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20150724 Excellent sheep

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The elite college education in America is broken. It is based on quasi-meritocratic admission system that selects applicants using tests and formal criteria that give priority to well-healed and hard working children of wealthy parents who pay for training, test preparations, and work these children so hard to excel that they become neurotic, psychotic, and miserable even if they do get into Ivy League. Consequently they become oriented to material success so they go into finance and law, rather than to do-good non-profits. Another big issue is decrease in quality of education that went away from great books and emphasis on learning how to think in order to train for less abstract practical skills like STEM. The obvious solution for author is to provide more money so more children could have access to intellect developing liberal arts education to prepare well rounded individuals and pay for this by raising taxes on 1%.


PART 1. Sheep

  1. The Students

The students are overworked and stressed by need to get all points checked as required for admission into top-level universities. They are highly trained in test taking, bag all required activities, and as result are over-programmed and often are at the brink of psychological meltdown. They are highly oriented to external success trappings at the expense of free development, leading to what author calls credentialism: accumulation of credits for activities person is not really interested in. These people are trained to compete and win and therefore seek external approval and appreciation over others in everything they do. Consequently they prefer careers in finance and consulting that lead to high monetary returns.

  1. The History

In this chapter author goes through history of development of admission process in XX century from admission based on status: WASP elite selected mainly by family status to meritocratic elite selected by ability to pass tests supplanted with high level of conformity to formal requirements however meaningful or meaningless these requirements are. It also touches such issue as university ranking and strives for top selectivity numbers. The short characteristic of resulting product of higher education became the name of this book: excellent sheep.

  1. The Training

The training students are going through is increasingly result oriented with objective to produce highly compensated lawyers and doctors, in process suppressing natural inclinations of individuals. Consequently it produces high level of stress and unhappiness.

  1. The Institutions

Author traces all these problems to historical change in education that occurred at the end of XIX century when top universities start moving away from English model of education designed mainly for financially independent elite and directed to produce widely educated ladies and gentlemen capable to lead, quite independently, their households, businesses, and government. The new direction was German model of highly specialized education designed for individuals with insignificant levels of initial wealth and directed to produce effective bureaucrats capable to successfully clime up within bureaucratic hierarchy in process obtaining wealth and power. Author designates two institutions as representing each of these modes: Liberal Arts college for English mode and Research University for German. There is continuing tension between these two modes within educational system with German mode becoming consistently more and more prevailing due, to significant extent, necessity to obtain financial return on education to repay loan and succeed. Finally author sees a negative side of dramatic expansion of high education after WWII in change of institutional approach to the students from highly humanitarian human development process to business process of producing effective money producing alumni out of raw material of a student.

PART 2. Self.

  1. What Is College For?

This is discussion of meaning of college education. Traditionally it was to teach a young generation “how to think”. The latest development in cost, loans, and attitudes brought a significant change. Now college is considered an investment and the meaning of college become to get good financial return on money paid for the college.

  1. Inventing Your Life

Here author provides a more meaningful suggestion on how to use college years: invent one’s life. It includes first of all developing good knowledge of self and defining, based on this knowledge, what direction in life to take. The second is developing ability to act even if it includes risk of failure. Overall this is the most important thing if one to avoid work that he/she hates and live good, enjoyable life.

  1. Leadership

All colleges claim to turn people into leaders and all look for students with “leadership potential”. Author somewhat rebel against this idea and suggests that it would be more important to train citizens, while leadership is secondary at best.

PART 3. Schools

  1. Great Books

This is a very interesting critic of contemporary movements of college education away from liberal art to practical areas of STEM. I think author makes a good sense when he writes about limited application of technological and practical knowledge compared with knowledge of how to think, how to build argument, and how communicate that supposed to come from liberal arts and great books. He also stresses that there is nothing antithetical between these areas of knowledge, they supplement each other, but basics of effective thinking and communications should come from humanities.

