The credit crisis has inspired a new version of the old question: What did you know and when did you know it? Specifically, can we hold the government and Wall Street responsible for not preparing for what clearly was coming. Or was the financial market crisis entirely unforeseeable?
Banker and economic historian Charles Morris says he saw it all coming. He makes his case in The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash. The book, published earlier in March, lays out, in precise detail, what went wrong over the past few months in the global financial system.
Morris describes exactly what brought down Bear Stearns, why the U.S. may be headed for recession and why investors around the world are terrified.
But here's the thing: He wrote much of the book last spring — months before the first hint of any problem. Back when leading government and finance people were touting the rosiest of financial futures.
The book's life began with an e-mail Morris sent, in early 2007, to Peter Osnos, the founder of Public Affairs books, which said: "I think we're heading for the mother of all crashes, it will happen in summer of 2008, I think."
Right at the same time as that e-mail, February and March of 2007, Federal Reserve Board Chairman Ben Bernanke was telling Congress that the U.S. has a Goldilocks economy: just perfect, the right amount of inflation and growth and employment.
Financial journalist Larry Kudlow, like many others, talked about the glories of a U.S.-led period of prosperity capitalism.
You get the picture: The leading voices in Washington and on Wall Street agreed that the economy was going great and would only improve. So, why did this guy, Morris, see things so differently?
Sounding the Alarm
He was in the perfect position. He's not just a writer; he ran a company that created the software investment banks and hedge funds use to build these new, exotic credit instruments. And he saw how they used his software, and thought, "This is crazy," he says. "I was sure that people weren't keeping track of the trends so they had proper margins and collateral and so forth."
Morris said by 2007 he had warned every financial professional he knew. Nobody listened then, but we now know that Morris was right.
Hedge funds, investment banks and many other big financial institutions had invested countless billions in brand new forms of debt — things with weird names like synthetic collateralized debt obligation. You don't know what that is? Well, the banks hardly know. Morris says they didn't have any way of actually assessing the riskiness of all these new instruments.
"Because you couldn't possibly do it," he says. "The volume of trading was so huge."
Morris was certainly not the only person to see the credit crisis coming. Some economists and leading investors predicted all of this. But Morris had something they lacked.
"It's not enough to be right. You also have to be readable," says Osnos.
That was the key: Morris was writing not for the professionals but for the rest of us.
And some might say that even though his book came out so quickly, it's still coming too late.