Bad Money: The Inexcusable Failure of American Finance: An Update to Bad Money (a Penguin Group Especial from Penguin Books)

This is a scholarly, intellectually courageous and very timely expose of the rise and fall of America's twenty-five year experiment with unfettered laizze faire capitalism, and it's destruction of the U.S. economy, the U.S. dollar, and the U.S. standard of living. He shows how Greenspan, the Bushs, and the Clintons, essentially turned America into a nation of debters. For example, Phillips shows how Greenspan and company quietly and unilaterally lowered social security benefits by replacing the original Consumers Price Index or CPI which measures inflation with a completely bogus index that understates the tue inflation rate by half or more. This not only reduced the COLAs to which retirees are entitled to by law, but also reduced the pay checks of tens of millions of working people, while making it appear that the Fed was sucessfully controlling inflation while inflation was in fact completely out of control. Wait till the social security and AARP learn how they have been cheated out of their full and rightful benefits. Phillips discusses in depth and in detail the creation of the housing bubble in which the Fed and banks actually orchestrated the defrauding of millions of Americans who now own houses that are worth less each month than they owe on them. He presents a range of possibible outcomes, non of them good, and all of them already overtaken by actual events, i.e. the continued collapse of house prices with no end in sight. (See [...] for daily updates of the housing bust.) He documents how the Fed under Greenspan repeatedly rescued the rich and powerful, using the tax money of the middle-class, which enabled the rich to become even more rich while impoverishing the middle class. Phillips discusses the trillion dollar student loan industry, unique to the U.S. No other country requires its students to mortgage their futures to get advanced education and in fact neither did we until very recently. I would have appreciated a more in depth and detailed discussion of the student loan racket, such as provided by Marty Nemko, the author of COOL CAREERS FOR DUMMIES who says the problem with the student loan program is that the colleges and their lobbyists manipulate legislators into increasing govt-funded financial aid, which merely allows the colleges to raise their prices more i.e.the taxpayers are lining the colleges' pockets while providing the student borrowers with a TERRIBLE education. Nevertheless, this is a must read book.

For those who have read Kevin Phillips' American Theocracy: The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21stCentury, many of the themes in the current work will sound familiar. In this book, as well as American Theocracy, he reminds us that previous empires such a 17th century Spain, 18th century Holland, and the late 19th and early 20th century Britain all succumbed to financialization as their global power reached its peak. He argues the the United States is now in a similar position. In the last 30 years financial services have grown from 11% of GDP to 21%, and manufacturing has declined from 25% to 13%. A reversal of roles that Phillips sees as very unhealthy. This huge growth of the financial sector was not without adverse consequences: in the last 20 years public and private debt has quadrupeled to $43 trillion. How this came about has been expertly explained in another book called The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash by Charles Morris. There was easy money as the Federal Reserve was lending money at less than the rate of inflation. Money was risk-free for the lender since they collected fees up front and sold the securitized loans to investors. When this process was repeated millions of times, one ends up with hard-to-value securitized debt throughout the global economy. Then when housing prices start to decline and homeowners start to default on their mortgages on a grand scale, you have a global crisis of American capitalism. (Bear Stearns alone was estimated to be holding $46 billion worth of bad money.) As in American Theocracy, Phillips writes that the oil industry is another component of the current crisis. In the US oil production peaked in the 1970s, on a global level it is peaking right about now. And with the ravenous appetite for oil from newly industrialized countries such as China and India, prices will continue to go up. The US still gets "cheap" oil relative to Europe since oil is priced in dollars, but that advantage may soon disappear. The weakening dollar is forcing OPEC countries to move to Euros and other currencies. And some oil producing countries such as Iran and Venezuela are moving to other currencies for reasons other than economic. The author began his career as a Republican strategist, but he has long since disavowed them. Having a monetary policy of free money, a fiscal policy of tax cuts and increased spending, and an ideology of unregulated market fundamentalism, the Republicans have lost most of their credibiltiy. This does not mean Phillips has gone over to the Democratic side. He believes that Bill Clinton was instrumental in the financialization of the economy, and that currently Hillary and Obama are beholden to investment bankers and hedge fund managers. What used to be the vital center in Washington is now the "venal center." The conclusion of this volume is very gloomy. Phillips believes that we are at

Phillip's book is similar to several other books currently available that show how the deregulation,especially of the banking and financial services sector, and privatization polices,started by Carter in 1978 and continued by all American Presidents since then ,has converted the United States of America into a speculator type economy where financial sector firms seek to extract a profit by the manipulation of balance and income statements .The goal is to make a return without any actual production of goods or services. There are two minor shortcomings in the book.First,Keynes's chapter 12 in the General Theory(1936)explained exactly how the USA had been converted into a speculator economy during the 1920's.There is no mention of Keynes's contribution anywhere in the book.Second,Adam Smith was perhaps THE major proponent in history of a heavily regulated banking and financial services sector.Smith warned against allowing banks to make any loans available to projectors(Keynes's speculators and rentiers),prodigals ,and imprudent risk takers.Smith warned of the very serious consequences that would probably result if such loans were made-the aggregate savings of the nation would be"... wasted and destroyed..."[Smith,1776,Wealth of Nations,pp.339-340,Modern Library (Cannan) edition].Smith,contrary to Phillips, was not a believer in laissez fairy land.Smith was, in fact, the last of the Scholastic philosophers.He improved Scholastic thought and brought it up to date through the 18th century .The warnings of Smith and Keynes concerning the dangers of allowing speculators to run economic policy have been ignored.I have deducted 1/2 of a star from my rating because Phillips has ignored these warnings also. Nevertheless,I recommend this book .

