The Ten Best Books of 2011

Bowing to convention, here's my list of the best new books I've read this year on globalization. None of these are dry academic studies; all are engaging first person narratives, journalistic accounts, or colorful histories that illuminate the complexity of globalization for ordinary readers. All of these are highly recommended.

1. Simon Sebag Montefiore, Jerusalem: The Biography (Alfred A. Knopf, 2011)

• This "biography" of the city of Jerusalem, by focusing so clearly on the most coveted holy city in the world, illuminates the rise and fall of regional and global powers that have claimed possession of Jerusalem's sacred space over millennia. It's the most readable 600 page history book I've ever read, entertaining and enlightening at the same time. It was impossible to put down.

2. Michael Lewis, Boomerang: Travels in the New Third World (W.W. Norton, 2011)

• As my recent review indicates, this is a entertaining and sobering account of recent financial history by one of our best-known non-fiction writers.

3. Bethany McLean and Joe Nocera, All the Devils Are Here: The Hidden History of the Financial Crisis (Penguin, 2010)

• Another book reviewed in this space, All the Devils is probably the single best place to start reading about the origins of the financial crisis, although it's best read in conjunction with the next selection. McLean and Nocera largely blame Wall Street for the crisis, mostly corroborating Charles Ferguson's Inside Job.

4. Gretchen Morgenson and Joshua Rosner, Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon (Times Books, 2011)

• Unlike McLean and Nocera, Morgenson and Rosner focus on the story of James Johnson's tenure at Fannie Mae, the quasi-government mortgage guarantor. They convincingly show how Fannie Mae was involved early in contributing to the crisis, especially in hijacking Washington politicians. The lesson? Beware of the capitalist-statist complex, the overlap between Wall Street and Capitol Hill: this is the space Fannie Mae exploited to enrich Johnson and his cronies under the guise of expanding homeownership to new borrowers. If you read this and All the Devils, you'll have a fairly complete picture of what happened.

5. Stacey Edgar, Global Girlfriends: How One Mom Made It Her Business to Help Women in Poverty Worldwide (St. Martin's Press, 2011).

• An upbeat and hopeful example of alternative globalization. This young mom built a fair trade fashion business aimed at empowering female producers by giving them access to the large U.S. market through Global Girlfriend.com. While the narrative is a bit too cheerful and optimistic, it also stimulates hope about making a dent in global poverty.

6. Annia Ciezadlo, Day of Honey: A Memoir of Food, Love, and War (Free Press, 2011)

• If you can get past the cheesy cover, you'll find an engaging story of eating across the Middle East in a time of war. Having married a Lebanese journalist not long after 9/11, this young writer becomes a war reporter, but she ends up writing about ordinary Middle Eastern life by focusing on the region's cuisine. Globalization is often accused of undermining traditional diets, but, as Ciezadlo shows, it can also foster cross-cultural understanding. Recipes are included!

7. Connor Grennan, Little Princes: One Man's Promise to Bring Home the Lost Children of Nepal (William Morrow, 2011)

• A young man decides to spend his savings on a trip around the world and decides to volunteer at an orphanage in Nepal because it sounds cool. He ends up finding his wife, discovering his vocation, and starting an organization to combat child trafficking in Nepal. A great story, told humbly. (Full disclosure: I received a free copy of this book when it was chosen for Malone University's Fall 2011 required freshman reading program.)

8. Robin Wright, Rock the Casbah: Rage and Rebellion Across the Islamic World (Simon and Schuster, 2011)

• As the Arab Spring continues to unfold, this is a helpful first cut at telling its early history, by a seasoned journalist. Wright explicitly links the changes in the region to the forces of globalization. Far from being isolated from the world, the region turns out to be very much interconnected: satellite TV, Twitter, Facebook, and YouTube are all significant tools in spreading revolt against corrupt regimes.

9. Susan Maushart, The Winter of Our Disconnect: How Three Totally Wired Teenagers (and a Mother Who Slept with Her iPhone) Pulled the Plug on Their Technology and Lived to Tell the Tale (Penguin, 2011)

• A reflective romp through a six-month experiment at going screen-free: no TV, no computers, no cellphones, and no video games in the house. Maushart has a Ph.D. in communications from New York University, so she's got some excellent preparation for thinking about media in society. Her lessons, "The Ten Commandments for Using Modern Media," are excellent advice for all of us. Instead of accepting the intrusion of electronic media as inevitable, we need to slow down and find alternatives that keep us human. We need to make space for kairos time and resist the flattening forces of chronos.

