Plunder and Blunder: The Rise and Fall of the Bubble Economy

This book is short and to the point: How did the stock bubble of the 1990's and the housing bubble of the 2000's contribute to two successive recessions? and, How did the so-called experts not see this coming? This is not a polemic. It states the facts in a way that is easily understood and makes some easily implemented, common sense recommendations to minimize the chance of this happening again. I compliment the author, Dean Baker, on keeping it short, less than 150 pages, easily read in two days. I compliment Baker on a clear writing style. Unlike so much contemporary writing that is dense, obtuse and almost impossible to follow, Baker writes in a way that gets the ideas across clearly. He doesn't over simplify, but he does present economic concepts in language that is easy to follow. This is a must read! I will recommend it to my family, friends and acquaintances.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington DC. He shows how Clinton's high-dollar policy blew up the $10 trillion stock bubble and also started the $8 trillion housing bubble. The government pushed people to build assets, as if you could buy yourself rich. The bankers banked on the bubble, governments and media pushed it, regulators didn't regulate it, and economists denied that it existed. The bull markets were a huge con. And it's really still all bull. For example, the Washington Post editorialised on 11 January 2008, "Nor is there any consensus that a recession, if one comes, will be severe; Goldman Sachs thinks it's likely to be short and mild." By October 2008, the crash had cost US families $5 trillion, $70,000 per homeowner. This is the first postwar recession caused by a fall in investment: nominal investment fell by $50 billion in 2000-01. This slump, unlike earlier ones, is not curable by lower interest rates. Clinton, to get elected, talked for two opposing policies - public investment and budget deficit cuts (just as Cameron and Brown do now). When elected, he did the latter, as the ruling class demanded. As Baker notes, "There has been extensive research on the economic impacts of reducing the federal budget deficit. The overall conclusion is that deficit reduction provides only a modest boost to economic growth." It would do nothing to increase demand: wages would rise by just 2% in total over the next ten years. Finance is supposed to steer money from savers to borrowers - which it fails to do - it is not an end in itself. We may want many things, but we don't want yet more financial deals. In the 1960s, the financial sector got less than 10% of all corporate profits, by 2004, more than 30%. But Baker notes, "The fewer people and resources we need to do our banking, to provide insurance, and to meet our other financial needs, the better off we are." What to do? Baker proposes - cut the value of the dollar, cut the incompetent and corrupt financial sector, hold the incompetents accountable, tax gambling in financial assets, stop the evictions, and increase government investment in industry.

Plunder and Blunder is a fair,tough, and impressive book. Although an economist, Baker savages his profession for completely missing the coming bubbles in the stock and housing market. All of the major players-President Bush, Alan Greenspan, Henry Paulson, etc., look like colossal fools. Dr.Baker explains why the bubbles were bound to occur and what we can do to avoid them in the future. I hate to use the word "best", but I think it can be said this is the best book written on the bubble economy.

Well we are in a serious economic recession. How did we get here? Rush Limbaugh endlessly repeats that it was caused by laws like the Community Redevelopment Act (CRA) and other efforts by Democratic politician to terrorize the banks into making loans to low income people. Of course in reality, any loans made under the CRA were too small to have any impact on the financial crises, even assuming that a large number of them defaulted. In this book, Dr. Baker does not mention the argument about the CRA possibly because this book went to press before the argument about the CRA became prominent and also possibly because there is no empirical evidence to support Limbaugh's argument. Dr. Baker explains how an increasing share (perhaps 25 percent of corporate profits) of our economy is dominated by finance. Deregulation of finance during the 1970's and beyond allowed lenders to circulate a staggering amount of money throughout the world. American manufacturing began to seriously decline in the 70's and the trade deficit ballooned. Productivity growth in the United States was very low in the 70's, through the Reagan-Bush Sr. years and Clinton's first term. Then, for unknown reasons, productivity started to pick up substantially. Investors began to speculate in the stock of emergent companies involved in the internet and related fields, which drove the stock prices of these companies into the stratosphere, even as few of the companies were actually registering any profit. The impressive stock market performance of these companies versus their poor performance in the real economy was reflected in the Price to Earnings (PE) ratio. In the past, according to Baker, the PE was around 14 to 1. But in 2000, it reached 30 to 1. In spite of the obvious fact that the stock market could not be sustained on such a wide PE ratio, market analysts, economists and politicians of both political parties kept insisting that the stock market bubble would never go away. According to Baker, it was the very questionable foundation of the stock market bubble, provided by capital gains tax revenue increases, that allowed Clinton to balance his budget. Idiotically accepting the assumption that the stock market bubble would continue to bring in revenue, politicians suggested that the US national debt could be paid off in ten years. Alan Greenspan refused to publicly warn against the irrational exuberance of the bubble. He bailed out the Long Term Capital Management hedge fund in 1998 so many investors probably thought they could continue to gamble in financial markets and Greenspan would bail them out. Greenspan accepted the assumption that the economy would provide enough revenue for balanced budgets for years to come, arguing that Bush's tax cuts in 2001 were necessary so that the US would not have to pay off its debt too quickly and so have to invest in public assets instead of selling its debt. A bunch of CEO's and speculators took 7 or 8 figure incomes from this bubble befo

This is an excellent book.The author traces the problem back to 1980.However,it was the Carter administration that started on the road to deregulation in 1978 and 1979,although it is true that the Reagan administration , the two Bush administrations,and the Clinton-Gore administration increased the tempo of deregulation a 100 fold.A common confusion runs through all of these administrations.The misbelief that speculation is enterprise/entrepreneurship is the common confusion held in all of the administrations named above.Adam Smith spent 80 pages in his The Wealth of Nations carefully demonstrating what the consequences would be if the banks loan to speculators or are allowed to speculate on their own.Smith's conclusion was that the savings of the depositors would be wasted and destroyed.Smith reached these conclusions based on his study of the Mississippi and South Sea bubbles that decimated Europe in the 1719-1721 time period.The author, unknowingly, essentially repeats Smith's analysis but substitutes the bubbles of the 1980's,1990's ,and 2000's in the United States of America as the reference point. The author correctly shows that the Securities and Exchange Commission (SEC),which is supposed to regulate the now collapsed investment banks ,was packed with appointees who were actually trying NOT to regulate .The same goes for the Federsl Reserve System (FRS).Except for the years 1938-1952,the FRS has been run by the big,giant private commercial banks.Too many FRS board members in Washington viewed themselves as cheer leaders for the speculative practices of the major banks. Academia provided the intellectual fig leaf with a pseudo scientific theory called the Efficient Market Hypothesis(EMH).This pseudo theory was the brain child of a number of University of Chicago economists from the economics department and business school, such as Milton Friedman,George Stigler,Gary Becker,Robert Lucas,and Eugene Fama.This pseudo theory claims that there can never be a bubble in finacial markets.It assumes that all financial markets can be modeled as being Normally distributed.Benoit Mandelbrot has continuously demonstrated that this is false numerous times since 1958.All goodness of fit tests demonstrate that the distributions are a long way short of close to being normally distributed.In fact,they are all Cauchy distributions,which means that the risk of negative outcomes is a 100-1000 times greater than specified by the Normal Distribution. Unfortunately,the bubble makers will simply lie low for 10-15 years and then try to start all over again,just as they have successfully been doing for over 400 years.