  1. Spirit Guides

This chapter is about another important part of college education that is dramatically diminishing lately: direct communication with teacher and mentoring of young people. The current environment with its dramatic increase of number of students and shifting of actual teaching from professors to assistants and adjuncts, mentoring becoming a lot more difficult, while with Massive Open Online Courses (MOOC) just plain impossible turning education from process of formation of personality into process of knowledge transfer.

  1. Your Guide to the Rankings

This small chapter is about general meaningless of ranking by some formal parameters that can easily be and are manipulated. Obviously there are material differences between colleges at different level in quality of teachers and not less important of students, but within group of colleges at the same level differences are not significant. Author actually expresses preference for second tier colleges.

PART 4. Society.

  1. Welcome to the Club

In this chapter author going a bit out of main theme of this book to contemplate about overall state of American society with its growing inequality, decrease in intergenerational class mobility, and other negative trends. He especially concerned with elite colleges cultivating conscious perception of its students of their own intellectual superiority. Interestingly enough he also provides some information about comparatively much higher grade-inflation in elite schools. This information put under question if these best and brightest are really that smart or they just benefited from mammy and daddy alumni status, wealth, connections, and/or skin color to get into elite colleges and then just glide on through life coddled in super safety super net of their status getting rewards without any proportion to achievement and getting their failure swept under the rug every time they need it.

  1. The Self-Overcoming of the Hereditary Meritocracy

In final chapter author expresses his opinion about what needs to be done to overcome hereditary meritocracy. He starts with expressing disbelieve in genetic character of intelligence based on statement that people like Charles Murray are bad, without even discussing data provided in Murray’s books. Much more reasonable is his statement about “Meritocratic” elite suffering epidemics of Ivy Retardation when people like Romney or Obama just plainly incapable to make emotional connection with regular people. When he makes case for change he give an interesting quote from Baltzell’s “The Protestant Establishment”: “History is graveyard of classes which have preferred caste privilege to leadership”. Author’s suggestions for remedy: change educational system to mitigate the class system through changing admission process making it based on class affirmative actions, weight SAT by socioeconomic factors, stop consider failures in applicant history as disqualifying, and a few other changes. As it could be expected big on his list is increase in direct taxes to expand high quality education for everybody and these taxes should be paid by 1%.

The final word however is that “the elite purchased self-perpetuation at the price of their children happiness” because they make elite education condition of prosperity and force their children to work too hard to obtain this education resulting in misery and psychological disorders.


This book is pretty good as eyewitness evidence for conditions of elite college education that builds meritocracy not on the merits of real live actions, but on the merits of testing, meeting formal requirements, and supreme value of conformism in search of good place in hierarchy of government or big corporations. I went though experience of college education in USA at the level of executive business school that had somewhat different dynamics, but from what I saw the narrative of this book rings the bell. I think that most important point here is that education for development of intellect significantly pushed out by education for obtaining top-notch credentials. The former is good for living in free market society when superior thinking and decision making abilities provide superior material and psychological returns, while latter is good for living in big government / big corporation environment where completely different skills set is required for prosperity that is good for success in office politics, but not that good for psychological well being. Unfortunately author’s leftist solution of big taxes for more liberal arts does not sound reasonable or plausible, not the least because higher public expense on education proved to be a failure many times over.

20150717 We the People

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The main idea is that USA deviated from constitution and expanded government to such extent that it is impossible to come back to the rule of law and constitutional republic as founders designed it. However not everything is lost because the huge bureaucratic machinery that rules USA, practically by decrees, is highly inefficient, overcomplicated, and has a zillion of contradictory rules and directions. It opens this system to effective push back from organized civil disobedience that potentially could start dismounting bureaucracy and initiate slow movement back to constitutional republic. It could be done within law by actively resisting the most egregious violations with legal and financial support of non-governmental organizations and funds created specifically for these purposes.



Chapter 1: A Broken Constitution

This is a brief history of destruction of American Constitution that was slowly occurring since the beginning of the Republic, but really took off in the era of New Deal when legal revolution of Roosevelt administration successfully attacked what still remained of state rights and practically removed any restrictions on government spending and regulations. Author believes that this revolution is not reversible because too many people now depend on government for resources for everything from social security to protection of environment, therefore no political party would be able to obtain support of majority if it tries to stop these resource flows.

