The Great Money Binge

That is the name of a new book on the credit crisis that was recently reviewed in the WSJ. The book is by George Melloan. The review was called Crisis Management: We need less government intervention in the economy, not more (P. A17, 1-22-2010). Here are some key exerpts:

"Mr. Melloan writes that "seeing the problem clearly will be the first step" toward restoring the economy, and "The Great Money Binge" greatly assists with this task by laying out the real reasons for a crisis that has been wrongly blamed on free markets. Mr. Melloan notes that the housing bubble was turbo-charged by Fannie Mae and Freddie Mac, government-sponsored enterprises that—by buying, bundling and reselling housing debt—gave banks a ready market for reckless loans. Fannie and Freddie operated with an implicit government subsidy that became explicit when they went into conservatorship in September 2008, leaving taxpayers on the hook for billions of dollars. Relatedly, the Community Reinvestment Act, hugely expanded by the Clinton administration in the 1990s, encouraged banks to make loans to less-than-creditworthy borrowers."

"...the accounting mandates of the Sarbanes-Oxley Act, rushed through after Enron and WorldCom imploded in 2002, stifled entrepreneurial dynamism by increasing the costs of initial public offerings."

"Mr. Melloan argues that Mr. Spitzer's crusade against American International Group—involving charges now dropped or yet to be proved—made the 2008 crisis worse, by forcing out longtime CEO Maurice "Hank" Greenberg."

"Mr. Melloan also fingers the mark-to-market accounting rules promulgated by the Financial Accounting Standards Board in 2007. They added gasoline to the fire of the crisis, he says, by requiring companies to adjust their books every time an asset changed value. The result was often paper losses that had a cascading effect, forcing companies to sell assets that they had intended to hold and thereby lowering prices further. "Since uncertainty had locked up the market for [mortgage-backed securities], the mark-to-market rule exacerbated the problem. How do you mark something to market if there is no market?""