The Two Trillion Dollar Meltdown | Charles R. Morris

Summary of: The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash
By: Charles R. Morris

Introduction

Dive into the thrilling account of ‘The Two Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash’, an enlightening analysis of the factors that led to the 2008 financial crisis. Learn how poor economic management, flawed financial models, and misguided deregulation intensified the recession and exposed hidden structural flaws. Morris provides thought-provoking insights into why America’s financial system appeared to follow Japan’s economic misfortunes of the 1980s and highlights key lessons from the Volcker era, including the importance of decisive and tenacious action. This summary equips you with a clearer understanding of what led to the credit crash and how better policies could have potentially averted this economic disaster.

Two Roads of Financial Crisis Response

In the wake of the mortgage crisis of 2007, central banks struggled to contain economic fallout from the collapse of complex mortgage-backed securities, which experts couldn’t predict. The response of central banks in North America and Europe was to open the money spigot, but it was to little avail. History presented two roads that policy makers could choose. Former Federal Reserve Chairman Paul Volcker took the first road in the late 1970s and early 1980s when he addressed the challenge of wringing inflation out of the U.S. economy, restoring confidence in America’s financial institutions. Japan took the second road after the collapse of its 1980s bubble. Japan concealed its problems, avoided responsibility, and failed to take corrective actions. As a result, Japan’s financial system still has not fully recovered. In the face of the mortgage crisis, America appears to be following Japan’s approach.

America’s Economic Misery in the 1970s

From 1973 to 1982, the US experienced a decade of stagflation and subpar economic growth due to business failures, demographic changes, and poor economic management. Companies focused on market-sharing arrangements rather than technological innovation and became unwieldy conglomerates. The abundance of young, unskilled labor led to lower wages, less investment, and cheap capital. Inflation soared in the early 70s, followed by a collapsing currency and double-digit inflation. President Nixon’s attempts to control wages and prices and increase monetary supply did more harm than good. As a result, faith in the government’s ability to manage the economy faded, paving the way for a new economic ideology.

The Fallacy of Correlation

The popular “Chicago-school” economics ideology, advocating for free markets, was accepted by America in the late 1970s. The mistaken belief of the resulting investment boom following a tax cut was established, which eventually led to a powerful financial sector. The correlation between Reagan’s decontrol of oil prices and subsequent gasoline price drop was also a misconception. In reality, it was due to increased energy efficiency that lessened the demand for oil. Hence, the idea of correlation equalling causation is a false one, and economics should be viewed without such fallacies.

Volcker’s War on Inflation

Paul Volcker’s tenure as the Fed Chair aimed to combat inflation and stabilize the financial system. Despite committing to the monetarist theory, which advocated controlling inflation by managing the money supply, the Federal Reserve Open Market Committee struggled to define what constituted money due to new financial instruments. Regardless, Volcker’s public announcement and aggressive use of various levers brought down inflation rates, leading to a recession that Americans accepted as the cost of a stable financial future.

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