The book from Morris provides some interesting insights into the market's implosion.
It's not that we didn't have any warning. Morris makes the point that the collateralised mortgage obligations crisis, the 1987 stock market crash and the collapse of Long Term Capital Management were a practice run for the meltdown. All reflected the shift to deregulation, the agency problem where no-one is sure that companies, their employees or their contractors are not acting against the interests of shareholders and the mistaken belief that markets can be reduced to a mathematical formula. "All three of the those trends – the shift of financial transactions to unregulated markets, the steady worsening of the Agency problem, and the pretense that all finance can be mathematized – flowed together to create the great credit bubble of the 2000s."
Adding to the problem were Alan Greenspan's policies of cutting interest rates whenever there was trouble. In 1987, the Fed cut interest rates three times in six weeks, in 1998 when the S&P dived in response to the Asian currency crisis, the LTCM fiasco and the Russian default, it cut rates three times in seven weeks, and it did that again in 2001 after 9/11. This was the Greenspan Put: no matter what goes wrong, the Fed would rescue you by creating cheap money.
As a result, a lot of the so-called prosperity was like a Potemkin village, totally fake because it was based on massive consumer borrowing on bubble-priced assets.
As a result, he says we are in for a period of what he calls The Great Unwinding where we will see a shock-and-awe surge of asset writedowns and widespread collateral defaults. The global financial system will be in catastrophe. And the global banks, investment banks and hedge funds have become part of a giant Ponzi scheme.
Morris writes: "In effect, they have built a huge Yertle the turtle like unstable tower of debt by selling it back and forth among themselves, booking profits all along the way. That is the definition of a Ponzi game. So long as a free money regime forestalled defaults, the tower might wobble, but stayed erect. But small disturbances in any part of the structure can bring the whole tower down, and the seismic rumblings in evidence portend disturbances that are very large…the American financial sector today is far more powerful than it was in the 1970s. And to date, its response to the looming crisis has been, overwhelmingly, to downplay and to conceal. That is a path to turning a painful debacle into a decades-long tragedy."
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