Book Review - Contagion: The Financial Epidemic That is Sweeping the Global Economy... and How to Protect Yourself from It by John R. Talbott
So how did we get ourselves into this economic mess? Beyond the knee-jerk "it's the bankers fault", what really drove our system to the edge that we now balance on? John R. Talbott does a very good job in laying out the cause and effect in his book Contagion: The Financial Epidemic That is Sweeping the Global Economy... and How to Protect Yourself from It. It's tempting to want to believe that it will all work itself out as it always does, but after reading Talbott, it's hard to maintain much optimism over how this will all end up.
Bamboozled, What Didn't Cause the U.S. Housing Boom and Bust; What Did Cause the U.S. Housing Boom and Bust; The Contagion Spreads from Subprime to Prime; How Low Will Hosing Prices Go in the U.S.?; The U.S. Economy Was Not in Great Shape to Begin With; The United States Enters a Long Recession; The Global Economy Catches the Contagion; Too Big to Fail - The $400 Trillion Derivatives Market; Local Governments Feel the Pinch; From Wall Street to Main Street; Demographics Magnify Contagion; Which Investments and Which Countries Will Weather the Storm the Best?; Stop the Bleeding; No Future without Reform; A Warning Shot Across the Bow; References; About the Author; Index
I've heard most of the arguments that Talbott lays out in Contagion, but not all in one cohesive package, understandable to the general public. He starts out with the housing bubble, where prices appreciated far beyond what typical supply and demand would expect. As all parties became less "responsible" for their actions, the rules became less and less stringent. Banks were able to package their loans to third-parties who assumed the mortgages were AAA grade. Since borrowers had less at stake in the house, there were fewer ramifications if one wanted to "walk away" from the mortgage. In effect, they were playing with house money. Prices go up, you win. Prices go down, you leave it on the table. When loans started to go bad, the cascade effect started. Throw in the incredibly high level of risk that credit default swaps (CDS) carried, and the house of cards came crashing down. Meanwhile, we have a government bailing out the very people and industries that caused the problem, under the explanation that these institutions were too large to fail. Again, investors ended up with no liability for their risk-taking behavior and greed, and the taxpayer (and future generations) are left to pay the price down the road. Obviously, there are a number of other factors that play into everything going bad, and Talbott makes a convincing case as to why it happened, as well as the outcome. Basically, there's no solution that won't cause a large amount of pain. It's a matter of whether we own up to our failures and start to make things right, or do we instead pass it along and let others figure it out later (because I got my piece before it went bad).
In terms of how best to weather the storm, he recommends cash, TIPS, gold, and investments in China (if you feel compelled to have money in equities). Whether you agree or not is obviously up to you, but he makes strong points as to why you should avoid certain stock market sectors, as well as most municipal bond offerings. I think the effect on local governments was the most eye-opening part of the book for me. When you consider that government budgets are being slashed, workers are being laid off (less taxable income), and property is losing 30% to 50% of its value (less property tax revenue), there's little hope that government spending will be a safe bet for many years to come.
Well worth reading, even if you don't think you agree with the premise. There's less information on "protecting yourself" from the effects, but it may just be that there are no good answers. I would like to believe Talbott is wrong, but his math works better than the government's math does...