10. Paul Ingrassia, Crash Course: The Automobile Industry's Road from Glory to Disaster (Random House, 2010)

• Also reviewed here, this book focuses on the American automobile industry in a global context: the oil price spike and financial collapse of 2008 were the nails in the coffin for an industry that had many internal problems. 

Back to Our Regularly Scheduled Programming: Global Finance

Just before the Egyptian Revolution broke out, I was preparing to review more books on the global financial crisis.

Today's book is Bethany McLean's and Joe Nocera's All the Devils Are Here: The Hidden History of the Financial Crisis--an important contribution to the conversation about what happened to the US and global financial systems in 2007 and 2008 (click here for more posts on this topic). This book makes a great companion to the film Inside Job.

"Hell is empty, and all the devils are here," wrote Shakespeare in The Tempest. Borrowing his phrase for the title is an apt move, since the authors (former colleagues at Forbes magazine) attempt to interview all of the culprits who contributed to this caper. Unlike the cooler historical and analytical overview provided by Nouriel Roubini in Crisis Economics, this is a vivid, human drama, filled with characters who have stories.

Although I occasionally got bogged down in blizzards of names and esoteric financial terms, I found All the Devils to be the clearest and most comprehensive overview of the crisis out there. By interviewing most of the key players, McLean and Nocera help us to see the complexity of the crisis through their eyes. In the process, they clarify several points that have been disputed in analyzing the crisis. Among them are the following:

1. The government-supported mortgage guarantors (Fannie Mae and Freddie Mac) were not responsible for the crisis, although they tried to profit from it and were dragged down by it.
This criticism has been a standard conservative criticism, blaming the Clinton administration and Democratic politicians for leaning on Fannie and Freddie to push mortgages on unqualified borrowers (in order to increase homeownership). McLean and Nocera address this directly, arguing that both Fannie and Freddie got into the subprime business because Countrywide and other banks were making immense profits from it (p. 50). But they got into it late in the game, between 2005 and 2007 (p. 185), seeking to make big bucks like the Wall Street banks.

2. Quantitative analysis, which many didn't properly understand, lulled many into thinking that risks were under control when they really weren't.
McLean and Nocera describe how a J.P. Morgan analyst named Till Guldimann invented a measure called Value at Risk (or VaR), which all the other big Wall Street banks came to use. The problem was that VaR assumed normal market conditions similar to the past. "The fact that VaR told you how much your firm might lose 95 percent of the time didn't say a thing about what might happen the other five percent of the time" (p. 57). You could lose billions, but the statistic gave the misleading impression that Wall Street banks were controlling and predicting the risk to their investments. In the book, I call this arrogance. Humility means knowing that you cannot predict or control the future.

On this score, Goldman Sachs was rare among Wall Street firms: "When it came to managing risk," write McLean and Nocera, "Goldman had what can only be called a kind of humility, a belief that the model was only as good as the inputs and that faith in the model had to balanced with the informed judgment of human beings" (p. 158).

3. The private bond rating companies and government regulators were corrupted.
Moody's, Standard & Poors, and Fitch Ratings were supposed to analyze the portfolios of mortgage-backed bonds to see how risky they were as investments. Unfortunately, the Wall Street banks would go "ratings shopping" between the three companies (p. 118). If they didn't get the high ratings they wanted, they would threaten to take their business to one of the other ones. This was a classic example of a "race to the bottom" (p. 119). Furthermore, all three companies were profiting from rubber-stamping these deals. The president of Moody's took home $3.2 million in compensation in 2007 (p. 124).

Alan Greenspan, chairman of the Federal Reserve, trusted that private, self-regulation would work to keep companies in line. "Market discipline," rather than government regulation, would be effective. But that didn't work out so well in practice.

