Friday, November 2, 2012

Book Review: The Financial Crisis and the Free Market Cure

The Financial Crisis and the Free Market Cure By John A. Allison
This is one of the most enjoyable new books I have read in some time.  You might find this hard to believe since it is about the financial crisis of 2007 – 2009.  Yet, it does more than dissect the financial crisis; it provides optimism and hope for the future.
John Allison knows what he is writing about.  As the former CEO of a successful bank (BB&T), he has the knowledge and experience that enable him to isolate the key causes of the financial crisis and explain them in simple, direct prose. 
As a business person who worked his way up the ranks at BB&T, Mr. Allison created a new American success story.  The result is over 40 years of active participation in the American economy and first-hand experience with the causes of the crisis.  Throughout those years, he participated in the decisions that helped BB&T survive and thrive.
Mr. Allison does an excellent job of identifying the various factors that created the financial crisis and he squarely places the blame on government regulations and policies.  This assessment provides some excellent principled observations based upon his unique vantage point as an actor in the American economy.  He clearly explains the roles of the Federal Reserve, the Clinton administration and Congress as well as Fannie Mae and Freddie Mac, not to mention crony capitalism, which he aptly calls “crony socialism”.  Mr. Allison goes into detail on the role of each of these parties and even discusses how these factors influenced decisions he had to make at BB&T.
Mr. Allison’s explanation of the crisis details the damage done by the government as it sought to increase home ownership.  He doesn’t put stated intentions ahead of results.  He doesn’t argue that the end justifies the means.  On the contrary, he lets no one off the hook, clearly identifying the coercive actions and policies that caused the recession.  He explains how the principles of the free market could have prevented the crisis – had we been in a free market.  He even points out the irony of having the two men most responsible for the crisis write the legislation (Dodd/Frank) that would ensure it did not happen again.  Not likely, according to John Allison.
After thoroughly explaining the causes of the crisis, Mr. Allison proceeds to offer free market solutions.  His explanation of the principle of supply and demand is excellent and more broadly explained than I’ve read before; and he clearly shows how the various actions of government violated this principle and caused serious harm to both rich and poor.  As he states:
“The reason the United States entered the recession was not a lack of demand; it was because our resources had been misallocated, so we could not continue to consume (demand) at the same level.  Trillions of dollars of capital had been misallocated to housing, and millions of workers had learned the wrong skills.  However, we did not have the resources (capital and labor) to meet the demand—that is the demand was illegitimate because of the lack of productivity of our economic system.”[1]
I found that this particular discussion coincided well with similar explanations made by classical economists such as Henry Hazlitt, Ludwig von Mises and others.  Henry Hazlitt tells us:
“If we try to run the economy for a single group or class, we shall injure or destroy all groups, including the members of the very class for whose benefit we have been trying to run it.”[2]
Mr. Allison is clear about his basic principles.  He understands that economic success can only come about in a nation of free people who benefit or suffer from their own decisions.  He understands that production engaged in by free individuals, not consumption, will improve economic conditions and he understands that re-distribution brings little in the way of economic stimulus. 
I recommend this book for anyone who wants to understand why our economy is in the doldrums.

[1] Page 185
[2] Economics in One Lesson, Henry Hazlitt, Paperback, Three Rivers Press, Page 158

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