By John M. Mason

Both of these books are excellent reads.  They represent different “takes” on the recent financial crisis and consequently complement each other.  Sorkin’s book is the more personal due to the fact that he is a New York Times reporter and business columnist: he has a legendary collection of connections which he incorporates very well into the story surrounding the events of the past several years. 

The book by Cassidy contains a history of the ideas that led up to the financial crisis with commentary relating to what is needed to prevent or modify the instability of capitalism.  Cassidy’s personal favorite, in terms of analysis and recommendations, is Hyman Minsky, the maverick Keynesian who wrote about the fact that free-market capitalism is inherently unstable and needs to be firmly regulated if its worst traits, as detailed by Sorkin, are to be contained. 

The thing that came through to me in reading these books at roughly the same time is that economic cause-and-effect are often separated by a extended period of time.  That is, economic actions have to work their way through societies (and globally) and many times take years, if not decades, to fully exhaust what they started.  Periodically, economists discuss the lag-in-effect of monetary policy or some other policy and work at explaining the channels through which such a policy works and the time-lags that are involved in connecting the various channels. 

In addition, economists, as well as policymakers, get “locked into” a belief system and become “fundamentalists” in just the same way that the religious become “fundamentalists.”  As John Maynard Keynes once remarked that “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.”  Of course, the problem now is that this “defunct economist” very often turns out to be Keynes, himself.

So, what the books by Sorkin and Cassidy lead me to consider is, first, the economic theory that led to the economic and financial crisis of 2008-2009, and then, to the actors in the drama as it evolved during this time period.

In terms of the long running cause-and-effect issue, let’s start out in the 1960s. Keynesian economic theory first became a part of the economic policy of the United States in the Kennedy administration which came into office on January 20, 1961.  The Kennedy tax cut was the first explicit government program that can be directly associated with the Keynesian “intellectual influence.”

In the early 1970s we have Richard Nixon supporting deficit spending, wage and price controls, and a removal of the dollar from the gold standard.  And, in his now famous quote, he declared that “we are all Keynesians” now.  And, so we were!

The basis for embracing the Keynesian dogma was captured in the Full Employment Act of 1946 along with the Full Employment and Balanced Growth Act of 1978.  The basic idea behind this legislation was that a modern society could not tolerate labor be unemployed and that the number one goal of monetary and fiscal policy should be sufficient rates of economic growth to achieve the full employment of the workforce. 

Translating this goal into the actions of the government resulted in an underlying inflationary bias to economic policy.  The purchasing power of the dollar declined by roughly 85% between 1961 and 2009.

But, this cause-and-effect gets lost in the talk about the greed and irresponsible actions of bankers and traders: of all who work in finance. 

However, inflation, and the instability inflation causes, permeates almost everything that people do.  It affects where people work: more and more people go to work in jobs related to finance rather than in manufacturing or industry.  It affects productivity: businesses find it more profitable to invest in short-lived investments that can be put in place quickly rather than those that take longer to start-up but are more productive.  It affects how people finance things: more debt and less equity.  It affects how people construct their balance sheets: more trading and less investing.  And, it creates its own instability as debt burdens are built up and then reduced, only to be built up again in the next credit cycle; asset bubbles are created which eventually burst. 

Cassidy introduces the ideas of Minsky to examine the instability of this behavior.  Free-market capitalism is assumed to be inherently unstable and the financial types are depicted as being innately irresponsible.  As a consequence, the economy will be subject to periodic blowups, some of them quite severe.  The only possible solution to this dilemma is firm, effective regulation.  Thus, the only way that capitalism can move forward as a reasonable structure for society is to make sure that there is sufficient oversight and constraint placed on the executives of financial institutions.  As Cassidy indicates, Minsky was in favor of a capitalistic society and was concerned with making such a society work better.

Sorkin gets into the consequent behavior of those that operate within an inflationary environment.  Remember that inflation takes place not only in what is consumed, but also in what is held, assets.  In the 1990s and 2000s there were at least three examples of inflation in asset prices, something we refer to as bubbles.  The stock market bubble of the 1990s and the housing bubble and the stock market bubble of the 2000s.  The subprime market was fueled by the inflation in housing prices.  The stock market bubbles took place within an environment in which some people saw the Dow going to 30,000.  New financial instruments were created to take advantage of this era of credit inflation and other tools like credit default swaps, were devised to hedge against any failure.  Layer-after-layer of finance was constructed to coax out a few more basis points for investors. 

The stories Sorkin tells are good ones, even though we have heard variations on many of the stories before.  The sorry part of the story is that no one really comes out looking good, either in the public sector or in the private sector. 

But, people in the private sector were responding to the incentives created by those in the public sector who were embracing the inflationary bias of the Keynesian economic dogma.  And, when things fell apart, those in the public sector quickly pointed a finger at those in the private sector, accusing them of being greedy and irresponsible.  Well, the people in the private sector were greedy and irresponsible, but in focusing upon them, all blame seemed to be removed from the greedy and irresponsible behavior of those in the public sector that had originally created the all-inclusive inflationary environment many years ago.            

Andrew Ross Sorkin, author of Too Big To Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System and Themselves (Penguin Group/ 2009), is the award-winning chief mergers and acquisitions reporter for The New York Times, a columnist, and assistant editor of business and finance news. He is also the editor and founder of DealBook, an online daily financial report. He has won a Gerald Loeb Award, the highest honor in business journalism, and a Society of American Business Editors and Writers Award. In 2007, the World Economic Forum named him a Young Global Leader.

John Cassidy is a journalist at The New Yorker and a frequent contributor to The New York Review of Books. He is the author of How Markets Fail: The Logic of Economic Calamities (Farrar, Strous & Giroux/ Nov 2009).

John M. Mason writes on current monetary and financial events. He is a professor at Penn State University and has taught in both the Management Division and the Engineering Division. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania. Dr. Mason has been President and CEO of two publicly traded financial institutions and the Executive Vice President and CFO of a third. He has also served as a Special Assistant to the Secretary of the Department of Housing and Urban Development in Washington, D. C. and as a Senior Economist within the Federal Reserve System. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.

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