Very important read, although "Wealth and Democracy", written back in 2004 is Phillips's absolutely seminal work. Basically Phillips (historian and former political advisor to Richard Nixon) establishes critical linkages between debt, overreliance on finance, peak oil, and political corruption. It is masterful in its historical sweep, demonstrating that America is not the first empire to tread through these roads. In "Bad Money", Phillips expands on some of these key themes that are common to his prior works, but with a focus on Wall Streets practices, particularly over the past 10 years.
The discussion on financial instruments like CDS and other forms of derivative trading is concise and to the point. He also discusses how the repeal of Glass Stegall and other 1930's era regulations allowed the banks to get into speculative enterprises like hedge funds and other forms of stock trading.
Phillips' central thesis is that any nation that relies excessively on finance, to the detriment of manufacturing and other productive enterprises, begets chronic instability resulting from the creation of fictitious capital. This a cancer that spreads into the rest of the economy. He cites the Roman, Dutch, British, and Spanish experiences as examples of finance gone awry.
This crisis which Phillips mentions through his book really began in Wall Street, where it weakened the stock market, which impact the real wealth of the middle classes. It's interesting to note that the stock market's value, when adjusted for inflation, is worth only 54% of its notational value from 2000. That's value, capital, that has evaporated due to excessive debt and the debasement of the currency. The economic panic broke out in the banks that sold derivatives.
The real significance of the collapse of Bear Stearns and Lehman Bros. is that it exposed broad systemic problems with the credit markets, which have yet to fully recover from those convulsions from last year. The banks remain overleveraged with bad debt and derivative contracts that they cannot ever hope to repay. The big banks are profitable only because of government guarantees, but that's not a long term strategy and is in fact a productive drain on the broader economic system.
I wish that Phillips would provide a better discussion on solutions to the problem: how we can change our economic development strategy. My take on it is that we need to build on the things that we do well, where we still have a competitive advantage. One of the few sectors where this dynamic is still evident is high-tech and the semiconductor industry. Why is it that Silicon Valley, the Research Triangle in VA and other magnet regions for hi-tech still doing relatively well while other areas that based their growth on RE and banking (FL, NV, AZ) are doing very bad? We have to build upon the things that we do well. I think that low interest loans to small businesses and startups in these sectors in particular, directly guaranteed by the Treasury, would be a excellent start. It would certainly be a better use of monetary resources (creates capital, jobs, etc) than spending it on guaranteeing bad debts. Furthermore, we need to rebuild the manufacturing base of the country by encouraging the growth of leaner moderately sized businesses using similar techniques to the ones stated above.
In short, the wealth needs to start flowing from the top down rather than from the bottom up. That's my take on it, short and sweet.
This is stuff that a lot of people would rather not discuss. People everywhere today have an attitude of "there's nothing to see here, move along" when it comes to this crisis. But ignoring it won't make it go away, and it isn't a "crisis of confidence" as former McCain economic advisor Phil Gramm claimed last year. The problem is wide, systemic and related to overleveraging of bad debt that cannot be wished away. Cash for clunkers, TARP, and other government "solutions" will only make the problem worse, as all of these programs involve taking on more debt to pay for bad debt. The threat of a compound debt trap is real.
But there is also hope for recovery. That can only come about if we're first HONEST about where we stand and then confronting it with prudent and equitable solutions. Otherwise, we will just continue jumping from crisis to crisis without any strategy.
