Those trying to understand how we got into the financial crisis and how we might get out of it have no shortage of books to choose from as we head into the holiday season, but one fine place to start would be with the new offering by a veteran of the Wall Street Journal editorial page, George Melloan, issued under the title, "The Great Money Binge: Spending Our Way to Socialism."
The book begins with an introduction by Amity Shlaes, who tells a story that is a useful reminder that both Republicans and Democrats are capable of egregious economic policy errors. At the presidential retreat at Camp David at which President Nixon "closed the gold window and imposed wage and price controls to camouflage what he'd done," she writes, Milton Friedman himself attended, as did George Shultz, Paul McCracken, and Herbert Stein. "The economists all went along in part because they were overwhelmed by a familiar combo: a sense of crisis and a proximity to political power." Familiar, for sure.
Mr. Melloan doesn't flinch from this conclusion in his own text, either. "What transpired under a Republican administration, albeit with a Democratic Congress, in the second half of 2008 will discredit Republican claims to be for small government for years to come," he writes. That sentence alone is worth the price of the book.
The author notes that during the "eighty years in which the United States had no central bank," "Somehow economic growth and technological development survived the absence." Mr. Melloan doesn't follow that argument to Ron Paul's conclusion, however, preferring instead that the Federal Reserve survive with a singular focus on preserving and stabilizing the value of the dollar.
One of the valuable services Mr. Melloan provides is simply reprinting some of his own work from the Wall Street Journal editorial page over the years. Anyone tempted to believe Nobel laureate Paul Krugman's deluded rant that "if you listened" to the Wall Street Journal editorial page you'd believe "there isn't any housing bubble" will be glad to see Mr. Melloan's 2005 column that ran on that very page and said, "All that liquidity being generated by the Fed thus flowed heavily into real estate to fuel both a home-construction boom (good) and a home-price bubble (bad). Bubbles look good at first, too, as home owners enjoy the illusion of rising wealth, but they are unpleasant when they finally deflate. Ask the Japanese."
One of the wonderful things about nonfiction books is the way in which they are giant collections of facts, and in this regard Mr. Melloan really comes through splendidly. For all the complaining about the "government-sponsored enterprises" Fannie Mae and Freddie Mac, Mr. Melloan reports that in 2005, the $558 billion in mortgage-backed securities issued by Citigroup, Lehman Brothers, and Merrill Lynch dwarfed the $163 billion issued by Fannie and Freddie.
Another fact, from "The Russians" by Hedrick Smith of the New York Times, as quoted by Mr. Melloan: in the Soviet Union, privately farmed plots were 40 times as productive, on a per-acre basis, as land that was farmed collectively.
And another fact, pointing to the dynamism and growth in capitalism: "80 percent of today's Fortune 100 largest companies weren't on the list in 1970. Huge ventures like Wal-Mart were tiny then, and some giants, including FedEx, Microsoft, Cisco, and Home Depot, didn't even exist in 1970."
Another strength of the book is the insight offered into Mr. Melloan's former employer, the Wall Street Journal. The editor, Robert Bartley, was the son of a professor of veterinary medicine at Iowa State. Mr. Melloan was an Indiana farm boy. And their colleague Jude Wanniski was the son of a coal miner. As Mr. Melloan memorably puts it, "We Journal editors were a rather proletarian lot to be promoting capitalism." Mr. Melloan pays special tribute to Bartley, who died in 2003:
He recognized the merit of the supply-side argument early on and provided a prominent platform, the Journal editorial page, for its advocates. He spent many hours turning the economist-speak of some of those advocates into highly readable copy. And in his own writing, he enlarged on those ideas and made them come to life.
At moments one wonders whether Mr. Melloan's loyalty to his colleagues at the Journal, from which he is now retired, causes him to pull a punch or two. When Mr. Melloan rues that, on the $700 billion Troubled Asset Relief Program, "Congress was stampeded into prompt action on this massive bailout by cries from Wall Street, the government, and the press that without federal measures, human life as we know it would end," he doesn't say that his former colleagues at the Wall Street Journal editorial page were touting TARP, too.
In contrast to his admiration for the Journal, Mr. Melloan is scathing about the political bias of much of the rest of the press. He quotes MSNBC's Chris Mathews reacting to an Obama primary victory speech by saying, "I felt a thrill go up my leg," and he also notes HBO's Bill Maher's description of Sarah Palin as "a snarling bitch."
Sometimes Mr. Melloan's tone is off, as when he refers to "the tiny terror from Beverly Hills, Henry Waxman." What's Congressman Waxman's height, reportedly 5 feet 5 inches, got to do with it? It's not as if Mr. Melloan himself is exactly of NBA center height, and the description undercuts Mr. Melloan's genuine indignation later in the book at the condescension of a Labour Party member of Parliament discussing what her party is doing for "little people." As for Beverly Hills, it is part of America and deserves representation in Congress as much as does the rest of Mr. Waxman's district, which includes Ronald Reagan's longtime home of Bel-Air as well as more middle-class communities like Northridge and Chatsworth. If the point is to paint Mr. Waxman as an out-of-touch elitist, it is a cheap shot. The congressman reportedly grew up above his father's grocery story in Watts. Mr. Melloan is more effective when sticks to skewering Democratic congressional leaders on the substance, as in Senator Harry Reid's legislative provision to make "Nevada eligible for the Pacific Coastal Salmon Recovery Fund," which Mr. Melloan observes is "a rather puzzling allotment for a state with no seacoast."
Other times this book is sloppy about details in a way that should have been caught by the book's editors (disclosure: Threshold Editions is an imprint of Simon & Schuster, which is the parent of the publisher of my biography of Samuel Adams. Further FTC-mandated disclosure: the publisher sent me a free review copy of this book, and if you buy books via the Amazon links on this page FutureOfCapitalism.com gets a small percentage of the revenue.) For example, the law requiring the Federal Reserve to target employment as well as inflation is referred to once as "the 1946 Humphrey-Hawkins Act" and later in the book as "the 1978 Full Employment and Balanced Growth Act (better known as the Humphrey-Hawkins Act after its two Democratic authors, Senator Hubert Humphrey of Minnesota and Representative Augustus Hawkins of Los Angeles)." A writer twice referred to incorrectly in the book as Henry Steele Gordon is later correctly identified as John Steele Gordon.
And at times Mr. Melloan has been overtaken by the facts. He writes that Warren Buffett's $5 billion purchase of Goldman Sachs preferred stock was "a venture that in the short term at least was not one of his legendary triumphs"; in fact one recent estimate put the profit earned by Mr. Buffett's Berkshire Hathaway on the investment at $4 billion, or an 80% return in less than a year, the stuff of which legends are made.
But these are mere quibbles. The book concludes on a somewhat optimistic note, as befits an author who saw the malaise of the 1970s transformed into the growth and prosperity of the 1980s and the years that followed. Mr. Melloan writes, "The American political system constantly springs surprises, and sometimes they come when we most need them. The American private sector, with all its hard workers, its entrepreneurs, its talented research scientists, its skilled professionals, its engineers, and its sober, realistic managers of profit-making enterprises, has standards of its own and they are in conflict with those of the ruling party." To the list of hard working and sober standard-setters might be added Mr. Melloan himself.
