Author: Charles Morris
Sometimes in the markets you get to be wise, sometimes just lucky. Charles Morris, it would seem, is both. A couple of years ago, Morris, an American financial author and former lawyer who has worked with complex credit products, became concerned that a bubble was forming in the credit world. He embarked on a book, with the aim of publishing it later this year, because he expected "the mother of all crashes" in 2008.
In the event the crash started a year earlier. But Morris's publisher has rushed the book out at top speed, thus ensuring that his work has the honour of being the first to offera credible and readable account of the current credit turmoil. This means that what Morris has to say looks highly relevant, especially in a month when banks keep reporting more bad news.
For, as his eye-catching title declares, Morris calculates that the likely cost of the credit crunch will be some "trillion dollars". Three months ago, when his book went to press, that estimate might have seemed bold. After all, last year Washington was cheerily insisting subprime losses could be "contained" at about $100bn (£50bn). These days, the pain having spread, the trillion dollar number no longer looks outlandish.
Morris offers a detailed explanation of how he has reached this sum, and points out that the pain extends well beyond subprime. More sobering still, he warns that this sum could rise further if the authorities mishandle policy. "We are accustomed to thinking of bubbles and crashes in terms of specific markets - like junk bonds, commercial real estate and tech stocks," he observes.
"A credit bubble is different. Credit is the air that financial markets breathe and when the air is poisoned there's no place to hide."
In addition to this gloom, Morris offers a timely - and eminently readable - potted history of how we got into this mess. In his eyes, the story starts back in the 1970s, when Paul Volcker, chairman of the Federal Reserve, killed the inflation demon and restored confidence to the financial markets.
Morris considers this to have been a fabulous achievement and a central lament of his book is that the US seems to lack a 21st-century Volcker - in the sense of someone who was both willing to take on Wall Street and had the moral courage and stature to do so. But Morris concedes that Volcker's success formed the seed for today's mess, because the new climate of stability left banks confident enough to crank up their leverage and risk-taking.
That, coupled with technological change and a steady slide to a more laisser-faire regulatory regime, triggered an explosive burst of financial innovation, which spun out of control in the current decade.
Morris's solution to all this is clear. Because no one is willing to step into Mr Volcker's shoes yet, the US gov-ernment must return to regulating markets more tightly in order to restore balance.
"My personal belief is that the 1980s shift from a government-centric style of economic management toward a more markets-driven one was a critical factor in the American economic recovery of the 1980s and 1990s," he writes. "But the breadth of the current financial crash suggests that we've reached the point where it is market dogmatism that has become the problem, rather than the solution."
He stops short of offering any detailed prescription, however, and simply concludes that "a very long agenda" of steps is now required.
Such reticence is perhaps understandable given that the crisis is still unfolding. But it also highlights a limitation of the book: namely that Morris's account ends pretty early in this financial drama.
Moreover, what this book does not do is offer much "on the ground" feeling of what it was actually like to be inside the financial machine in recent years, as innovation went mad. That is a pity because Morris was an insider for a while: in the late 1990s he was president of a software company that analysed structured finance, and thus presumably saw the craziness develop at close quarters.
Notwithstanding these quibbles, Morris's book is both thought-provoking for experts and a readable primer on events for the layperson. His work clearly highlights the central policy challenge for America's political leaders. If you give credence to the "trillion dollar" loss estimate (as I do), the banking system faces a clear challenge in accessing capital.
And that, in turn, begs the central question: how can you plug this gap if western shareholders are reluctant to recapitalise the banks?
Stand by for the next act in this drama, trillion dollar or otherwise.
The writer is the FT's capital markets editor
Copyright The Financial Times Limited 2008
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