Financial Shock (Updated Edition), (Paperback): Global Panic and Government Bailouts--How We Got Here and What Must Be Done to Fix It

This is an excellent overview of the Economic Crises of 2007 & 2008. It is accurate, fair and balance. It is well written and easy to read and comprehend. I plan to use it, along with the book AND THEN THE ROOF CAVED IN by David Faber as texts for a seminar class offered in the Fall.

Mark Zandi's book takes you inside the mortgage industry, where the greedy use their creativity to take advantage of the population while the government looks the other way. Zandi explains the changes in the system over the last few decades that allowed for such a disaster to happen. And, like all things economic, it's complicated. And, like all disasters, hardly anyone could see it coming, because nothing quite like this ever happened before. If you want a thorough and accurate understanding of what caused The Great Recession, read Financial Shock.

America could be on its way to becoming a third world country. Now in a newly updated and expanded second edition, "Financial Shock and Government Bailouts - How We Got Here and What Must Be Done to Fix It" is an economic guide explaining the current crisis from many angles to best inform readers about what's really going on in today's economy and what's being done to stop it. In some cases, what's being done might be enough, but in too many, it will not be. "Financial Shock" is of recommended reading to any who want a fuller understanding of one of today's biggest issues.

Central bankers had opened the money spigots wide after the dot-com bust, 9/11, and the invasion of Iraq combined with the Bush tax cuts. China had forced prices lower for so many manufacturing goods that central bankers also focused on fighting deflation (keeping interest rates low). In addition, there was the ballooning trade and federal deficits. At the same time, deregulatory zeal overtook the federal government - market forces would impose discipline. Rising home prices allowed homeowners to refinance again and again, lenders, investment bankers, and rating agencies got more and more fees. Meanwhile, securitizing mortgage loans greatly expanded the supply of funding, dicing those loans into tranches allowed selecting the desired risk and return level. When risk premiums shrank, leverage built them back up. Investors could also sell default insurance to each other - default was seen as a remote possibility. Derivatives such as CDOs (bond-like securities whose cash flows are derived from other bonds, which in turn might be backed by mortgages or other loans) became particularly attractive, even though little understood. The Internet also contributed, cutting transaction costs and boosting loan competition. Then, as loans became tougher to obtain, ARMS, IO, and no-down-payment loans (second mortgage avoided mortgage insurance costs) came into vogue. Housing price gains became increasingly attractive because interest payments of mortgage loans were tax deductible, and since the mid-1990s, even capital gains on most home sales hadn't been taxed. Homeowners also became adept in taking equity out of their homes through home-equity loans and refinancings. All the makings of a great financial conflagration were there, and the results didn't disappoint. Lehman's bankruptcy caused one of the oldest and largest money market funds to "break the buck." Investors began taking their money out, and the commercial paper market dried up, as well as re-financing. Bank woes were further acerbated by falling stock prices. Zandi believes the current stimulus actions are not enough, citing the large and growing number of "underwater" homes. Zandi believes the next financial crisis will be related to the federal government's fiscal problems reaching record debt levels in proportion to the economy. Preventing another commercial market failure could be accomplished through standardizing and simplifying the foreclosure process, fixing the federal budget, and improving regulation and securitization. On the negative side, Zandi's material is a bit of "old news" - eg. emphasizing sub-prime mortgages. Stan Liebowitz's 7/3/09 WSJ analysis tells us that the single most important factor in foreclosures is whether the homeowner has negative equity, not the rise of subprime mortages. He found that while only 12% of homes had negative equity, they comprised 47% of all foreclosures (probably conservative, since he lacked second-mortgage data). Interest rate resets did not

This is an impressive little book. It is both a comprehensive and accessible analysis of the 2007-9 financial crisis. If you are interested in understanding the genesis of the financial crisis and its structural causation, this is the book to begin with. Zandi's book is the best of its kind. Zandi does not shy away from describing the structural causes behind the current crisis. This is important, because popular versions attempt to place blame on bad decision making of individuals. Zandi certainly does not deny that speculation fed the unsustainable real estate boom. Speculation, however, was a minor culprit generating the frenzy and structural dynamic of the real estate boom. Too many homebuyers facing foreclosure internalize their fate. Zandi's book convincing suggests this is an emotional mistake. Numerous forces made homebuyers highly vulnerable. The majority of federal agents (e.g., elective officials, regulators, etc.), quasi-federal agents (i.e., the Federal Reserve board), and private agents (e.g., builders, real estate agents, mortgage brokers, and Wall-Street financers) simply failed to understand how vulnerable homebuyers had become. Consequently they failed to comprehend the fragility of the financial system. Sincere and innocent homebuyers became the `collateral damage' of a financial system which had rapidly metamorphosed into a structural coordinated Ponzi scheme. Zandi certainly does not put it as strongly. He is painstakingly fair in his explanation of how the modern financial system came into being. There was no conspiracy to enrich mortgage brokers or Wall-Street financiers. Zandi suggests there was a sincere attempt from both federal and quasi-federal agents to simultaneously promote homeownership and stabilize the macroeconomy. According to Zandi these efforts were understandable, if not justifiable. He fairly represents the benevolent intentions of the Clinton and Bush administrations to promote responsible homeownership. Likewise, in the aftermath of 9/11, a stock market crash, two wars, and a jobless recovery Greenspan's Fed benevolently encouraged a real estate boom for the `health' of the macroeconomy, employment, and growth. Zandi suggests it is only in retrospect we can understand all the structural and institutional dynamics which undermined these attempts. Zandi laments "there's plenty of blame to go around." But his careful analysis indicates no one individual, group, institution, policy, program, or company bares culpability for the systemic and frenzied real estate boom and collapse. The systemic collapse was strictly systemic in origin according to Zandi's account. This 2009 edition has been updated from the 2008 edition. The main updates come in the last three chapters (i.e., 12, 13, 14), especially chapter 12, and how the "Timid Policymakers Turn Bold." These updates do not change the thrust of the book. This book makes high-finance accessible to its read