Wednesday, December 29, 2010

The Best Book (Yet) on the Global Meltdown

It's the Christmas season. And that has me thinking again about the global financial crisis, the subject of several earlier posts (just click on the chapter 3 tag here or at the bottom of this post).

The links there might not be entirely obvious, but there are two good reasons why this is a good time to dwell on financial globalization. First, Chapter 3 of my book is about lessons from the Christmas season for global finance, where I feature the 2007-2008 crisis as a case study. Second, the holiday season allows for more time to catch up on reading, and I've just had time to review Nouriel Roubini and Stephen Mihm's Crisis Economics: A Crash Course in the Future of Finance.

In a series of three posts in July and early August, I reviewed five other books that diagnose the crisis and explain it to readers. All of them were worth reading. Compared to these, however, I think Roubini's book is the best analysis, combining well-researched rigor with clear writing. It's a serious tome of 300 pages, and it certainly lacks the humor of John Lancaster's I.O.U. and the storytelling of Michael Lewis' Big Short or David Faber's And Then the Roof Caved In.

But it makes up for these deficits with helpful historical analogies drawn from previous financial crises and with sharply realistic prose devoid of ideology or wishful thinking. Other than a little chest-thumping at the beginning (crediting Roubini with predicting the crisis well before it began), the book rebuts the presumption that our current financial crisis was completely unexpected or unique. Instead, the authors argue, what happened from 2006 to late 2008 was entirely predictable; indeed, Roubini himself predicted much of what followed.

They argue in Chapter 2 that the crisis nicely fits Hyman Minsky's model of financial crises--a model made famous in Charles Kindleberger's Manias, Panics, and Crashes. Like Joseph Schumpeter and other Austrian economists, Minsky believed that booms and busts were a recurrent reality of the financial sector in global capitalism. This time was no different.

The authors spend five chapters in the middle of the book describing the long-term structural causes, the string of bank failures from 2006 to 2008, the spread of the crisis globally, the Fed's response, and the responses of the Bush Administration and Congress.

But a real strength of the book, which goes beyond its predecessors, lies in its final third, where the authors lay out a program of reforms and policies that could help prevent another nasty meltdown. As their subtitle suggests, they want to offer some guidance on the "future of finance." It's doubtful that we'll be able to predict the future in detail, but these two have given us a good grasp of what just happened, along with some thoughts on how to prevent it from happening again (or at least contain the damage). With the benefit of a little more time, they've given us insight that earlier books couldn't offer.

Right now I'm thinking that this will be the text of choice for covering global finance in my international political economy course next fall--unless a reader out there discovers a text that might be better. If you do find a better book, please let me know.

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