"Bad Money" is about the insecurity of America's future given a debt-gorged financial sector, and vulnerability caused by expensive dependence on imported oil. The term refers not just to the depreciated dollar but also dangerous attitudes and flawed financial products. Phillips points out that over the last 30 years, financial services have nearly doubled to a record 20% of GDP (and an even greater share of corporate profits - 54% in '04), while manufacturing's share has halved to 13% (10% of profits), greatly imperiling the economy. En route, Washington has provided government bailouts and/or liquidity when financial institutions or methodologies got themselves into trouble (eg. S & L crisis; Citibank forced into technical failure, but allowed to stay open; bailing out junk bond investors by lowering federal funds rate; etc.), encouraging bigger problems down the road. The positive impact of borrowing has declined about 60-70% from the 1970s-80s when such monies would mostly be used for factory and highway construction, compared to today's increasingly likely use for increasing leverage for LBOs, M & A, and hedge funds. Meanwhile, the negative likelihood of families experiencing a 50% drop in income has increased dramatically from 1970 - resulting in a greater probability of default. Cognizance of our problems has been somewhat covered up with revisions to the CPI (understating costs of home ownership) and unemployment measures (not counting those who gave up and quit looking). Thus, the 2-4%/year CPI increase 2005-2007 would have been 5-7%/year, and unemployment would have been 8%. Early millennium results include the housing sector (including its "ATM effect") providing 40% of the nation's growth in GDP and employment (an unsustainable rate achieved through financial gamesmanship that set the stage for the current financial and construction crash), while imported petroleum outlays rose from $100 billion in '02 to $302 in '06. Observing from a distance, OPEC has reduced its foreign-currency reserves held in dollars from 75% to 62.5%, and Iraq and Venezuela began selling oil in euros and yen (admittedly for political purposes, at least at first). Meanwhile, the U.S. has antagonized major oil producers (Iran, Russia, Venezuela), and effectively dismantled Iraq - raising the risk of nations being unwilling or unable to supply the U.S. as supplies grow tighter. Declining oil supplies, rising demand, global warming, our recession, and global loss of confidence in American financial markets are all converging and demand strong political leadership. Phillips, however, is not optimistic that this will emerge based on strong financial sector support for the Democratic Party and political failures in other nations needing dramatic change. Phillips makes numerous comparisons between the U.S. today and the Great Depression (Eg. Total indebtedness was three times the size of GDP in 2007, higher than the prior record set in the years of the Gre

Kevin Phillips dedicates his latest insightful work of political and economic history to his grandson. It's a fitting tribute since, by the author's reckoning, the aforementioned young man might be well into his forties, and the U.S. deeply into its post-imperial senescence, by the time the mischief explained in the pages of Bad Money is fully digested by the earth's economic system. Instead of reflecting upon and compensating for the turn to an unprecedented expansion of finance capitalism that today supersedes manufacturing in this nation by at least six percent of GDP, Wall Street, our empire's "coliseum," chose instead to gamble upon the promulgation of an unregulated class of investments known as derivatives, the size and scope of which, particularly in terms of their capacity to hedge against risk, could only be guessed at. So much for the efficacy of market deregulation. In a similar context, it was sadly hilarious to hear former Treasury Secretary Robert Rubin state recently that no one could have guessed the present debacle. Or, to recall that Hillary Clinton had proposed a blue ribbon committee, presumably to be chaired or co-chaired by Allan Greenspan, to address the situation. Warren Buffett has been on record for denouncing derivatives as "weapons of financial mass destruction" since at least 2003. Even so, to paraphrase Pete Seeger, "the big fool(s)" at Citibank and Bear Stearns, "said to push on." Privatize the profits and socialize the losses. At present, these so-called derivative financial "instruments" are embedded deeply in every sphere of global economic activity, from domestic pension funds to the portfolios of credulous investors throughout the world who believed in the transparency of the U.S. market system. Their ramifications add up to a disaster, aided and abetted at every modern-day turn by America's government, under both Democratic and Republican leadership. Through his incisive and perceptive use of charts and tables,and,in his exceptionally clear narrative, Phillips makes the case that our government lies to itself as well as us. Now, we are fifty trillion dollars in debt. Go figure. Better yet, read and be ironically comforted by the truths contained in this quietly patriotic book.