4. The supply side on Wall Street was pushing predatory, punishing subprime loans
Subprime loan originators told the authors that it was Wall Street banks that drove the trade. These banks were lending the money to mortgage firms "and then buying up their mortgages and securitizing them" (p. 134). Riskier subprime loans "were roughly seven times more profitable than prime mortgages" (p. 134). Thus, the Wall Street firms demanded that subprime brokers pushed "payment option adjustable rate mortgages" which "gave consumers the right to choose whatever rate they wanted at the start, from a very low teaser rate to a higher rate that more resembled a thirty-year fixed mortgage" (p. 135). Eventually, these loans would reset to a higher rate and borrowers would go into "payment shock." It wasn't greedy borrowers so much as greedy Wall Streeters that drove this trade. This supply-side view aligns with the Financial Crisis Inquiry Commission Report, rather than the demand-side view that blames those who pushed or sought subprime loans for the crisis.

5. Subprime lenders often encouraged borrowers to lie.
McLean and Nocera share several stories of people who pursued home loans from Countrywide and were encouraged to sign on to fraudulent documents. Although there were certainly cases of people trying to borrow more than they ought, the subprime lenders were hardly innocent victims. Score another one for the supply side argument.


6. Everyone was making so much money from the global trade in bonds derived from subprime mortgages that they didn't care.
McLean and Nocera make a statement very similar to one made by Adam Davidson on NPR right after the crisis (and quoted in chapter 3 of the book):

Here was the ultimate consequence of the delinking of borrower and lender, which securitization had made possible: no one in the chain, from broker to subprime originator to Wall Street, cared that the loans they were making and selling were likely to go bad. In truth, they were all taking huge risks in granting these terrible loans. But they were all making too much money to see it. Everyone assumed that someone else would be left holding the bag (p. 218).

7. Despite all the damage done, very few people have been or will be held legally responsible.
The authors write,

Much of what took place during the crisis was immoral, unjust, craven, delusional behavior--but it wasn't criminal. The most clear-cut cases of corruption--the brokers who tricked people into bad mortages, the Wall Street bankers who knowingly packaged bad mortgages--are in the shadows, cogs inside the wheels of firms Ameriquest, New Century, Merrill Lynch, and Goldman Sachs. We'll probably never even learn most of these people's names (362).

And on that not-so-happy note, we return to special bulletins on the aftermath of the peaceful regime change in Egypt. Speaking of which, maybe a peaceful revolt against the new oligarchy on Wall Street would be in order. If Egyptians can demand change, then why can't we?

Even More Summer Reading on the Global Financial Crisis

First off, thanks to Google for making a new template available that works well for a blog about "the flat world." For those who've seen the blog before, this should be a less cluttered look and a better pairing of medium with content. (Let me know if you disagree!)

And now on to my post-World Cup summer obsession: reading interesting books about the global financial crisis. (Yes, such things exist!) I just finished two more books that help explain the mess the world economy got into by 2007 or 2008. The first, although prophetic, is now slightly dated and probably too technical for the average reader; the second is a current and compelling story that most people would grasp.

Dated and a bit technical, but prophetic
Charles Morris' 2008 book The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash was one of the first books published on the mess, coming out even before the full scope of the disaster was apparent. Morris was a former banker, with some high-level Wall Street connections (he thanks Nouriel Roubini, an early prophet of doom; George Soros, a world-famous currency speculator and intellectual; and Satyajit Das, an expert on the crazy financial products called derivatives, for helping him). Interestingly, Morris blames the free market ideology of the so-called Chicago School and of former Fed Board of Governors Chairman Alan Greenspan for a hands-off approach to regulating finance. In Morris' view, the roots of the crisis go back to the rise of "monetarism"--the belief that money supply drives inflation--in the 1980s. Deregulation was in, so financiers were left alone to police themselves.

But he goes beyond ideological polemics to explain the history that preceded the current mess. Three precedents are the 1987 "Black Monday" stock market crash, the 1998 Long Term Capital Management collapse, and the 2000 popping of the dot-com stock market bubble--all of which illustrated the flaws of applying mathematical models to manage the risk of market downturns. History doesn't obey the law of averages but has a way of coming up with never-before-anticipated events--events that don't fit on a "normal" bell-shaped curve. Globalized finance is not like physics and its mathematical expression:

The mathematics of big portfolios analogizes price movements to models of heat diffusion and the motions of gas molecules, in which uncountable randomized micro-interactions lead to highly predictable macro-results. Although it's theoretically possible that all the air molecules in my room will shift to one corner . . . the laws of large numbers ensure that the actual frequency of such events is way beyond never. Large securities portfolios usually do behave more or less as the mathematics suggest. But the analogies break down in a time of stress. For shares to truly mirror gas molecules, trading would have to be costless, instantaneous, and continuous. In fact, it is lumpy, expensive, and intermittent. Trading is also driven by human choices that often make no sense in terms that models understand. Humans hate losing money more than they like making it. Humans are subject to fads. . . . [I]n real financial markets, air molecules [real human beings] have a disturbing knack for clumping on one side of the room (pp. 56-57).

