I’ve drafted a review of I.O.U.: Why Everyone Owes Everyone and No One Can Pay. This is an explanation of the financial collapse of 2008-? by an English novelist that has gotten excellent reviews in newspapers and magazines.
Comments/corrections would be appreciated.
You have two very similar quotes quite close together: “In Britain, going into the credit crunch, the typical household owed more than 160 percent of its average income,” followed by “the average British household owes 160 percent of its annual income.” I’d think that “average” in the first quote should read “annual”.
I was surprised to read “Since 2004, Canadians’ average incomes have grown at 11 percent a year, compared with 5 percent in the U.S.” As far as I can tell, this is total growth over the period, not growth per year. See, for example,here:
http://www.bcprogressboard.com/archives/aTB09CanUSIncomeGrowth.html
I suppose with such a book you hope that the novelist will see the significance of things an insider might not notice, or take for granted, and be able to explain them vividly to the general reader. On the other hand, he may not have a good grasp of figures or basic economic principles and be too uncritical of his sources – faults you identify in the book’s first section. You make a very good point about the effect of immigration on median wages.
Overall, you make the book seem interesting; I’m sure there are some insights I haven’t picked up elsewhere. If I want to further stoke my indignation about financial services, I’ll be sure to take a look.
Oh, and the On A Kindle section is handy, although I don’t have one.
Very interesting. Where is the accountability for Moody’s and their equivalents?
They clearly played a huge role in this fiasco. We need to send a clear message to every employee and investor: contribute to gross incompetence or borderline illegal behavior and we’ll pull the plug–game over.
Generally helpful review. In your leverage section you make reference to investors’ ability to leverage stocks on their own. However this ignores three real-world practicalities: (a) debt at the corporate level is non-recourse to the individual investor’s other assets (b) interest on debt is tax deductible (see the full Modigliani-Miller description in your Brealey & Myers) (c) Regulation T limits margin on loans on stocks to 50%. So perhaps if an investor want non-recourse leverage at higher multiples with the added benefit of the present value of the debt tax shield, the price is 20% of the excess returns.
The review seems fine, but I think that the event analysis could be simplified to “coercion and collusion”.
Oversight was bartered or bullied away – or incompetents were appointed to run it – and a perfect storm of money-harvesting hidden in a cloud of Greenspan’s twaddle was created, satisfying the Bush administration’s backers very nicely.
This argument aside, the social effects of our current unprecedented wealth-stratification enabled by deregulation is a true threat to social stability, and one that may badly backfire on the fund managers that have hidden themselves in greenery of Connecticut.
” The result is a system in which one man (hedge fund manager John Paulson in 2007) can make more money than the total of the salaries of every police officer, firefighter, and public school teacher in Chicago, while another man stands hungry in the cold. Any attempt to fix the system is called Socialism.”
— Paul Buchheit