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Kevin Phillips's book entitled Bad Money is seven chapters that span 240 pages. To date, Mr. Phillips has written thirteen books where he discusses the decline of America from its dominate place on the world stage. This book continues on this theme. This time Mr. Phillips primarily covers the financial aspects of America's decline. He centers his position around three primary topics in what he believes has led to our continued decline from global prominence.
Those three topics are
The "financialization" of America and our propensity to acquire more and more credit while racking up more and more debt,
The mega housing bubble and the subsequent failings to effectively deal with and contain the crisis that followed, and
America's continued dependence on foreign oil and the negative affect this has on the American economy and US dollar as a world currency.
Mr. Phillips starts out describing what he calls the "financialization" of America. He shares that over the past three decades (starting in the 1980s), America's economy has become increasingly dependent upon the financial sector to drive the health and wealth of our economy. Mr. Phillips cites that the financial sector's contribution to America's GDP (Gross Domestic Product) has steadily increased from 11-12 percent in the 1980s to more than 20 percent in 2005 (and 21.4% or more than $3 trillion in 2009 as reported by the US Bureau of Economic Analysis) (Gross-Domestic-Product-by-Industry Accounts). This is about a 95% increase from 1980 until today. However, this has come at a high cost to what Mr. Phillips sees as the foundation of our country, the manufacturing sector. He points out that Manufacturing has experienced a steady decline from 25% in the 1980s to 11% (or about $1.5 trillion) in 2009. The reason he believes this is bad, is because history has shown that other countries whose GDP became dominated by their financial sector eventually fell from global prominence. Phillips draws comparison to the Spanish in the seventeenth century, the Dutch of the eighteenth century and most recently the British after World War I. Mr. Phillips believes we are destined for the same fate.
His basis for this conclusion finds its foundation in the second failing his book highlights. He dedicates an entire chapter entitled, "Securitization: The Insecurity of It All". Here he directs blame squarely at the financial sector for this problem. He indicates that this "problem" took hold after "tech bubble" of the early 2000s. After this bubble, this housing boom began to grip the country. With all-time low interest rates, an almost completely deregulated financial sector, and people eager and frothing to capitalize on "The American Dream" of homeownership. A recipe for disaster was casted. It began with the issuance of exotically crafted sub-prime mortgages to people who really could not afford them in the first place. Then, Wall Street did some creative financing where they were able to take bundles of these sub-prime mortgages and create new "securities" for which investors could purchase parts. Through "securitization of collateralized debt obligations and credit default swaps", people began a high risk, high stakes gambling session where they were basically betting against people and their ability to repay these grossly inflated mortgages. For a time, it seemed to work, and Wall Street was able to export this concept around the world. But, then everything came crashing down with the collapse of Bear Stearns. The bottom fell out of the housing market, and the financial sector began to scramble to ensure its survival by turning to the Federal Government to bail them out.
Phillips's last part of his trio of this failing is America's continued reliance and dependence upon foreign oil. Our dependence has created a situation where our very economy is at risk because our currency is tied to the purchase and sell of Middle Eastern oil. Phillips introduces the concept of "Peak Oil." This is essentially the concept that the production of oil around the world has peaked. Demand and consumption is now exceeding supply. This will create all sorts of problems for our country as we continue to be dependent on this finite resource.
After describing each of these situations, Mr. Phillips then wraps up with how our leaders in Washington have bungled each of these crises and how the "politics of evasion" seems to be the modus operandi in addressing each of the crises. Phillips believes this to be because of Washington's tight linkage with Wall Street and its co-dependence upon the millions of dollars of campaign contributions received from the financial community.
My Impressions of This Book
Obviously, there is much, much more to this book than I can possibly hope to cover in a brief overview. However, I believe these are the important highlights and should set the basis for the discussion of my reactions to this book.
Let me begin with how what I read relates to the topics presented in this class. This is tough for me to assess. My reason is I found this book to be more of a history lesson than a lesson in Managerial Finance. There was a bit of discussion in the book referring to currency valuation and its effect on the overall economy, but it was kept to a high level. I suppose Phillips discussion of the overall state of the U.S. economy and its effect on the World stage could be set in what is presented in Chapter 2 "The Domestic and International Financial Marketplace" of our text book. In the end, I would say this book was marginally relevant to the vast majority of what I learned from this course in Managerial Finance.
