Financial Fiasco

I recently finished reading Swedish economist Johan Norberg‘s book about the financial crisis, aptly titled Financial Fiasco. It’s both short and informative. Six chapters and 155 pages, all of them worth reading.

The first two chapters are about the two big regulatory causes of the recession. One, monetary policy that was too easy for too long. The price system works. When the Fed messes with that price system, prices send out the wrong signals. People behave accordingly. Two, a decades-long drive to raise homeownership rates caused a lot of people to take out loans they couldn’t afford. It was only a matter of time before the consequences would come to bear.

Chapters 3 and 4 are about how the private sector reacted to the incentives regulators gave them. Let’s just say they acted badly. If people can game the system, they often will. Norberg’s criticism of overly-complicated securitized mortgage packages is both shocking and infuriating.

Chapter 5 is about how the government and private sector reacted to the crisis once the housing bubble popped. The $700 billion bailout program to reward bad behavior comes under fire.

Norberg is in top form in Chapter 6. Having looked at the causes and consequences of the crisis, now he offers a way out. One lesson is that politicians will always behave badly. “Politicians who distribute pork they cannot afford are reelected; butcher shops that sell pork they cannot afford go bankrupt. (p. 150)” Politicians are just like you and me. They go wherever their incentives lead them. We need to approach them accordingly.

The way to a full recovery is not bailouts. It is letting bad companies fail. And just as important, letting good ones prosper. “Government support for companies is thus not a way to save jobs, as politicians try to make us believe. It is a way to move jobs from good companies to bad companies.” (p. 151) In the long run, bailouts keep the economy down by keeping jobs and resources away from where they would do the most good.

Financial Fiasco has echoes of Tocqueville; a foreigner is trying to figure out how America works. Norberg, like Alexis de Tocqueville, is uncommonly perceptive. His experience living under an economy more thoroughly mixed than America’s allows him to see things that have escaped American commentators. This is extremely valuable. The fact that his book is concise, well written, and accessible to those of us who don’t have economics Ph.Ds makes it even moreso.

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