Chapter 2: A Lawless Legal System

Here the point is made that despite incessant declaration of adherence to the rule of law by all politicians, in reality we live in practically lawless society because laws and regulations are too complex and contradictory for anybody to know and understand, process is too slow and expensive for people of reasonable means to be able to contest any violations by bureaucracy. It is also consequence of moral bankruptcy of legal profession when lawyers abandoned self-restrain causing explosion of litigation.

Chapter 3: An Extralegal State Within the State

This chapter is about regulatory state and administrative courts that all but eliminated Constitutional order of law creation and enforcement by creating parallel unconstitutional system of agency regulations and even administrative courts with power to enforce regulation as laws.

Chapter 4: A Systemically Corrupt Political System

This chapter is about political corruption that made it all but impossible serious reform of regulatory state and history of maturation of corruption in USA. This corruption is directly connected to amount of resources acquired by the state from productive part of population, which politicians have opportunity to distribute to their clientele. Since this clientele includes both rich and poor, providing money and votes, to make change is practically impossible. The deal is simple: rich get protection from competition and government contracts in exchange for financial support of politicians’ ambitions while in office and making them wealthy through lobbying and/or consulting after leaving office. The deal with poor is also not complicated: they vote for those who support more of welfare for them.

Chapter 5: Institutional Sclerosis and Advanced Democracy

Here author reviews in details why it is not possible to limit federal power via normal political process. The reason is well-established dynamics of collective action in advanced democracies when special interests include practically everybody making it impossible to remove redistribution and limiting political competition to competition between allied groups of special interests.


Chapter 6: On the Choice of Civil Disobedience

First author make case for legitimacy lost based on traditional American understanding of government legitimacy as voluntary agreement of governed. The federal government lost its legitimacy in theory during legal revolution of 1937-1942 and lost it in practice in 1960s. He estimate that only 10-20% of Americans would agree with this opinion, but he points out that the level of trust in government doing right thing fallen to even lower level. In practice Americans had 3 compacts that provided legitimacy for government:

  1. Americans would expect from government to limit itself to protection from enemies foreign and domestic.
  2. Government would not impose its position on moral issues. Prohibition is provided as example of correct resolution of moral issue via constitutional amendment.
  3. Government let Americans to have pride in themselves and would not interfere in private affairs.

Government violated all three in 1960s. Author provides details for these violations and states that it eliminated legitimacy of federal government.

Chapter 7: The Ground Rules for Civil Disobedience

Here author defines rules for civil disobedience: which laws and regulation should be and which should not be subject to disobedience. He also details how exactly such disobedience could be conducted. The main objective is to move to practical implementation of rule: “No Harm, No Foul”, by ignoring laws and regulations that have no relation to preventing harm to the people.

Chapter 8: Help for Ordinary Americans

This is analysis of federal government enforcement capacity based on numbers of attorneys, administrative judges, and other personal. Author believes that since these numbers are small the probability of ordinary Americans to be persecuted for disobedience is small and could be compensated by creating safety and support net in form of “Madison” funds to pay fines and compensate losses from government actions.

Chapter 9: Treating Government as an Insurable Hazard

In this chapter author reviews approach to government as insurable hazard and analyses one specific case of potential disobedience: inspection of dental offices. He believes that it would be possible to repulse government counterattack via expanded litigation and support of public opinion.

Chapter 10: From Systematic Civil Disobedience to a “No Harm, No Foul” Regulatory Regime

This is analysis of another potential movement to “No Harm, No Foul” regime based on assumption that it is possible to get courts to change approach to “Arbitrary and Capricious” clause of typical regulations. He even presents some evidence that such strategy could work.

Chapter 11: A Necessary Crisis

Here author reviews a conceivable scenario when failed regulatory state could lead courts to move back towards written constitution ignoring, if necessary, stare decisis based on 80 years of leftist big government supporting cases. He even provides a hypothetical scenario for such situation.

