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The most surprising thing about the current combined crisis of real estate, banking, and the economy is that anyone would be surprised. While many thoughtful people have described how such crises are shaped and driven, and while many find their world rocked each time the next one arrives, it always takes the next new recurrence to bring reality home. Perhaps a simple reading list may help avert the next one.

Financial meltdowns should be no surprise

In his The Crisis of Global Capitalism, Soros says that the construction industry “is notorious for its boom/bust character” and that “after each bust bank managers become very cautious and resolve never to become so exposed again.”

How quickly they – and the rest of us — forget.

Soros says chastened lenders seem to lose their bust-earned conservatism “when they are again awash in liquidity and desperate to put money to work.” At this point, Soros says, “a new cycle begins.”

Soros is far from alone in recognizing the predictable, near-inevitable return of “desperate” lending, particularly when the lending industry is freed by political deregulation. Since the Great Depression, when safequards were set in place to reduce risk of another financial meltdown, politicians have been forgetting about risk as avidly as the lenders have forgotten it.

To help encourage some wider appreciation of rising risk under lax government, I’ve excerpted passages from books and other sources that could serve as a reading list.
Lance Olsen

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“Animal spirits are an American staple and the tendencies of the 1980s do not constitute some alien strain in the national character. Real estate speculation must be as old as the land – in the United States, it is certainly as old as the frontier – and the first bad bank loan was no doubt made around the time of the opening of the first bank.”

“Still, the boom of the 1980s was unique. Not only did creditors lend more freely than they had in the past, but the government intervened more actively than it had ever done before to absorb the inevitable losses. Two important trends converged in the boom : the democratization of lending and the socialization of risk : more and more people were able to borrow, and more and more debt was federally subsidized …. the resulting public complacency has brought its own costs, most visibly the unpaid invoice for the banking and savings and loans debacles. By standing behind good banks and bad banks alike, the government in effect removed the oldest charter in banking – that is, safekeeping.”

Grant, James.Money of the Mind : Borrowing and Lending in America from the CivilWar to Michael Milken. Farrar Straus Giroux. 1992, p.5.

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“Proponents of the loan push notion suggest that the banks have victimized themselves by their absurd lending decisions …. From this perspective, bankers as loan pushers become active door to door salesmen (albeit in pin stripe suits).”

The Loan Pushers: The role of commercial banks in the international debt crisis, by William Darity and Bobbie Horn. 1988. Ballinger Publishing Company, a subsidiary of Harper & Row

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“Access to more capital makes bigger crises feasible: every now and then, somewhere in the world, one is going to happen.

“Is this because the same mistakes are made again and again, or is each crisis unique? The answer is yes to both : each crisis is unique, and the same mistakes are made again and again.”

“While a bubble is inflating, reckless lending seems merely bold, and appropriately well-rewarded. Deteriorating credit quality is easy to conceal so long as the price of property and other assets offered as collateral is going up. The growth in lending fuels demand, so economic growth stays high as well. That reinforces the government’s reputation for competence, so the boom continues.”

The Economist, “A cruel sea of capital : A survey of global finance,” May 3rd, 2003.

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“Controlled capitalism … had been a truly colossal success. From the end of the Second World War until the mid-1970s the American and European economies were uplifted by many years of rapid growth, bringing affluence from the relatively few to almost all …. In the late 1970s the tendency to control capitalism was abruptly reversed .… the most striking feature of our turbo-capitalist times, the hollowing-out of democratic governance over the economy.”

Edward Luttwak, Turbo-Capitalism. 1998 in Great Britain by Weidenfeld & Nicolson. 1999 in the U.S. by Harper Collins.
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“ … the main dangers to the success of capitalism are the very people who would consider themselves its most ardent advocates : the bosses of companies, the owners of companies, and the politicians who tirelessly insist that they are ‘pro-business’.”

“… widespread and quite outrageous abuse, by capitalists, of capitalism … The danger exists everywhere in the world, but it matters most in the United States.”

“ … the abuse of capitalism and of democracy in the country that is seen – especially by itself – as the highway to greatness.”

The Economist, Special 160th Anniversary Issue, A Survey of Capitalism and Democracy, June 26-July 4, 2003
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“Our concern here is with the social consequences of the free market and its transformation into a closed circle. American society during the nineteenth and twentieth centuries gradually turned from a society of many independent producers into one of a relatively small number of large producers. It became a collection of employees rather than entrepeneurs ….

“The market closed down family grocery stores, mom-and-pop diners, and family pharmacies, and replaced them with national retail chains ….

“The natural and unavoidable activity of the market is to erode traditional social institutions and to weaken the hold of religion and family over individuals ….

“Conservative economics overthrows conservative order; this is the central paradox of the American right. The free market is a market in which large producers are free to extinguish small farmers, storekeepers, and businessmen, the social pillars of traditional values. The longer and more freely the market operates, the more inexorably it destroys its political base.

“Historically, liberal society emerged from a conservative one…”

Mead, Walter Russell. Mortal Splendor: The American Empire in Transition. 381 pages. Houghton Mifflin. 1987. Excerpts, pp. 178-179, chapter 13, “The Anatomy of the American Right.”

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