Bailout Nation

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

“The greatest economic calamity in a generation has now swept from
Wall Street through Main Street, to Iceland, Europe, and beyond.
Barry Ritholtz not only saw the financial tidal wave coming, but tried
to warn us before it hit, when few believed anything like it could
happen. Now that clean-up is at hand, who better to explain what
went wrong? Read this book: when Barry Ritholtz speaks, as the
saying goes, attention must be paid.”

—Jeff Matthews Author,
Pilgrimage to Warren Buffett's Omaha

 

“This thrilling page-turner is really a doctoral thesis in disguise on the history of financial debacles and the inner workings of the global financial system and modern economics. Barry is truly one of Wall Street's important thinkers and rising stars. Bravo Barry!”

—Jeffrey A. Hirsch Editor-in-Chief,
Stock Trader's Almanac

 

“Barry Ritholtz, long known to readers of
The Big Picture
for telling it like it is, does exactly that in Bailout Nation. With sparkling clarity and his inimitable brashness, Barry names names and tells you where to look for the bodies who are profiting from the unprecedented $8 trillion government bailout.”

—Michelle Leder Author,
Financial Fine Print
and
Footnoted

 

“Part history lesson, part social commentary, part in-depth analysis,
Bailout Nation
serves up a riveting indictment of the age of hubris and excess.”

—Michael Panzner Financial Armageddon

“As Wall Street wizards were turning into welfare kings, Barry Ritholtz was there to chronicle every new outrage on his blog,
The Big Picture
. Now he's focused on the really Big Picture—how we got into this mess—with his great new book,
Bailout Nation
.”

—Jesse Eisinger Portfolio

 

“Barry Ritholtz crystallizes the absurdity of the bailouts and why America's addiction to them is doomed to fail. This should be required reading for every future politician with a conscience.”

—Herb Greenberg former journalist, CNBC, Marketwatch, and now director of GreebergMeritz Research & Analytics

 

“Barry Ritholtz is leading the first wave of critical analysts who are trying to make sense of the past year beyond the official explanations. He not only illustrates the conflicts and contradiction in current economic leaders and policies, but suggests some solutions and even opportunities in this sea of global financial misery. I'm already looking forward to volume two.”

—Christopher Whalen Institutional Risk Analytics

 

“
Bailout Nation
provides a timely review and analysis of the issues and problems that led to and are evidenced in the present financial turmoil. These forensics are much needed today.”

—David Kotok Cumberland Advisors

 

“Barry Ritholtz has a one-two combination punch of insight and skepticism that leaves financiers, bankers and politicians out cold on the floor. This is pungent and funny required reading about the current crisis.”

—Dr. Paul Kedrosky
Infectious Greed
Partner, Ventures West VC

Copyright
^©
2009 by Barry Ritholtz. All rights reserved.

 

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

 

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eISBN : 978-0-470-53598-1

 

D
o you find yourself wondering:
How did we get here?
How did the United States of America get into such a predicament whereby in one year, 2008, the financial system nearly vaporized, the stock market crashed, real estate tanked, and major corporations were being bailed out (or begging to be) on a regular basis. How did our great country, a bastion of capitalism, devolve into a Bailout Nation where the gains were privatized but the losses were socialized?

This terrific book by Barry Ritholtz will explain to you how this sorry state of affairs came to pass. By reading it you will come to understand how we got here, which is a necessary prerequisite for understanding how to navigate the future.

The primary reason that I wrote
Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve
(McGraw-Hill, 2008) was so that when the U.S. credit/housing bubble inevitably burst, people would understand why such enormous financial and economic problems were occurring, seemingly erupting out of nowhere. But they didn't erupt out of nowhere; these problems were created over time by the monetary policies of the Federal Reserve, specifically the targeting of interest rates and the Fed's ongoing refusal to recognize the flaws in this approach.

Although nearly everything that has transpired since my book was published in February 2008 I had expected to occur, I was still shocked by the total collapse of so many major financial firms, such as Bear Stearns, Countrywide Financial, Fannie Mae, and Freddie Mac in such a short amount of time.

But that is what happens to highly leveraged financial entities when significant portions of their underlying assets are found to be essentially worthless. The mind-set of deregulation that was championed by Federal Reserve Chairman Alan Greenspan in the wake of the Long-Term Capital Management (LTCM) bailout in 1998 is partially responsible for the massive overleveraging of nearly the entire financial system in the United States.

That Wall Street bailout (which led to the notion of the “Greenspan put”) set the stage for what we are witnessing today in the United States (and in the United Kingdom), with the prudent being forced to bail out the reckless. As Barry notes, “The parallels between what doomed LTCM in 1998 and what forced Wall Street to run to Washington for a handout in 2008 are all there.”

The United States has abandoned its capitalist roots, and the country has morphed into a Bailout Nation; now almost any large entity that finds itself in trouble feels the government (taxpayers really) should provide financial support. Similarly, homeowners who overextended themselves also feel that they too should be rescued from their mistakes.

Barry weaves together the problems created by the Federal Reserve's interest rate targeting policies with the determination on the government's part to thwart the “creative destruction” aspect of capitalism. We have now arrived at a juncture where our government seems to embrace free markets only when they deliver the results it wants. If they don't, an attempt is made to alter the outcome, leading to unintended consequences down the road, which often are more severe than the original problem.

Ritholtz also names the villains in this tragedy—the rogues' gallery of politicians and officials who screwed up big time—and demonstrates what they did to make the problem either bigger or worse. He also shows how each bailout throughout modern history has impacted what happens in the future—for example, why Chrysler should have been allowed to fend for itself in 1980, and the impact that has on future bailouts.

This book is the history of how the United States evolved from a rugged, independent nation to a soft Bailout Nation, one in which too few question why we ask the taxpayers “to allow financial firms to self-regulate, but then pony up trillions to bail them out.”