PART Ill A Propitious MOMENT

Chapter 12: The Return of Diversified America

This is a very interesting brief review of the history of ideological diversity in America. Below is table representing ideologies and attitudes of 4 founding groups of America:

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It did not have less diversity afterward with Germans, Irish, Jews, and many others landing in this country. Actually mid XX century period if highly uncharacteristic, relatively short, and practically ended by now, bringing wide diversity and consequently instability. The original constitution was so effective because it provided framework for mainly peaceful coexistence of these diverse groups that regulatory redistributionist state could not provide. The return to original rules of game and dismantling of such state could be one and only way to avoid not necessarily peaceful fight for spoils of redistribution.

Chapter 13: The Best of Times

Author believes that we live in the best time when it becoming possible to move on to expansion of liberty as it was understood in original American republic and in this chapter he reviews various factor that support this believe:

  • Technology, especially Internet opened option of government oversight by public
  • Visual evidence restricting government officials due to omnipresence of cameras
  • Internet based companies matching sellers and buyers outside of government controlled areas
  • Easy access to documents related to government actions and ability visually demonstrate negative consequences of these action, incompetence and corruption of government officials
  • The alienation of productive people resulted from continuing increase of their financial burden required to pay for government indulgence
  • The alienation of big business, which finds itself under continuing attack from government for both looting and scapegoating
  • Increasing tensions between federals government and state / local government on other side especially in area of environmental restrictions
  • Frustration of low level bureaucrats with their positions and opportunities

Chapter 14: Once the Curtain Has Been Pulled Aside

Here author presents a number of logical inferences for where we should be economically and politically at current and projected future level of technological achievements if we can limit or, even better, eliminate deleterious result of activities of “Government of the Factions, by the Factions, and for the Factions.” He is optimistic that growing diversity of America will make it to overcome current government logjam and that America, as we know it, will remain the land of the free.


I fully agree with author’s analysis of deadly threat for America’s soul created by dramatic expansion of big government into all areas of live pushing away free markets and personal freedom of the people. However I do not think that such remedy, as civil disobedience would work to push government back. People who control government: Bureaucrats and Politicians are pretty smart and highly capable to develop counter measures limiting or even just plainly outlawing Madison Funds, making it illegal for one person or organization to pay fine for another person, or even criminalizing disobedience. I think that development will go its usual way: revolution of groups of individuals who feel dispossessed and exploited by current regime against people who mainly benefit from this. We currently at the point in our development when majority of people who are hurt by regime believe that they benefit from it. This includes recipients of government handouts whether in form of welfare, low level bureaucratic government jobs, or government contracts. For time being real beneficiaries of the regime: high-level bureaucrats and government-connected plutocrats would be able to continue its offensive against America. The forces resisting them: free market plutocrats and productive individuals are getting progressively weaker for now because they are undermined by cheap foreign competition, automation of labor, and government intervention. However it will stop and pretty soon when government bureaucracy will keep increasingly proving in more and more areas that it is not capable to meet needs and wishes of individuals, turning even those who lives off government handouts against government. It would happen a lot sooner if these people would have other source of resources than sales or labor or government handouts.

20150710 Siedentop – Inventing the Individual

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The history of Western civilization shows that contemporary notion of individual and his/her natural rights is not innate for human species, but rather process of long cultural development of the Western world based on Christianity. The common for all humanity approach is not individual, but rather family based, including family gods, family hierarchy, and rigid roles for everybody highly dependent on age, sex, and other mainly inborn parameters. The process of creation of idea of individual was highly dependent on separation of temporal and spiritual world developed by Christianity as consequence of feudal development in Western Europe with its interplaying multitude of entities both religious and secular none of which could obtain continuing dominance. This separation opened way for the idea of moral equality under god, that was core Christian believe, to expand into all areas of Western civilization prompting establishment of nation states and wide accepion of notions of individual and individual rights.


Prologue: What is the West About?

