This slim volume of 200 pages expounds the central idea with a series of fascinating, even entertaining vignettes of the bubbles and crashes of the last 30 years - the 2008 crisis and its current aftermath (the book was completed in January 2009), the 2000 tech bubble, the Japanese real estate bubble and subsequent lost decade, the 1998 Asian currency crisis. It is a book of economics for the non-economist, with no jargon and simple, but precise explanations of events, illustrated by pertinent graphs. The writing and language is engaging and flows smoothly, perhaps the by-product of Barbera being obliged to communicate constantly with non-economists in his job.
The author exhorts us to heed the ideas of Hyman Minsky, who stated that people's attitude towards risk changes with stages in an economic cycle: with prolonged good times in the recovery and growth phases, individuals get complacent and believe that the good times will continue forever, leading them to take on ever-increasing risk and leverage, goaded on by the financial system, till a typically small negative event, which he calls a "Minsky Moment", pricks the bubble and the violent slide destroys wealth, at which point everyone gets very (too) risk-averse. The financial system itself, as the holder of all the "cannot be paid back" debt, then has to be bailed out by the government. As he puts it, "Thus, government rescue operations are an inescapable part of capitalism."
There is a brilliant example on page 31 contrasting a homeowner with a conservative mortgage and one with a very large mortgage predicated on rising house prices to sustain affordability, such as was common in the USA in the years leading up to the housing crash there. The easy-to-follow table shows how a small rise in interest rates or a small decline in house prices will cause catastrophe for the large mortgage holder. This example is then extended to explain to show how the risky mortgage default effect can cascade into the general economy through financial institutions and create havoc even for those home buyers who have been cautious, or for completely unrelated companies and sectors.
Barbera thinks that destructive capitalism of most businesses benefits society by cleansing bad businesses with better ones but he says that the financial system is an exception and must be prevented from failing to prevent destructive deflation such as happened in the 1930s - thus he severely criticises the decision to allow Lehman to fail in September 2008. Barbera has an ax to grind and that ax is what he believes is the mis-perception by governments, central bankers and the mainstream of economic thinking on how the financial system works to create recurring bubbles.
Overall the book is a highly engaging and well-argued essay on what ails capitalism and the financial system. Barbera advocates that central banks should be mandated with controlling not just inflation but also asset bubbles to nip them in the bud before they grow too large and wreak havoc. He does not want to see overshoot on the regulatory side in reaction to the 2008 crisis, saying that the huge engine of wealth that is capitalism should not be hobbled too much - one might characterize it as "as much new regulation as necessary but only as much as necessary".
What is the value of this book for an individual investor?
- a cautious attitude - understanding that bubbles are inherent and inevitable in our system makes one cautious and on the lookout for the next one; that is a powerful message of this book
- awareness of bubble signs - it helps to know some signs to monitor since bubbles originate from the financial system, like high and climbing levels of debt and leverage; once a bubble exists it is impossible to predict when it will collapse as a slight seemingly innocuous event starts the fall
- awareness of calamity indicators - if financial institutions do start failing whether due to government neglect or powerlessness, then it really is time to look for escape and safety, certainly financially and perhaps even physically
Giveaway! The publisher McGraw Hill has kindly provided me with a copy to give away. So leave a comment on this post with some kind of unique name, i.e. not "anonymous", by closing date of midnight EDT Thursday May 28, 2009. If the fancy strikes you, in your comment say what you think will be the next bubble - green tech, gold, oil ... I will do a random draw to pick a winner and then I'll need to get a postal address from him/her to mail it. Good luck everyone!!