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The #1 Wall Street Journal Bestseller
Required reading. . . . Shows how our economic crisis was...
The #1 Wall Street Journal Bestseller
Required reading. . . . Shows how our economic crisis was a failure, not of the free market, but of government.
—Charles Koch, Chairman and CEO, Koch Industries, Inc.
Did Wall Street cause the mess we are in? Should Washington place stronger regulations on the entire financial industry? Can we lower unemployment rates by controlling the free market?
The answer is NO.
Not only is free market capitalism good for the economy, says industry expert John Allison, it is our only hope for recovery. As the nations longest-serving CEO of a top-25 financial institution, Allison has had a unique inside view of the events leading up to the financial crisis. He has seen the direct effect of government incentives on the real estate market. He has seen how government regulations only make matters worse.
And now, in this controversial wake-up call of a book, he has given us a solution. The national bestselling The Financial Crisis and the Free Market Cure reveals:
With shrewd insight, alarming insider details, and practical advice for todays leaders, this electrifying analysis is nothing less than a call to arms for a nation on the brink. Youll learn how government incentives helped blow up the real estate bubble to unsustainable proportions, how financial tools such as derivatives have been wrongly blamed for the crash, and how Congress fails to understand it should not try to control the market—and then completely mismanages it when it tries. In the end, youll understand why its so important to put free back in free market.
Its time for America to accept the truth: the government cant fix the economy because the government wrecked the economy. This book gives us the tools, the inspiration—and the cure.
There are six fundamental themes that reflect the basic causes, consequences, and cures of the financial crisis and the ensuing Great Recession. These themes outline the essential ideas that must be understood and that will be discussed in detail in the following chapters.
1. Government policy is the primary cause of the financial crisis. We do not live in a free-market economy in the United States; we live in a mixed economy. The mixture varies significantly by industry.
Technology is one of the least regulated industries in the United States. It should be noted that technology continued to perform well in the difficult economic environment.
Financial services is a very highly regulated industry, probably the most regulated industry in the world. It is not surprising that a highly regulated industry is the source of many of our economic problems. By the way, if you do not believe that financial services is highly regulated, obtain a copy of the state banking, Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Federal Reserve, Securities and Exchange Commission (SEC), or other agency regulations document that affects the industry. The claim that the financial industry was deregulated is a myth that will be discussed in Chapter 13.
Not only did government policy create the financial environment for a significant economic correction, but government policy makers unnecessarily turned a challenging economic environment into a crisis.
2. Government policy created a bubble in residential real estate. A bubble is an irrational, excessive investment of capital and human resources. The real estate bubble burst, as all bubbles do. The loss of wealth from the declining values in residential real estate was transmitted to the capital markets, destroying more wealth and leading to a significant reduction in economic activity, that is, to negative real growth and the destruction of millions of jobs.
The recent roots of the government policy incentives that created the bubble in housing can be traced to Lyndon Johnson's "Great Society" of the late 1960s. The errors multiplied and went exponential over about a period of 10 years ending in 2007.
Unfortunately, another of Johnson's Great Society programs, Medicare/Medicaid, will go exponential in less than 10 years and will be far more damaging than the housing bubble if the direction is not changed. (Going exponential means increasing at a mathematically accelerating pace.)
3. Individual financial institutions (Wall Street participants) made very serious mistakes that contributed to the crisis. These institutions should have been allowed to fail. (In Chapters 17 and 19, we will discuss the consequences of not letting companies fail.) However, any errors by these institutions, individually and collectively, are far less important than government policy mistakes, and almost all the errors were the direct result of government policy incentives. It is important to note that many of the financial institutions that should have been allowed to fail had a history of being crony capitalists; that is, these companies did not advocate limited government but instead sought special favors for themselves. Goldman Sachs, Citigroup, and Countrywide are examples of crony capitalists. Crony socialist is probably a better name for these individuals and firms. If the United States had separation of "business and state" as it does separation of "church and state," crony capitalism (or crony socialism) could not exist.
4. Almost every governmental action taken since the crisis started, even those that may help in the short term, will reduce our standard of living in the long term. If you misidentify the fundamental cause of a problem, you will almost certainly recommend the wrong solution. If your doctor treats you for cancer when you have heart disease, the outcome will not be good.
In addition, some of the primary culprits who caused the financial crisis, such as Bernanke, Geithner, Frank, and Dodd, are the people who developed the "solution." How realistic is it to expect that they would identify the cause as their own actions and suggest cures accordingly?