The answer to this question has to be based on two assumptions: The first assumption is that it should be based on the long view of moral and religious development that formed distinct Western attitude to key questions of what is moral center and highest value of civilization. The second assumption is that such believes are extremely important, actually more important than material basis of civilization. Author sees the key differentiation of the West from other civilizations in its positioning of individual at the center with direct connection to the god or nature with no middle man in between, leading to separation of state and temporal world with its necessarily hierarchical structure from spiritual world where all individuals are equal before the god. This separation in author’s opinion came from Christianity and eventually spilled over from spiritual area into material world creating civil society, democracy, and human rights.


The World of Antiquity:

  1. The Ancient Family 2. The Ancient City 3. The Ancient Cosmos

The ancient family as it developed from bands of hunter-gatherers was self-contained entity that included not only material self-sufficiency, but also complete spiritual structure including family specific gods, normally ancestors, usually believed to be actively involved in current affairs and capable rewarding or punishing people. The top man – father was the only controlling authority with direct connection to ancestors. Any person had value only as a member of the family with specific place in the structure and no value as individual whatsoever. The city emerged as conglomeration of families and as such had to have its own superstructure including its own gods who did not substitute family gods, but rather represented super family – hence making universe with some family gods more powerful than others and city-wide gods controlling and protecting the city as whole. From here came citizenship as form of belonging to superfamily of the city by the virtue of belonging to one of founding families of patricians. The plebeians were latecomers who joined city without family and therefore were not included in any of existing families, had no family altar, no ancestors, and consequently no gods.   This family based multilayered structure was based on philosophy of superiority of family and critical value of its competition with other families, including military competition that was a make or break activity with labor and commerce denigrated as inferior activity that could not add to the glory of the family or city. The ancient world was built on inequality of individuals within family and inequality of families within polity. The ancient Cosmos was built in the same way.


A Moral Revolution:

  1. The World Turned Upside Down: Paul 5. The Truth Within: Moral Equality. 6. Heroism Redefined. 7. A New Form of Association: Monasticism. 8. The Weakness of the Will: Augustine

This part is about moral revolution brought in by Christianity. It starts with discussion about Paul promoting new notion of human equality before god, most important it was the first time when moral equality was unrelated to the family and background. It was built on Jewish religions innovation: monotheism and nonlinear understanding of time as in contrast to usual cyclical understanding. The new relation between people and god created by Christianity was different from Jewish understanding of God as somewhat tribal leader of “chosen” people. It was expanded to all of humanity, creating direct relationship between god and any individual who wanted to accept it. Paul substituted natural inequality with new moral equality of all individuals. This part also traces development of Christianity in Roman Empire from initial rejection and martyrdom to increasing popularity. It traces formation of Monasticism as a new form of association completely egalitarian and, most important, separated from traditional family and its polytheism. Finally it discusses Augustine and his notions of complexity of human will as a motive force representing power of the soul distinct from intellect.


Towards the Idea of Fundamental Law:

  1. Shaping New Attitudes and Habits 10. Distinguishing Spiritual from Temporal Power 11. Barbarian Codes, Roman law and Christian Intuitions 12.The Carolingian Compromise

This part continues discussion about separation of spiritual and temporal power, stressing completely different approaches to temporal accommodation of human action. Even if an individual practically could not exist outside of his/her predefine station in life and had to act according to whatever wee existing rules of game, the spiritual power of this individual was making him/her equal with others in relationship to the god. Consequently author reviews in this part historical development up to the point of Carolingian Compromise, dividing these temporal and spiritual between feudal lords and kings and Christian elite of bishops and popes.


Europe Acquires its Identity:

  1. Why Feudalism did not recreate Ancient Slavery 14. Fostering the ‘Peace of God’ 15. The Papal Revolution: A Constitution for Europe? 16. Natural Law and Natural Rights

The analysis if Europe uniqueness rises an interesting question about slavery. Why medieval Europe did not have slavery, but rather used serfdom? The answer seems to be moral equality coming from Christianity with its equality of souls in combination with small farm method of agriculture. Author also points to difference between peasants uprisings from slaves revolt. The former were inclined to create representative governing bodies, while latter were directed to getting away. Another unusual characteristic was formation of professional clergy and separate distinct hierarchy in society dedicated to management of souls versus management of bodies by feudal authorities. This chapter also reviews contest between religion authority of pope Gregory and German Emperor Henry IV secular power. Amazing part of outcome was general accepion of the idea that king’s soul is not materially different from other souls and would be treated in similar way by god. The consequent popes and kings continued this contest eventually developing legal framework based on partial revival of Roman law and removal of a king from soul to god connection.


