Reckless Endangerment: How Outsized Ambition, Greed, And Corruption Led to Economic Armageddon by Gretchen Morgenson and Joshua Rosner
In Reckless endangerment: How outsized ambition, greed, and corruption led to economic Armageddon, New York Times financial writer Gretchen Morgenson and financial and policy analyst Joshua Rosner examine how government involvement, or lack thereof, in the economic sector helped contribute to the current economic meltdown. In the introduction, Morgenson explains the authors' goals in writing the book. First, they want to name names. She says that the book "identifies powerful people whose involvement in the debacle has not yet been chronicled" (Morgenson & Rosner, 2011). Second, they want to reveal how the seemingly discrete economic problems were actually interrelated, by revealing how they were connected to one another (Morgenson & Rosner, 2011). They recognized that the American people felt robbed, but they were also determined to try to answer the ignorance that many Americans felt in the wake of the disaster; not only did most Americans fail to comprehend how America ended up in the greatest economic disaster since the Great Depression, but, more telling, they failed to be able to identify the people who led them there. Therefore, the authors approached the financial crisis like a whodunit mystery, and set out to detail "who did it, how, and why" (Morgenson & Rosner, 2011). What they reveal is that the economic crises was not the result of any single bad act or single bad actor, but that "this was a crisis that crept up, building almost imperceptibly over the past two decades. More disturbing, it was the result of actions taken by people at the height of power in both the public and the private sectors; people who continue, even now, to hold sway in the corridors of Washington and Wall Street (Morgenson & Rosner, 2011).
The key concept of the book was to relate intentionally irresponsible lending practices to the current global economic crisis. It sought to demonstrate how corporate practices could impact an entire nation's economy. Moreover, it sought to demonstrate that the very people who helped create an economic crisis, because of their positions of power, would remain insulated from the impact of that crisis in a way that the average person would not be insulated. Not only would they be insulated from suffering any legal repercussions, but many of them saw tremendous profits as a result of this behavior, profits that took money away from the average American and were not repaid in any way. In fact, these people remain in power, able to create similar scenarios in a drive for profit. Their power has been magnified as the gap between the super wealthy and the average American has grown larger in this recession. That the powerful created this crisis and have not been punished for it may be the most important concept in the book.
This key concept is relevant to management in a few ways. Idealistically, understanding this concept would warn future managers of the dangers of allowing profit to be the primary motivator in a business scenario. It would help business professionals really understand how unethical business practices do not only impact their business, but can have a wider impact on the entire economy. Given that the U.S. economy is intrinsically intertwined with other economies, this literally means that an individual's shady practices can impact the worldwide economy. However, there is no morality tale in the book; the bad guys escape punishment, and the victims fail to receive any type of justice. Therefore, it seems that unscrupulous business or management students could take away the lesson that predatory business practices and profiting off of the misfortune of others are going to be permissible, as long as there is some effort to comply with the law.
In order to understand the book, one must look at how the authors support their key concept. The authors begin with a discussion of the critical role that the mortgage crises played in the economic meltdown. What many people do not realize is that the U.S. government has been using housing programs since the period of the Revolutionary War, exchanging land for promises to develop the land or as payment in exchange for some type of service. However, in the 1990s, President Clinton's use of economic incentives for home ownership differed from its predecessors. It was not really an economic incentive plan, since the economy was actually well into the recovery from a recession, and it was also not intended as a type of compensation. Instead, it was an effort for credit to be extended in a more "democratic" member, opening up the dream of home ownership to groups of Americans who had traditionally been disenfranchised from that component of the "American dream" (Morgenson & Rosner, 2011). However, it also differed from predecessor government programs in that it heavily relied upon private actors to accomplish the government goals, which led to a series of deregulations in the mortgage industry that eventually led to the current economic collapse. "Banks, home builders, securities firms, Realtors- all were asked to pull together in a partnership made up of 65 top national organizations and 131 smaller groups" to achieve the goal of making home ownership a possibility for Americans for whom it had previously been impossible (Morgenson & Rosner, 2011).
Not surprisingly, Morgenson specifically examines Fannie Mae and Freddie Mac. Fannie Mae is known for its mortgages and most people are aware that Fannie Mae received government support. However, prior to the economic meltdown, many people did not have a clear understanding of how large Fannie Mae was, but according to Morgenson and Rosner it was the largest financial institution in the world (Morgenson & Rosner, 2011). However, its success was illusory; the company had a history of creative accounting, which means that its receipts were never what they were reported to be. More significantly, Fannie Mae treated mortgage services as a means of driving high salaries and bonuses for executives, without regard to their underlying performance. Rather than discourage the type of risky financial decision-making that resulted in the economic meltdown, Fannie Mae encouraged those practices, and even employed lobbyists and used campaign contributions to ensure that they would be permitted to continue engaging in those questionable activities (Morgenson & Rosner, 2011). The problem with this practice was that it made the goal of home ownership, which had long been a way to provide financial protection during retirement or to transmit wealth from one generation to the next, independent of the ability to pay for the home. The elimination of traditional mortgage rules, which required substantial cash down payments for homes, verifiable income, and a demonstrated ability to service debts, combined with federal regulations that treated interest from mortgage debt differently than any other type of interest, set the stage for home purchases that had little to do with income protection, and, instead, focused on profit generation, not only for the banks, but also for many individual mortgage holders (Morgenson & Rosner, 2011). This removed the personal stake that many, though not all, homeowners, had in their homes, which set the stage for defaults if there was an economic downturn.
The book makes several important contributions to knowledge in the field. It is the most in-depth explanation of the causes of the current financial disaster. For example, the authors help explain how this drive to encourage home ownership also made home ownership impossible for many in various different locations. Opening up the lending market increased competition for houses. This increase in competition led to the housing bubble, as housing prices rose dramatically in some locations. It was not unusual for housing prices, which had been fairly consistent up until this time, to double within a five-year period, in certain locations. The result was that home ownership, rather than becoming widely more affordable, became much less affordable for a number of people who, prior to this, would have been able to enter the housing market. This explanation, contained in chapter thirteen, really helps explain how affordable lending could actually exacerbate the problem of a lack of affordable housing. After all, rising housing prices did not simply impact homeowners, but all residents in an area, as rising property values lead to rent increases for residential and commercial properties. These factors helped contribute to the eventual recession, and the authors' explanation of how those phenomenons are linked to the mortgage lending crisis is critical to anyone seeking to understand the current economic downturn.
In fact, the main strength of the book is the detail that the authors use to help explain not only why the country is currently in a recession, but also who caused the recession. The authors painstakingly detail the mortgage industry and how it worked throughout the 1980s -- early 2000s to demonstrate how those mortgage practices led to the downturn. In fact, they talk about how in the early 2000s, just as problems at Fannie and Freddie were beginning to become really…
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