5. The deeper causes of our financial challenges are philosophical, not economic. All of the destructive government policies are based on philosophical ideas taught in our elite universities to future elitist leaders. These ideas are inconsistent with the founding principles that made America great. They are also inconsistent with individual rights, especially property rights. At a deeper level, these ideas are inconsistent with humans' fundamental nature as thinking beings who must make independent judgments that are based on the facts and that use their ability to reason.
Academics purport to defend academic freedom. They are right to do so. However, when put in government policy positions, the same academics somehow believe that businesspeople can continue to innovate and create wealth despite the ball and chain of government regulations. In reality, government regulations prevent businesspeople from being innovative and from thinking creatively. In my career, I have seen a number of significant opportunities to add products and services that would unquestionably benefit our clients, and yet some law made this impossible. All human progress is, by definition, based on creativity, because anything that is better is different. Creativity is possible only for an independent thinker. Someone who is not creative, who cannot innovate, cannot contribute to human progress. Government policies often provide incentives for destructive activities and prevent productive innovations. In a broader context, our lives ultimately depend on our individual ability to make independent judgments based on our assessments of the consequences of our actions for us.
These regulatory policies are typically based on a fundamental misunderstanding of human nature, the means of human survival, and the nature of the production process. Ideas have consequences. We need to ensure that our future leaders are taught ideas consistent with the laws of nature and human nature, which are the foundation for a successful society and individual happiness.
Intentions that are called "good" often do not produce favorable outcomes. This is particularly true when these good intentions are based on false premises and a lack of understanding of what motivates human actions. Sometimes, unfortunately, the so-called good intentions actually reflect a lust for power, the desire to control others, and the belief that you are smarter than the people you are going to "save." Chapters 21 through 25 are the most important in the book because they deal with the philosophical issues. However, the preceding chapters make concrete the effect of the philosophical ideas expressed in these chapters and therefore are very helpful to an understanding of these concepts.
6. If we do not change direction soon, the United States will be in very serious financial trouble in 20 to 25 years. The economic forces that have now been set in motion are laying the foundation for a long-term disaster. Social Security deficits, Medicare deficits, unfunded state and local pension liabilities, government operating deficits, retirement of the baby boomers, and a failed K–12 education system are huge issues.
Countries do not go bankrupt the way businesses do. They typically hyperinflate—that is, print valueless money—and move to some form of authoritarian government. In 1920, the United States and Argentina had the same standard of living. Ar
Excerpted from The Financial Crisis and the Free Market Cure by John A. Allison. Copyright © 2013 by John A. Allison. Excerpted by permission of The McGraw-Hill Companies, Inc..
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1 Fundamental Themes
2 What Happened?
3 Government Monetary Policy: The Fed as the Primary Cause
4 FDIC Insurance: The Background Cause
5 Government Housing Policy: The Proximate Cause
6 The Essential Role of Banks in a Complex Economy: The Liquidity
7 The Residential Real-Estate-Market Bubble and Financial-Market Stress
8 Failure of the Rating Agencies: The Subprime Mortgage Market and Its
Impact on Capital Markets
9 Pick-a-Payment Mortgages: A Toxic Product of FDIC Insurance Coverage
10 How Freddie and Fannie Grew to Dominate the Home Mortgage Lending
11 Fair-Value Accounting and Wealth Destruction
12 Derivatives and Shadow Banking: A Misunderstanding
13 The Myth that "Deregulation" Caused the Financial Crisis
14 How the SEC Made Matters Worse
15 Market Corrections Are Necessary, but Panics Are Destructive and
16 TARP (Troubled Asset Relief Program)
17 What We Could Have—and Should Have—Done
18 The Cure for the Banking Industry: Systematically Move Toward Pure
19 Some Political Cures: Government Policy
20 Our Short-Term Path and How to End Unemployment
21 The Deepest Cause Is Philosophical
22 The Cure Is Also Philosophical
23 How the United States Could Go Broke
24 The Need for Principled Action
Posted November 20, 2012
Posted March 16, 2013
I worried that this would be far too technical in economics or in finance for me to fully understand. Wrong! Easily understood. If you have trouble following along as Mr. Allison has his own timeline, parties, and agenda, just read it through. Then you can go back to the Table of Contents and arrange the cause and effect - with possible solutions - to review it all. Then decide how you can become energized to help prevent this from ever happening again.
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Posted April 20, 2013
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Posted October 1, 2012
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