Money, Greed, and Risk: Why Financial Crises and Crashes Happen

Morris Is Sadly Deficient in Economic Understanding

The reader of Money, Greed, and Risk is informed that the book’s author, Charles R. Morris, has been a partner in a consulting firm, an executive with Chase Manhattan Bank, the secretary of health and human services for the state of Washington, and assistant budget director for New York City. In short, Morris has considerable experience as a manager and a bureaucrat. He is, in particular, seemingly well versed in the technical workings of various financial markets and financial instruments such as index futures, collateralized mortgage obligations, synthetic put options, and so forth. As long as Morris restricts himself to the operational details of “exotic” financial assets, the reader is likely to benefit. Unfortunately, most of the issues addressed by this book—the causes of financial crises—call for someone with an understanding of economic theory, economic history, and, especially, the perverse effects wrought by government regulation. In those areas, Morris is sadly deficient, and his book fails to enlighten.

The book is divided roughly into thirds. One part presents a survey, albeit brief, of American economic history from the early nineteenth century through the Great Depression. The emphasis is on finance, money, and banking, and it features the usual cast of characters: Nicholas Biddle, Andrew Jackson, Jay Gould, J. P. Morgan, John D. Rockefeller, Cornelius Vanderbilt, Andrew Carnegie, and the British firm Baring Brothers. According to Morris, this span of time was characterized by the “fleecing” of first British investors and then the American middle class. Greed was the motive force, and fraud was rampant.

Morris’s presentation is weakened, however, by two interrelated flaws. First, he relies almost entirely on a 1957 book by Bray Hammond, which, although reissued in 1991, fails fully to reflect recent scholarship on certain key banking issues. Second, Morris’s understanding of money and banking is so muddled that he (a) regards Nicholas Biddle as a genius and Andrew Jackson as a man consumed by “prejudice and ignorance,” and (b) insists that a central bank represents an enormous improvement over the “chaos” of free banking.

A second part of the book focuses quite closely on the financial innovations of the past 30 years and the many problems they allegedly have caused. Here the reader will be introduced to the “junk bond king” Michael Milken (in a chapter titled “Mephistopheles”); Howard Rubin, the exploiter of GNMA “strips”; notorious “inside trader” Ivan Boesky; the brain trust behind Long Term Capital Management; and “corporate raider” T. Boone Pickens, among others. Even though Morris seems to recognize that recent financial developments, such as corporate takeovers and derivative assets, have increased efficiency and improved the management of risk, he nonetheless portrays the innovators as being “offensively” greedy and generally sleazy. And he retains that sort of language even though, for example, he grants that the legal charges against Milken were based on ambiguous and contradictory evidence and were therefore unconvincing.

The third part of the book presents Morris’s ideas about the necessity of relying on governments to regulate financial markets. Such a position is a predictable outgrowth of certain of his expressed beliefs. For example, he asserts that “the average investor probably is a fool,” and that recently even financial “gurus” often haven’t had “a clue to what was going on in their own businesses.” Economists cannot be relied on either. According to Morris, they can neither figure out the cause of the Great Depression nor offer any helpful advice to nations experiencing currency crises. Wrong and wrong.

Worse still, in his opinion economists are entirely too wedded to free markets and too skeptical of “enlightened” regulatory structures. As far as he is concerned, financial markets were not safe “until the whole panoply of regulatory mechanisms and information requirements were in place.” His core claim is that, unless they are reined in by regulators, financial innovators will always brutally exploit the populace, thereby creating periodic crises. This he believes to be the dominant theme in economic history.

I have three fundamental criticisms of this book. First, Morris is oblivious to a large and growing body of scholarship that demonstrates (conclusively, in my opinion) that all systemic problems in monetary and financial markets have, in fact, been caused by various government regulations. Prohibitions on bank branching, the forced segmentation of financial services, legal tender laws, and the “moral hazard” of deposit insurance are some of the more obvious examples. Fraud and corruption, except where protected by statute, have played a very minor role. Second, he offers no explanation of why some financial innovations, such as credit cards, NOW accounts, and ATMs, have not precipitated crises. Finally, the manner of presentation is shrill and sensationalistic. There is too much hyperbole, too many pejorative terms, and too little scholarship.

All in all, Money, Greed, and Risk is one of those much-hyped books that it’s best to avoid.

Larry Sechrest is associate professor of economics at Sul Ross State University, Alpine, Texas.

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