Steve Reads

There already are many books about the financial collapse of 2008, and there will be many more. Plunder and Blunder, for breadth, brevity, and readability alone, should be one of the few on your shelf if you care to understand how it all happened.

Baker chases down the causes of the boom to a number of places and a number of people: the Clinton White House’s decision to maintain a cheap dollar in the ’90s, Joe Lieberman’s fight to have stock options not count as expenses under FASB rules, and the conflicts of interest — bond-rating agencies getting paid by the companies whose instruments they rated, property-value assessors getting paid by homeowners, auditors paid by the companies they audit, corporate boards existing at the whim of their CEOs — with which we’ve become so familiar in the past few years. His solution to these conflicts of interest is what you’d expect: enforce independence. A bond-rating agency would be chosen at random for a given bond issue, a home-price appraisal would be randomly assigned to a homeowner, and so forth.

Other solutions are maybe more controversial. Baker revisits the idea of a tax on stock-market transactions, proposed in 1989 (at the latest) by no less a personage than Larry Summers as a way to reduce speculation. Sometimes this seems like a good idea, sometimes not.

Plunder and Blunder is worth reading if only for two sections: a two-page sketch of how to identify stock-market bubbles in the future (using price-to-earnings ratios), and another on how to spot home-price bubbles. Home prices, says Baker, had not risen in real terms in one hundred years; the main allures of homeownership come through forced saving and some tax benefits. So any increase in home prices that exceeds inflation is immediately suspect.

Here would have been the place, by the way, for Baker to push for an end to the mortgage-interest deduction, which artificially increases demand for homes, artifically increases demand for larger homes, and benefits the wealthy substantially more than it benefits the poor. Baker didn’t take the bait, and it’s not clear to me why he didn’t.

It’s a quick, meaty read, and is a must-own.