Even though the crisis was just beginning to unfold, Morris identifies several new financial products that contributed to making the crisis so massive: collateralized mortgage obligations, collateralized debt obligations, and credit default swaps. If all these terms confuse the heck out of you, then try watching the "Crisis of Credit Visualized" video, which is very helpful. Credit default swaps are what led to the Fall 2008 near-collapse and $85 billion bailout of AIG, a giant global insurance firm, which had not yet happened when Morris was writing, but he could claim to have seen it coming (at least in general). Which just goes to show you that this thing was entirely possible to anticipate. While it took a while for President George W. Bush to realize that "this sucker could go down," people like Morris saw it coming well ahead of time.

A compelling story for most readers
David Faber, a reporter for CNBC, has the courage to say that he honestly missed this story as it was unfolding. But thanks to a hedge fund manager in Texas named Kyle Bass, who called him to clue him in, he eventually started piecing together what was really happening at multiple levels. In other words, Faber figured out the story that only a few experts on the edges of Wall Street like Bass (the same people that are heroes in Michael Lewis' The Big Short) had told up to that point. Once he "got it," he needed to tell the story.

As a result, Faber's book And Then the Roof Caved In (2009) does a nice job framing the crisis as a compelling narrative, with real characters taking actions that drove the story from its beginning to its end. It looks like Faber basically converted his reporting for the CNBC documentary House of Cards into book form. Unlike Morris, he limits to the story to the critical period between 2001 and 2008, focusing on the links between 1) ordinary homebuyers who were trying to use increasing house prices to get ahead financially, 2) unregulated subprime mortgage lenders who were eager to lend at high rates of interest, 3) Wall Street banks desperate to buy up "physical" mortgages to pool into mortgage-backed bonds, 4) global investors desperate for high returns above the low interest rates set by the Federal Reserve (Fed), 5) credit rating agencies (Moody's, Standard & Poor's, and Fitch) that were complicit with the Wall Street firms that paid them to rate bonds issued by the same firms, 6) a Fed that failed to regulate the subprime mortgage market or take action to ease the housing bubble (the steady increase in housing prices and the flow of overseas capital into the mortgage bond market), and 7) Wall Street bankers (like Stan O'Neal, the head of Merrill Lynch) who were more interested in playing golf and paying themselves huge bonuses than in what was going on.

These seven are the main characters in any accurate rendering of the drama (is it a tragedy or comedy?). I want to comment briefly on ordinary people, Wall Street banks, and global investors.

I was especially glad to see the attention paid to the impact of all this financial maneuvering on ordinary people (#1 above). Faber focuses on the story of Arturo Trevilla, an upwardly mobile Mexican immigrant to California, and his family. They bought a house for $584,000, signing papers that said he took home $16,000 a month when he really earned $3,600 a month. (Arturo's English wasn't great, and even if it was, loan papers are hard to understand.) He also borrowed money for the down payment (a so-called "piggyback" loan). He was hoping to get out of his subprime loan in the future by borrowing against the expected future value of his home, which he, like everyone, assumed would keep increasing. Then he could borrow $70,000 of his home equity and start the embroidery business he was dreaming of. Unfortunately, by the time his adjustable rate mortgage payments zoomed up to $5,000 a month, he was in trouble. Then he lost his job, and he, his wife, his three kids) moved into an apartment with another family. Predatory lending or irresponsibility? A little of the latter, but mostly the first, I think.

The issue of ordinary people "flipping" homes for profit was also a major contributor to the crisis. Kyle Bass, the hedge fund guy, knew there was a problem when he chatted with a bartender in Las Vegas in 2007 who told him that he wasn't doing so well because his "three houses are killing me" (151). He'd been borrowing to buy and flip houses but couldn't sell them. Yes, a regular old bartender was doing that. And, yes, the inability to sell suggested that the real estate price bubble had popped--especially in places like Las Vegas (or California, Arizona, or Florida).