A New Model of Government:

  1. The Centralization and the New Sense of Justice 18. The Democratizing of Reason, 19. Steps towards the Creation of Nation-States, 20. Urban Insurrections

This part is about development of law by canon lawyers who promoted secular law defining violations of such law as something separate than sin, creating separate areas for material and spiritual controlling systems for human behavior. They also introduced four fundamental changes in corporate law:

  1. Any organized group can be corporation instead of corporate privileges being granted by king.
  2. Corporation could create its own laws for its members, unlike traditional Roman law created by public authority only
  3. Requirement of consent of members for decision-making meant change flow of authority from the bottom up.
  4. They rejected Roman approach “what pertains to a corporation does not pertain to its members” turning corporate property formally into common property of its members.

Then author describes long history of expansion of ideas of separation of material and spiritual spheres implemented by popes from 1000 to 1300 as democratization of reason leading to development of notion of natural rights with consequential formation of nation-states moving identity of state away from a king to population and territory. Finally it reviews long process of incorporation of urban centers into these states with equalizing effect on individual rights and important role in new entities of new class created during this process: property/market oriented middle class intermediate between old castes of feudal society.


The Birth Pangs of Modern liberty:

  1. Popular Aspirations and the Friars 22. The Defense of Egalitarian Moral Intuitions 23. God’s Freedom and Human Freedom Joined: Ockham 24. Struggling for Representative Government in the Church 25. Dispensing with the Renaissance

This is discussion about process through which egalitarian moral institutions created by Christianity permeated individual attitudes and believes, leading to development of notion of individual freedom and representative government tasked with and legitimized for protection of natural rights.


Epilogue: Christianity and Secularism

Here author makes point that secularism is pretty much natural product of Christianity and usual popular believe that Christianity consistently and fiercely fought against development and expansion of science is incorrect, practically ignoring historical record of development of these ideas. This misconception at least partially based on presentation of ancient world as secular, when in reality it was world of family specific gods / ancestors providing supernatural support for family members. Author believes that key feature of secularism is its believe in moral equality of humans resulting in their ability to make their own decisions and have opportunity for free actions. As such it could not possibly contradict individual decisions about religious believes and actions providing they are voluntary and are not forced in any way.


It is a very interesting and new for me approach to development of idea of individual as an entity separate and different from family, tribe, and such. I am not sure that I buy idea that only Christianity with its moral equality before god and separate spheres for temporal and spiritual was sole or even main source of this idea. I would rather think that this idea is natural development in any culture that occurs with development of bigger populations, wider markets, and, very important, increased mobility of people within some big enough territorial entity under unified military control over population. When scale getting big enough, there is no way that family structure with its family god would provide material and spiritual support for fast moving people in even relatively primitive market economy because number of contact, alliances, and transaction with huge diversity of people would require spiritual and legal environment capable to provide common ground acceptable for everybody, that could not be possibly done with family gods. In this environment the spiritual environment had to move with individual pretty much as Jewish god would move with Jewish merchant wherever this merchant would travel, even if there is no Jewish community, leave alone family structured Jewish community in the new place. It would be interesting to trace development of notion of individual in Eastern countries where influence of Christianity was minimal for example during vast and loosely controlled Mongolian empire of XIII – XIV centuries with tremendous movements of diverse people, goods, and services throughout huge territories. Anyway it seems that all cultures had concept of human as an inseparable part of bigger entity, while still recognizing that it as a separate thinking, feeling, and acting entity driven by internal forces.

