November 24, 2009
Satya Thallam on Robert Pozen's "Too Big to Save? How to Fix the U.S. Financial System"
Posted by J.W. Verret

Satya Thallam is the Director of the Financial Markets Working Group at the Mercatus Center at George Mason University, an interdisciplinary group of scholars who conduct research and advise policymakers on financial regulatory reform efforts. He was previously the 2007 Hernando de Soto Fellow where he conducted research into issues of comparative property rights, and has also written on issues of technology regulation, fiscal policy, and urban planning. He completed coursework towards a Ph.D in economics at Emory University and is a contributing editor to the site FinReg21 and the journal Lombard Street.

Before we get started, I'd like to thank The Glom for inviting me to participate in this book club. I've been reading with great interest posts here for a while, but find the book club posts to be among the most interesting. Let's hope I don't drag down the team average too far. 


Robert Pozen’s new book Too Big to Save? How to Fix the U.S. Financial System begins with the usual rigamarole of pre-textual text. After the obligatory Foreword and Acknowledgements, Pozen inserts an instructive but slightly weird parable about the financial crisis. It’s unusual because it includes a cast of characters both familiar and fictional, mixed together in a straightforward telling of the financial crisis story. Real participants in the story like Standard & Poor’s and AIG exist alongside made-up entities like Wall Street Dealer, FinCredit and hedge fund manager Joe Engler. His mission is to create a brief narrative account of what happened before diving into the details. In this sense Pozen accomplishes his mission, but the effect of the fact/fictional mixture is to lead the reader to believe some parts of the actual story is unknowable and ultimately the parable loses some credibility. If there is one flaw in this book (among its many virtues) its that Pozen lacks the flare of a Gillian Tett or Andrew Ross Sorkin, which leaves his chapter-by-chapter historical narratives (especially in the first part) dry and straightforward. Then again, to some people that may be an advantage of the book.


To comprehensively address the claims in this book would itself require another book. There are literally hundreds of concrete and specific policy recommendations, conveniently highlighted in bold throughout the text. It should be said that Pozen’s stance is one of unapologetic pragmatism. He doesn’t try to remake the country’s financial system as it would be in a perfect world. He does not even really try to remake it as it would be in a decidedly better world. He starts from the world in which we live and makes allowances for marginal improvements given typical industry and political obstructionism. In an event last week I hosted with the author, the primary disagreement between many of my colleagues and Pozen was on this point – is where we are a useful starting point for reform? Whereas Pozen offers suggestions to restart and make more robust the now dormant securitization process for mortgage financing, other commentators question whether such a system is useful in the first place.


Pozen may also be too quick draw conclusions where there are none, or the evidence is unclear. At the risk of sounding obtuse, let me provide an analogy. Pretend we’re looking at a picture of two children playing on a see-saw. The see-saw itself is in mid swing, with both children an equal distance from the ground. How would we know which child just pushed off? Throughout Too Big to Save? Pozen looks at a similar snapshot of the financial crisis and then makes in inference as to who was doing the pushing and who was consequently pushed. For instance, while acknowledging that some homeowners knowingly took advantage of unscrupulous underwriting standards, he concludes that the primary cause of mortgages likely to default were mortgage brokers subject to too little consumer protection oversight. His recommendation is that consumer protection be consolidated into one agency as put forward in proposals for a new Consumer Financial Protection Agency. To be fair, Pozen uses credible sources of data throughout, but jumps from apparent correlations to causation. On the flipside, there is evidence that consumers simply responded to the incentives laid out by monetary policy and anti-deficiency laws. No doubt his many years in the industry, as well as turns in academia and public service brings with it a considerable amount of tacit knowledge that inform his conclusions, but they’re not always clear to the reader.


That being said, Pozen’s book is probably the most measured and comprehensive of its peers. In addition to the usual inclusion of discussions on derivatives, the bailout, corporate governance, and short-selling, the book includes a sober assessment of the oft-overlooked increase in the FDIC insurance limit, the often emotionally debated use of mathematical modeling (including a clear graphical explanation of distribution curves), and a lucid, though borrowed, example of how small mistakes in estimating the risk of underlying mortgage securities lead to catastrophic changes in the risks associated with CDOs.


As mentioned above, Pozen’s book is rather comprehensive and it would be silly to try to address all of his points, or even to select a subgroup of the “most important” ones. Suffice it to say the book does a fine job of elucidating the chain of finance which ultimately led us to where we are. While readers may take issue with the lessons he draws, they would be hard-pressed to accuse him of cherry-picking his data or evidence. Notwithstanding the difficulties I have with the book outlined above, it is an eminently readable and useful resource on the subject. And Pozen should be further commended for offering discrete and refutable policy choices on nearly every page where other writers often devolve into mealy-mouthed platitudes and vagaries.

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