20 January 2011

Book Review

Bailout Nation defies classification.  It isn’t a history book, it isn’t a finance book, it isn’t an economics book, nor is it a political work.  Instead, it incorporates all of these oeuvres into one satisfying yet depressing read that explains that financial, political, historical, and economic impact of the recent bailouts.  Fortunately, Ritholtz’s commentary and analysis is distinct and spot-on; he is one of very few people in this country who is able to think clearly for himself.

To summarize this book is impossible, for in many ways, the book itself is a summary of the most relevant aspect of the bailouts.  Indeed, given the scope of the topic, there is no way it could be anything else.  In order to avoid attempting the impossible, and in order to give readers some idea of what to expect, I will simply give the highlights of the book.

Early on, the best chapter is the one that addresses bailouts in the industrial age.  Virtually all presidents from Ford onward engaged in this practice, under the guise of saving the economy.  Of course, the implicit promise that Uncle Sam will save you can reduce or eliminate a business’s moral hazard.  Also, pay careful attention to the stock bailouts of the late 80s and early 90s.

Chapter 11, addressing the issue of deregulation, is also worth a perusal.  While I do not agree with the general assumption that regulation itself is necessary, I would agree that regulation is the necessary when moral hazard is diminished or removed.  If we’re going to promise bailouts to companies, either explicitly or implicitly, then we need to regulate them.  If the public is going to bear the risk of a company’s decisions, then it is well within the public’s rights to demand that their risk be kept reasonable.  The mistake that prior administrations made, most notably Reagan’s, was to allow companies to take more risks without having to bear the responsibilities that came with said risk.

Also worth reading is chapter 16, a tragicomic look at the psychology of motivation.  Chapter 13 is a must-read as well, particularly if you are unfamiliar with the meaning of moral hazard.

Finally, chapters 19 and 20 are necessary reading, since Ritholtz is essentially correct on figuring out where to pin the blame (and just as importantly, where not to pin the blame).  Unsurprisingly, a lot of politicians and bureaucracies make the blame list.

All in all, the book is a relatively quick read, chock full of information and insightful analysis.  It can get a bit technical at times, but Ritholtz does a good job of explaining even the most complex of financial instruments in relatively simple terms.  There is also some charting, a good portion of which is humorous.  All of it is pretty easy to understand, especially with the explanations given.  Best of all, the book is free from the biases and nonsense that mark most of the other books on this subject.  If you want to make sense of the last four years, this book is the place to start.

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