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Lost Decades: The Making of America's Debt Crisis and the Long Recovery
Welcome to Argentina: by 2008 the United States had become the biggest international borrower in world history, with almost half of its 6.4 trillion dollar federal debt in foreign hands. The proportion of foreign loans to the size of the economy put the United States in league with Mexico, Pakistan, and other third-world debtor nations. The massive inflow of foreign funds financed the booms in housing prices and consumer spending that fueled the economy until the collapse of late 2008. The authors explore the political and economic roots of this crisis as well as its long-term effects. They explain the political strategies behind the Bush administration's policy of funding massive deficits with the foreign borrowing that fed the crisis. They see the continuing impact of our huge debt in a slow recovery ahead. Their clear, insightful, and comprehensive account will long be regarded as the standard on the crisis.
304 pages, Hardcover
First published April 1, 2011
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115 people want to read
About the author
Menzie David Chinn
13 booksMenzie D. Chinn teaches at the University of Wisconsin, Madison, and runs the influential blog Econbrowser.
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Displaying 1 - 10 of 10 reviews
May 15, 2015
I agree with the cover blurbs saying this book may be the best single explanation of our recent financial crisis. The authors do a great job explaining the complex financial products that led to the interrelatedness of the global fiscal implosion. The authors believe government intervention was necessary to stem the global contagion and also call out the lack of effective government regulation which essentials allows the financial system to privative profits and socialize losses. Less blame is put on consumers who were leveraged nearly as much as large banks when taking into account what percentage of their incomes would be needed to pay off their mortgage, but are correct when they argue that there was no incentive to do due diligence when these mortgages were being packaged into financial products where the bank originating the mortgage would not be holding it on its books. Any replay of a crisis makes the explanation offered by commentators sober and filled with common sense which allows individuals to reflect on opportunities where things could have been different. Its too bad we continue to make the same mistakes over and over again.
October 6, 2013
The book includes a nice run-down of the effects of the financial crisis and subsequent government response. However, the book lands pretty flat in other regards.
The central thesis is that capital account imbalances used to finance home construction and growing government deficits set up the United States for a classic boom-bust cycle. Evolution in financial markets and a lack of concomitant regulatory response led the bust phase to be catastrophic. Moreover, in the inflow of funds reduced long-term interest rates, leading financial institutions to seek alternative (and more risky) sources of yield. As well, the capital flows created a divergence between the tradable good sector (manufacturing) and nontradables (services).
The authors largely focus on China and Middle East countries in this story, but more updated versions, and presumably available to the authors when writing this book, of this view have focused on European investors. So focusing on currency realignment in China and reducing oil imports is not responding to the details of the authors' theory.
But, while a narrative may be constructed for the U.S. using this story, it does not work well across countries. Spain, for example, had a declining debt to GDP ratio prior to the crisis with fairly large current account deficits. As such, policy decisions relating to outlays and revenue may have little to do with capital inflows (especially since a large portion of U.S. capital inflows relate to trade deficits from oil imports).
The authors then offer general guidelines for policy (restrain spending through entitlement reform and PAYGO measures, pay for social priorities through tax increases, focus on macro-prudential and systemic risk regulation, and charge monetary policymakers with incorporating asset prices within policy decisions). But, these generally only loosely tie back to their overall thesis. Higher capital ratio requirements might be a good policy, but is it really sufficient to prevent a crisis - when the feature of a financial crisis is a demand for safe collateral and cash?
A good overview for the general reader wanting a basic outline of the crisis and plausible theories of the why and the how. Other sources should be considered, as well.
The central thesis is that capital account imbalances used to finance home construction and growing government deficits set up the United States for a classic boom-bust cycle. Evolution in financial markets and a lack of concomitant regulatory response led the bust phase to be catastrophic. Moreover, in the inflow of funds reduced long-term interest rates, leading financial institutions to seek alternative (and more risky) sources of yield. As well, the capital flows created a divergence between the tradable good sector (manufacturing) and nontradables (services).
The authors largely focus on China and Middle East countries in this story, but more updated versions, and presumably available to the authors when writing this book, of this view have focused on European investors. So focusing on currency realignment in China and reducing oil imports is not responding to the details of the authors' theory.
But, while a narrative may be constructed for the U.S. using this story, it does not work well across countries. Spain, for example, had a declining debt to GDP ratio prior to the crisis with fairly large current account deficits. As such, policy decisions relating to outlays and revenue may have little to do with capital inflows (especially since a large portion of U.S. capital inflows relate to trade deficits from oil imports).
The authors then offer general guidelines for policy (restrain spending through entitlement reform and PAYGO measures, pay for social priorities through tax increases, focus on macro-prudential and systemic risk regulation, and charge monetary policymakers with incorporating asset prices within policy decisions). But, these generally only loosely tie back to their overall thesis. Higher capital ratio requirements might be a good policy, but is it really sufficient to prevent a crisis - when the feature of a financial crisis is a demand for safe collateral and cash?
A good overview for the general reader wanting a basic outline of the crisis and plausible theories of the why and the how. Other sources should be considered, as well.
May 28, 2013
When I was looking for a book on the economic meltdown, a buddy of mine said his PhD advisor had written a book, how about that? I wrote it down and promptly forgot about it (and read ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism instead).
This one is a macroeconomic take on How Things Went Wrong - a perspective I haven't seen much covered, and one that certainly added to my understanding of the subject.
I guess my biggest takeaways are that:
1. The major effect of a tax cut is to make the next guy have to raise taxes
2. It wasn't just poor regulations (although that certainly contributed), but an intentional fiscal policy that helped screw things up so badly.
3. Finance people used to get paid salaries comparable to engineers until the mid-90s.
Recommended.
This one is a macroeconomic take on How Things Went Wrong - a perspective I haven't seen much covered, and one that certainly added to my understanding of the subject.
I guess my biggest takeaways are that:
1. The major effect of a tax cut is to make the next guy have to raise taxes
2. It wasn't just poor regulations (although that certainly contributed), but an intentional fiscal policy that helped screw things up so badly.
3. Finance people used to get paid salaries comparable to engineers until the mid-90s.
Recommended.
December 12, 2011
Need a terrifying read for the holidays? Get this book. It explains in simple language the many reasons for the financial crisis (Fannie Mae, Fed, lacking regulation, lacking ethics) and paints a picture of the future. At best, we are in the middle of a lost decade. More likely, we're facing 3-4 lost decades. Happy holidays...:)
August 7, 2012
"Mohamed El-Erian was worried enough that the entire financial system was breaking down that he called his wife and told her to go to the ATM and take out plenty of cash. 'She said, "Why?" I said, "I don't know whether the banks are going to be open tomorrow." The system was freezing in front of our eyes.'" (113)
March 4, 2012
I thought this was a really clear overall explanation for the events of the recent recession and their global impacts. I didn't agree with every argument made, but I still appreciated the ways the authors simplified a very complex subject.
December 26, 2013
Good review of the events leading to the crash. Nothing really very new in the history or in the proposals.
June 17, 2012
Essential reading for anyone who wants a deeper understanding of The Great Recession than the cheap analysis offered by cable TV networks.
August 21, 2014
Another one of those, "it could've been an essay, books."
November 21, 2013
Read it for a class,could have been more interesting
Displaying 1 - 10 of 10 reviews