20150703 Hidden in the Plain sight

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The main idea of this book is that financial crisis of 2008 was produced by government intervention in economy. The prerequisite for it was first of all government push to expand home ownership via political methods by legislating “affordable housing” and then setting up goals for lending to people who traditionally would be considered unqualified for loans and forcing banks to meet these goal and GSE to buy loans to such people using dramatically decreased underwriting standards, consequently developing housing bubble. The secondary prerequisite was the change in accounting rules requiring to price assets to market that made assets dependent bank reserves highly volatile and dependent on housing market valuation. The crisis itself was caused by inconsistent reaction of government to manageable problems of investment banks created by liquidity crunch resulted from drop in housing prices. The initial rescue of Bear Stearns and following up refusal to rescue Lehman created huge gap in abilities to predict financial developments for financial managers, causing them to froze credit and run to liquidity in order to avoid bankruptcy.



1 Introduction: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again

The left worked hard to build false narrative about financial crisis of 2008. This narrative blames deregulation for causing the crisis. Author rejects this idea and points to actual causes:

  1. Government push for affordable housing goals that in practice forced banks to issue loans to people who were not qualified for these loan according to time tested underwriting standards
  2. This caused banks to decrease standards in order to meet government goals
  3. GSEs (Funny and Freddy) were also pushed by government so they start buying subprime mortgages
  4. This situation increased money flow into housing market, creating bubble with housing pricing nearly doubling.
  5. The second cause was change in accounting rules forcing asset reassessment to market, therefore creating hazard of liquidity crisis that eventually occurred when value of mortgage assets on books plummeted with burst of housing bubble.
  6. Moral hazard caused by inconsistent, even chaotic behavior of Feds and Treasury who first interfered with Bear creating expectation of government support for big investment banks and then let Lehman fail, creating situation of unpredictability that froze credit throughout the market.

2 The Difference between Prime and Nontraditional Mortgages: The Importance of Sound Underwriting Standards

Here author discusses traditional prime mortgages: 20% down, FICO >660, and DTI (Debt to Income) < 38%. He provides very enlightening table of default percentage in relation to variation of these parameters with Prime default rate 0.55% and Subprime from 0.98% to 7% depending on combination of subprime parameters.

3 The Financial Crisis Inquiry Commission Report and Other Explanations for the Crisis: Why Conventional Explanations for the Crisis Are Inadequate

This is about work of commission to analyze crisis that author participated in and reasons for his rejection of the report and other alternatives for causes of crises:

  1. Commission ignored Pinto’s report that demonstrated mass acquisition of subprime loans by GSE under pressure of government goals for affordable housing. Author believes that this report pointed to correct cause: dramatic increase of subprime loans on the books
  2. Low rates and foreign funds inflow: Author rejects it as insufficient in volume to cause bubble.
  3. Deregulation – per author there were no significant deregulation, because main deregulation – removal of Glass-Steagall led to creation of subsidiaries for depository business that were too small 1-5% of assets to have significant impact.

Author analyses other changes in legislative environment and concludes that they also could not have such impact. He also reviews multiple other explanations, but concludes that they are not adequate for scale of the crisis.

4 A Short History of Housing Finance in the U.S.: How and Why Housing Finance Was Substantially Changed in 1992

This is a brief history of American housing market after WWII that was very stable and successful until 1992 when housing bubble started to develop. Author blames growth of bubble on government intervention aimed to expand house ownership among unqualified people that started with Community reinvestment act.


5 HUD’s Central Role: How HUD Used the Affordable-Housing Goals to Reduce Underwriting Standards

This is about HUD as a tool to implement government policy of affordable housing that was implemented via % goal for banks and GSEs. Author provides graph demonstrating cumulative increase in subprime loans and growth of prices:

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6 The Decline in Underwriting Standards: How the Affordable-Housing Goals Forced on Increase in Nontraditional Mortgages

This chapter describes process of political interference into mortgage market and how it caused decline of underwriting standards. The table below demonstrates increase of low quality loans on GSE’s books:

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7 Force Fed: Why the Affordable-Housing Goals, and Not Market Share or Profit, Were the Sole Reason the GSEs Acquired Nontraditional Mortgages

This is detailed discussion of GSEs as political creatures. This nature defined GSE priorities when meeting political goals was much higher priority than any market related considerations. It is also provides logic of why any claims for GSE working to maintain market share are plainly incorrect.

