Who Could Have Known? The Greatest Financial Crisis Since the Great Depression

Book Review of Mark C. Taylor's "Confidence Games: Money and Markets in a World Without Redemption," published in the fall of 2004. Because it accurately foretold the likely outcome of the new financial architecture, especially the mortgage crisis, three years in advance, and there were only two dated reviews on Amazon.com, I decided to give Professor Taylor (Chrmn. of the Religion Dept. at Columbia University) his due. This review has just been posted on Amazon.com (Sunday, April 27, 2008)

This is obviously, from the title, a very contemporary review (April 27, 2008) of Mark Taylor's "Confidence Games," which was published in the fall of 2004. Since July of 2007, financial markets in the United States are going through the longest and most rattling crisis since the Great Depression, when measured by the extent of the mortgage crisis (10% of the mortgages are "upside down" - with projections of from another 10-20% to follow) and the degree and nature of interventions by the Federal Reserve and central banks in Europe. The collapse of the investment bank Bear Stearns in under a week (Wed. March 12th- Monday, March 17th, 2008) was the dramatic punctuation mark upon the shakiness and utter incomprehensibility of the new financial architecture both to the general public and the Beltway elite. It was a run against a major bank, but without the public lining up in the streets for withdrawals. Instead, the run occurred due to loss of confidence by unspecified major players operating in the spectral electronic spaces described so well in Taylor's book - years in advance. We are still waiting, the public and investigating Congress, to find out what really happened.

Today, as the press and public increasingly ask how this could have happened, even "wise men" such as Robert Rubin from the Clinton era "Committee to Save the World" are being questioned for their roles in and understanding of the still unfolding calamity.

This reviewer thinks it is important to credit those who, however far removed from mainstream press consideration, saw the dangers early and clearly in the brave new world of our financial markets, built between 1980 and the late 1990's, the era of de-regulation and free market worship - and idolatry. Now Taylor's book is breathtaking in it's scope and interdisciplinary reach, not easy reading, but given the breadth of what he covers, it deserves a much wider audience.

I direct readers' attention, in light of contemporary events, particularly to Chapter 5, entitled "Specters of Capital," just about 25 pages long, which should be required reading on Wall Street, in Congress, and in the world of journalists, such as they are, especially the ones who question and write about our presidential candidates.

Here is the essense of Taylor's findings on the fruits of decades of "financial engineering," or, as I like to call it, our "new financial architecture."

Page 152: "Contrary to expectation, the strategies and new financial instruments designed to avoid risk often end up creating greater volatility and thus actually increase risk."

Page 166: "Derivative investments are not only highly speculative but are also off-book, i.e., they do not show up on balance sheets. Moreover, derivatives are highly leveraged; in some cases they require little or sometimes even no capital up front. Throughout the 1990's, the derivatives market continued to grow until, in 1998, it had a nominal value of $70 trillion, eight times the annual Gross National Product of the United States." (Note: by 2008, the notional value is in the hundreds of trillions of dollars).

Pages 176-177: "With the attitudinal shifts about borrowing and debt and new government policies encouraging the creation of the new financial products computers and networks make possible, a collateral crisis became unavoidable...With Wall Street leveraged at 25:1 it might have seemed reasonable at least to extend margin rules to derivatives. But policies tended in the opposite direction. In his testimony before Congress in 1995, Alan Greenspan actually proposed completely eliminating all margin requirements....Indeed even the mortgage market changed in the 1990's. In their ongoing effort to make something out of nothing, financial engineers ended up transforming something into nothing; the ground virtually disappeared from beneath the real estate market. The securitization of mortgages through the creation of Mortgage Backed Securities and Collaterilized Mortgage Obligations led to pyramiding schemes in markets that once seemed secure."

On page 178 is a graphic of the Mortgage Market illustrating the layers and distance of investors from the actual real estate mortgages themselves - with collateral being used three times. Taylor, quoting author John Geanakoplos, nails the events of July 2007- to the present right on the head: "'Mortgage pass through securities offer a classical example of pyramiding. Pyramiding naturally gives rise to chain reactions, as a default by Mr. A ripples through, often all the way to D.'" (Page 179).

Just after this quote, Taylor comments: "At this point it becomes difficult to deny that the confidence game has become not only a casino but is actually a house of cards."

I don't think that much more needs to be said about whether our troubles could have been anticipated; they were and very clearly. This review writer knows that it was possible. He gave Taylor's book and warnings central "booking" in his own essay, "Fiscally Responsible, or Ingredients for an Economic Katrina?" The date? February, 2007.

William Neil