Why was Wall Street so stupid? In passing, Faber mentions a study of 24 housing busts that had happened since the 1970s (p. 175). In the last post, I reviewed John Lanchester's I.O.U., who had lived through a real estate bubble in England And yet really smart people all over the world were convinced that housing prices in the US would keep rising? Everyone knew that things were getting risky, so why did they keep investing in mortgage-backed bonds? According to the former CEO of Citigroup, they were afraid of losing market share (p. 168).

The global dimensions of this crisis are significant. Without the "giant pool of money" held by investors outside the U.S.--something like $70 trillion in 2008--this crisis wouldn't have started or become so widespread. According to Faber, "In 2005, 80 percent of subprime mortgages were being securitized and sold to voracious investors around the world. The subprime mortgage had become the chief export of our country" (p. 78). Message to the world from the USA: "Sorry about that."

On two controversial, politically charged points in the narrative, Faber weighs in with his own reading of the evidence.

First, he doesn't blame Fannie Mae and Freddie Mac, the two federally supported mortgage guarantors, for driving the crisis. After delving into the story, he attacks the "myth" that "the lax lending standards of Fannie and Freddie promulgated the current crisis. It is not true. Wall Street rushed into the vacuum created by the absence of Fannie and Freddie in 2003-2005 [because they were under pressure to be more cautious and accurate in their financial statements]" (p. 66). 70 percent of U.S. mortgages originated in 2003 were sold to Fannie and Freddie. By 2006, only 30 percent of mortgages were (p. 65). However, he does note that Congressman Barney Frank, the Chair of the House Financial Services Committee, later encouraged Fannie and Freddie to increase lending, on the theory that extending credit to less creditworthy borrowers would help expand the American Dream of homeownership. Still, in Faber's view, Wall Street is the one that drove the game.

Second, probably because he scored an interview with Alan Greenspan in 2008, Faber gives a wide berth to accusations that Greenspan and the Fed failed to take appropriate regulatory actions (in contrast to Morris, as noted above). However, he does point out (on pp. 50-54) that Edward Gramlich, one of the Fed's Governors, and Sheila Bair, the head of the Federal Deposit Insurance Corporation (the main regulator of banks), tried to persuade Greenspan to tighten lending requirements for mortgages. No dice.

Because of this reverence for Greenspan, Faber ends the book on a rather futile note, with no lessons for possible future corrective actions. As he puts it, in the final paragraph of the book,

Greed is the fuel that makes our capitalist system run. It is a powerful emotion. When I asked Alan Greenspan about it, he agreed, and then he gave me a sideways look from that famous 82-year-old face and said: "And you're going to outlaw that? Go ahead and try it."

Well, there's nothing we can do. There is No Alternative to letting the market run. You might as well try to pass a law against gravity.

Do you buy that?

Books I wish I could have read . . .

Evangelical publishers are starting to get into topics that crop up in The Fullness of Time. I only wish that I could have had time to learn from them before getting my own work into print. In just the past few months, I've seen a few interesting books popping up in two main categories:

Practical guides to more holistic living in a globalized world: For example, Tracy Bianchi is coming out with a book entitled Green Mama: The Guilt Free Guide to Helping You and Your Kids Save the Planet. In addition, Julie Clawson has just come out with Everyday Justice: The Global Impact of Our Daily Choices.

Evangelicals discovering the liturgical year: Joan Chittister is coming out with The Liturgical Year: The Spiraling Adventure of the Spiritual Life. And InterVarsity has just published an interesting book by Bobby Gross: Living the Christian Year: Time to Inhabit the Story of God.

I've just ordered a copy of Gross's book, and I look forward to working through it. The only comparable book that I've been able to find up to this point is Robert Webber's Ancient-Future Time. I'll try to find time to post some reflections on the Gross book here.

In the meantime, I am encouraged that so many others are responding to the paralysis that many of us feel about global capitalism being the only system that can organize our lives. Margaret Thatcher used to say that "there is no alternative," making what many have called the TINA argument.

But there are many alternatives, and the Christian year helps us to imagine them and start acting on them.