8 Going Viral: Why and How Reduced Underwriting Standards Spread to the Wider Market

This chapter discusses how GSE behavior impacted wider market. This influence in combination with political pressure on banks practically forced non-government organizations follow suite. Here is the graph for this:

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There is also a very interesting table from Freddy presenting ratio of default for various deviations from prime conditions:

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9 The Great Housing Price Bubble: How Loosened Underwriting Standards Stimulated Its Growth

This chapter discusses overall nature of bubble and specifics of USA housing bubble of 2008 claiming that reason of unusual scope of this bubble (9 times bigger than any previous one and global rather than local) was political interference to dramatically decrease underwriting requirements and with it amount of money flow into mortgage market.

10 Flying Blind into a Storm: How the GSEs’ Failure to Disclose Their Acquisition of Nontraditional Mortgages Magnified the Crisis

This chapters describes various statistical and accounting technics that made growing bubble practically invisible for decision makers in both public and private sectors. Mainly it was done via classification of subprime loans as prime often using previous GSE criteria for loan purchases that were not operational any more in reality.

11 31 Million Nontraditional Mortgages Precipitate a Crisis: Why Even Government-Backed Mortgage Securities Were Contributors

This chapter discusses volume of bubble and some additional reasons for people missing it. First and foremost it was caused by dramatic inflation of housing prices that masked the problem by decreasing levels of defaults and delinquencies due to use of equity loans. It lasted as long as prices kept going up. As soon as prices stopped individuals with unaffordable loans stopped paying and bubble burst.

12 Fair-Value Accounting Scales Up the Crisis: How Mark-to-Market Accounting Made Financial Firms Look Weak or Unstable

This chapter discusses another precondition for financial crisis – switch to Mark-to-market accounting. It comes down to simple notion that bank reserves in form of marketable assets are highly vulnerable to price movements for these assets causing dramatic decline in reserves if price dropped significantly. With significant share of reserves tied up in housing related assets, burst of bubble immediately undermined liquidity of reserves of otherwise healthy institutions, pushing them into bankruptcy.


13 From Bad to Worse: How Government Blunders Turned a Mortgage Meltdown Into an Investor Panic and Financial Crisis

Here author presents crises development as consequence of government interference / noninterference that started first with unnecessary rescue of Bear Stearns that created market expectation for government interference on behalf of any significant player. As result management of Lehman brothers based its strategy on this assumption and did not apply emergency efforts to stop deterioration of liquidity position due to mortgage asset devaluation to market. The result of this strategy opened Lehman for bankruptcy and, when expected government interference did not occur, Lehman went down. The unexpected inaction of government practically froze credit everywhere because everybody recognized liquidity situation caused by the burst of bubble and nobody knew what expect from government. Author analyses in details all reasons that where provided for this interference / noninterference and concludes that these reasons are not valid.

14 The False Narrative and the Future: Why the Failure to Understand the Causes of the Crisis May Lead to Another

The final chapter discusses various false narratives provided to justify government action and assign responsibility for crisis elsewhere. It provides support for author ideas that these false narrative prevented effective learning from this experience and left open road to the next crisis that could occur for the same reasons as the last one: government push for increase in landing to political constituencies that could not and would not pay their debts in the future. It remains to be seen if this next attempt to sabotage American economy will be as successful as the previous one.


I found evidence provided by author and his logic very convincing and sequence of event leading to crisis highly feasible. Bubble burst causing decrease in mortgage related assets prices in turn leading to reserves liquidity crunch as result of mark-to-market accounting accompanied by Feds rescue of Bear Stearns and refuse to rescue Lehman made behavior of managers who froze all the credit logical and justifiable. I also think that his critic of various alternative justifications and explanations looks pretty robust and well documented. However I do not share fear of the next crisis developing in similar way mainly because it would require the same political approach based on liberal ideology and implemented by two consecutive presidents Clinton and Bush. I think that political power is going to shift and quite dramatically making repetition of crisis with the same causes unlikely.