Now, what did I learn from this book? In a nutshell, our country is on a dangerous course headed for self-destruction as a global power. The control of our economy by an out of control Finance sector, over-extension of credit and the massive amount of debt our citizens and country maintain and our continued dependence on foreign oil creates a situation where we may no longer be able to control our fate or place in the world. We have become increasingly dependent on the financial resources and wealth of other emerging countries (primarily China).
Which leads me to what I believe are some of the strengths and weaknesses of this book. Mr. Phillips does have panache for describing the topics in very clear, somewhat colorful way. However, this is also tempered by what I consider to be somewhat sensationalism and a fore-telling of doom and gloom. Also, I believe Mr. Phillips is much too quick to draw parallels to events of the "distant" past to use as a fore-telling of things to come for us. I found that I am not alone in this opinion. In his review of Phillips's book, Daniel Gross of The New York Times indicates "During bubbles, analysts are always prone to extrapolate from recent trends indefinitely into the future and reach dramatic conclusions." (Gross) While Phillips maintains that America is still overly reliant the financial sector, Gross contends that we are actually moving on to the next "big thing", that being the creation and manufacturing of the components for Alternative Energy solutions (Gross).
In addition, I believe that while Phillips does do a decent job describing each of these crises, he does a poor job of offering any tangible solutions or even any proposals. It is, as though, he just wants to take shots across the bow of the political landscape of 2008 (which happened to be an election year). Robert Solow of The New Republic Online says that Phillips stays "as the superficial level of Chicken Little." (Solow) Solow continues in his review of Phillips's book to point out that Phillips maintains a flair for the dramatic but fails to understand some of the very points he is trying to drive home. For instance, Phillips, in his chapter entitled "Bullnomics", attempts to describe why he believes the Consumer Price Index calculations are purposely flawed and lack integrity. (Phillips 80-84) But, Solow, being a Nobel Prize Economist, rebuts almost every point that Phillips makes. (Solow) He does however give Phillips credit for his discussion of "Peak Oil". I believe this is mainly because Solow tends to support the notion "that world demand is increasing faster than world supply and availability (Solow)." Nevertheless, Solow ends by writing, "It is too bad that he [Phillips] has no taste for genuine analysis." (Solow). Ouch! That feels a bit harsh but then I am not a Nobel Economist. Nevertheless, I will attempt to describe some specific financial policy proposals that I would like to see come as a result of this book.
Financial Policy Proposal
First, I would like to see much better oversight of our financial community. Personally, I would like to see the reinstatement of the Glass-Stegall Act, which was repealed by President Clinton in 1999. Mr. Phillips points out that "the Glass-Stegall Act of 1933 kept commercial banks, mortgage finance, insurers, and securities firms apart and unable to collude with each other in the unsafe and speculative practices they had indulged in the 1920s" (Phillips Preface xix). I believe the repeal of Glass-Stegall could be viewed as the beginning of the mega-finance bubble that popped in 2007. Once those businesses were able to merge with each other, this eventually led to the need for the $700 billion bailout the taxpayers had to pay. The firms grew so large that they were deemed "too big to fail". If Glass-Stegall had still been in place, this could have never have occurred.
Secondly, I would like to see some stiff legislation that aggressively promotes the reduction of America's dependence on fossil fuels. As a country, we cannot afford to continue to be tied to the Middle East and foreign oil. There is a lot of "big talk" in Washington about the need to pursue alternative energy sources. However, that is all it is, "big talk." Our elected leaders need to listen to the country. We want alternative energy. Now, let us back the businesses that are trying and struggling to push forward in this sector. Shift some of that finance sector-focus to the something that could be our future legacy.
The first two policy proposals lead me to my last proposal. I believe there should be term limits for all members of our federal government. In my opinion, members of both houses should be limited to two terms just like the President. This is probably a pipe dream, but I believe this is part of the problem. There is not enough "new blood" flowing into Congress each year. The senior members of Congress are tied to their campaign contributors. And, they must do what their contributors wish instead of what their constituents demand. We, the people, should be able to have the opportunity every four years to vote for BRAND NEW members of Congress just as we have the opportunity to elect a new president. Alas, I am probably just dreaming a dream that will never be a reality.