NO MORE BUBBLES TO POP? Michael Barone recommends some reading, and contemplates recent history.

If you want to read a very short book on how we got into the financial crisis, I don't think you could do better than John B. Taylor's Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis. Taylor argues persuasively that the Federal Reserve kept interest rates too low for too long in 2002-05 and that "government programs designed to promote home ownership, a worthwhile goal but overdone in retrospect," together with the credit that was plentiful because of unduly low interest rates created the housing bubble.

"The rapidly rising housing prices and the resulting low delinquency rates likely threw the underwriting programs off track and misled many people." The ratings agencies also bear some responsibility for creating the toxic assets that clog the banks and other financial institutions. "The ratings agencies underestimated the risk of these [mortgage-backed] securities because of a lack of competition, poor accountability, or, most likely, an inherent difficulty in assessing risk due to complexity." He also mentions, rather fleetingly, the role of Fannie Mae and Freddie Mac in flooding the marketplace with mortgage-backed securities; his account can usefully be augmented by the works of my American Enterprise Institute colleague Peter Wallison.

I'm going to add that book to my list of things to acquire and read. There should be no problem meeting the fifty this year. For Book Review N^o. 9 I offer Michael Lewis's Panic, which suggests it's 20 years in the making. Mr Lewis collects a number of columns, some humorous, some instructive. One column helped me understand the tranching of mortgages in mortgage-backed securities (although I'm still not completely clear on whether specific mortgages provide collateral for specific securities, or whether the principal and interest are commingled in backing the entire convex combination of securities). The book ends with a series of columns on the recently-ended real estate bubble. But before that came the dot.com bubble (but for the campaign against terrorism might the real estate bubble have come sooner), preceded immediately by the Asian Tiger bubble, and a decade before that came the portfolio insurance bubble and the Crash of 1987.

Thus the story of my life: to come of age during the experiment against reality that was the late 1960s and early 1970s, and to spend young adulthood and middle age detached from the experiment against reality called upscale indulgence, where the glamour careers were hustling real estate or internet startups or derivative securities. Perhaps I can grow old watching the restoration of The America That Worked^(TM).

(Cross-posted to 50 Book Challenge.)