroup a company which malinvested itself into bankruptcy THREE 3 times, and each time was bailed out by the government, allowing it to become bigger and worse next time That s so basic a point but I don t recall the discussion ever gracing the pages or airwaves dominated by the MainStreet Media.HISTORY Did you know The other discussion that we don t hear about is the history of the 1920s vs the 1930s In the early 1920s there was a severe economic correction, which was over quickly because the government did not interfere the correction was deep, but it ended quickly By contrast in the early 1930s, the severe economic contraction then was sustained for an entire decade because the government implemented massive regulations, massive taxes and massive spending TARP turned out to be just another way for government to do all three.We are reminded of another historical comparison.a one result of the Great Depression was to scare Americans away from stocks for a quarter of a century stocks didn t regain 1929 levels until 1954.b today s crash happened as Americans suddenly realized that housing is consumption and not investment will it similarly be a quarter of a century before housing returns to the pre crash pre 2008 levels BANKING SYSTEM CURES Did you know We get a glimpse of an entire culture in its death throes Then, Mr Allison lays out the prescription for our return to economic health, but sadly, we can expect NONE of his recommendations to ever gain the attention or respect of those in power consequently, we can brace ourselves for an incredibly destructive crisis in the next decade or two Those in power are smart enough to grasp that Allison s achievable set of steps would work but they want to hang on to their power, instead The American voter not only won t grasp Allison s assessment he won t even try to grasp it, ever The Dodd Frank reform bill, offered by those in power as a solution, actually worsens the situation a it gives government protection to the too big to fail companies, virtually ensuring their ongoing risky behaviors b its Durbin amendment is little than government mandated redistribution of wealth from bank shareholders and customers to large retailers and c it gives power to the Fed and bank regulators power to the very entities that created the crisis in the first place In the end what it comes down to is stable money is the foundation for long term prosperity p 189 But what the current crop of policy makers gives us the exact opposite Their every decision takes aim at our long term prosperity their ever increasing regulations their ever increasing taxes their ever increasing spending The scope and breath of Mr Allison s coverage paints the terrifying picture of how fast our country is moving from two and a half centuries of prosperity into the quagmire of a regulatory welfare state, where we must brace ourselves for unprecedented hardships and unprecedented loss of personal freedoms.Why are Americans so content when the rule of law is jettisoned, as long as it is to benefit a union Why are most Americans so comfortable with implementing policies which have always failed in the past How can all this be, you ask It is all possible, says Allison, because of philosophic ideas at play here As with Yaron Brook s book, Allison also makes the case that what we really face here is a philosophic moral ethical battle he contends that the financial crisis is most basically the result of philosophic ideas, not economic ideas He speaks of the ideas which predominate in American universities today and which are responsible for the creation of our teachers, our journalists, our politicians Even today s indoctrinated students might concede that we cannot indefinitely consume than we produce But, hampered by today s philosophic pragmatism, they are never able to develop an action plan based on such a principle because the dominant philosophy denies that there is any permanent truth, i.e., principles, to go by In today s universities it is acceptable, even fashionable, to be thought of as pragmatic Students in the humanities are proud to be pragmatic proud to claim no principles When a whole nation of voters is pragmatic, they will vote for a candidate pledging not to reform entitlements, even when those entitlements are leading directly to bankruptcy.When we combine philosophic pragmatism with altruism, we get a veritable witch s brew We get a quest for equality of outcome, along with the Orwellian notion that justice means getting what we do NOT deserve We get an entire Administration that thinks that justice consists in creating equality by hobbling the most able.We get a Congress blithely shepherding the country into the nightmare of a utopian tyranny, where monetary stability is sacrificed so that the hoards can have free stuff We get a country on the brink, but where the citizenry is unable to see what s happening to them We get a citizenry voting to move faster in the same direction In Allison s book we get a dose of clarity to clear the fog which heretofore comprised our understanding We get to see just how close we are to global upheaval to a US decline into 3rd world status to civil unrest to union violence like in Greece to barbarians at the gate Allison dares us to look at 1920 Argentina, which at the time had a standard of living equal to the US Then it plunged itself into statism via taxation, redistribution, and loss of individual rights It became a 3rd world economy for decades, all mediated by the morality which condemns selfish America s own decline may have developed slowly, starting with Teddy Roosevelt s and Woodrow Wilson s progressive disrespect for the Constitution But today it has accelerated to a frightening pace the incredible march of the regulatory state p 259 The teachers, the journalists and the politicians have attained a frenzy of utopian idealism, destroying individual rights, expropriating wealth, oblivious to the cost in prosperity and standard of living Our intellectuals and politicians are willing to sink a nation into 3rd world status if that s what it takes to achieve the evil of making everyone equal Why do they do it They do it because they have bought into the philosophy of altruism, requiring us to sacrifice ourselves until everyone is reduced to equality That is what they mean by social justice Mr Allison s book demonstrates that they do not have economic ideas on their side but they are winning because of their promotion of philosophic pragmatism along with altruism Their philosophy is winning on the national stage And since the Republicans mostly agree with their basic philosophic positions about what is needed for social justice , a reversal of direction back toward freedom and individual rights does not seem likely to come from the Republicans The real challenges are philosophical, not economic, p252 but in order for better philosophic ideas to get a hearing, the bad economic ideas must be swept away.Brace yourself and arm yourself with the knowledge in this book

John Allison is an Executive in Residence at the Wake Forest School of Business He is a member of the Cato Institute s Board of Directors and Chairman of the Executive Advisory Council of the Cato Institute s Center for Monetary and Financial Alternatives Allison was president and CEO of the Cato Institute from October 2012 to April 2015 Prior to joining Cato, Allison was chairman and CEO of BB

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  • Audio CD
  • The Financial Crisis and the Free Market Cure
  • John A. Allison
  • English
  • 01 June 2018
  • 9781470846053

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