Roubini and Mihm's book is one of the best I have read on the current economic crisis. Particularly lucid, comprehensive and insightful, it not only explains the causes and effects of the crisis, but also places it in an illuminating historical context. The authors show that repeating crises are the normal state of affairs in capitalism and not the exceptional or 'black swan' events that many pundits have suggested. Subsequently, they go on to suggest ways in which the effects of these inevitable crises may be minimised before finally turning to consider the immediate future and the likelihood of their proposed mitigating measures actually being adopted.
The book starts with an explanation of the current crisis and the events leading up to it. The chapter is entitled 'The White Swan' - a deliberate reference to Nassim Nicholas Taleb's 'Black Swan
' hypothesis. Far from being a one-off ('black swan') event, the current crisis mirrors those in years gone by. Although, since the end of the Second World War, we may have been living through 'The Great Moderation', now we are actually seeing the return of business as usual - the normal capitalist routine of boom/slump and 'Crisis Economics'.
The next section looks at the 'Crisis Economists'. From John Stuart Mill, William Stanley Jevons and Karl Marx, the authors arrive at Keynes - '[t]he most important economist to emerge out of the Great Depression'(P47). In relation to Keynes, they then go on to briefly discuss Friedman and the Chicago School, Minsky, Schumpeter, Hayek and the Austrian School. The authors believe that the best approach may be a synthesis of Keynes and Schumpeter. Finally, they take a crucial point from Paul Samuelson:
'A founder and codifier of the neoclassical school, he oversaw his profession's embrace of esoteric mathematical models as a way of describing timeless economic phenomena. But when [an] interviewer innocently asked, "What would you say to someone starting graduate studies in economics?" Samuelson gave an unexpected answer. "Well," he said, "this is probably a change from what I would have said when I was younger. Have a very healthy respect for the study of economic history, because that's the raw material out of which any of your conjectures or testings will come." (P59)
In the following chapters, the authors present a detailed comparison of the development of the current situation with the slumps, recessions and depressions of the past. It is absolutely clear from reading these that anyone who claims that the economy has reached a 'new' form and the old rules no longer apply is seriously mistaken. The only surprising thing is that anyone could have been taken in by such pronouncements (I'm reminded very much of Thomas Frank's excellent polemic 'One Market Under God: Extreme Capitalism, Market Populism and the End of Economic Democracy
After the historical exposition, the authors go on to present a number of reforms or 'First Steps' (Chapter 8). They consider the bonus culture of Wall Street, the extremely obscure financial products that were concocted, the failure and moral ambiguities of the ratings agencies, the derivatives market and banking rules and the Basel agreements. Within the terms of the system their proposals seem eminently sensible.
From these immediate suggestions, they then move on to more systemic 'radical remedies', looking at 'Enforcement and Coordination' (P215), including taking control of the 'shadow banking industry', the reintroduction of some form of Glass-Steagal Act (introduced in the 1930s to keep commercial and investment banking separate - but finally repealed in 1999 with the disastrous consequences that we have all seen), and a far more active role for central banks in controlling and minimising the development of bubbles. The authors are also very aware of the close links between some of those in the shadow banking industry and the US government:
'...we are by no means counseling [sic] a continuation of the high-level "revolving door" that connected some of the biggest financial firms with the regulatory establishment in Washington. Goldman Sachs is particularly infamous for this practice: several CEOs of that firm have held senior positions in the U.S. Government, while scores of other Goldman executives have held high-level jobs too.' (P221)
Again, I'm very much reminded of Thomas Frank - this time of 'The Wrecking Crew
Moving out from these essentially national proposals, the authors consider the international ramifications of the crisis and the obvious need for supra-national agreements to control the global economy, reform of the IMF and other global institutions. But, at the same time, they note that even now, some are calling for a return to 'business as usual'.
Finally, they consider the outlook for both the immediate and longer term future. It is not really a very happy picture. The future really does depend on transnational cooperation and, quite frankly, that does not strike me as likely. Whether the current slump is V, U or W shaped, whether Russia should be considered along with Brazil, India and China as a major developing country (BIC? BRIC? BRICK? P285), the fate of the dollar as the world reserve currency, the possibility of countries defaulting on their debts (the so-called PI(I)GS - Portugal, Italy (Ireland), Greece and Spain), the predictable rise in the price of gold (at the time of writing the book, it was at $1000 per ounce, at the time of writing this review, it stood at $1500 per ounce), whether inflation or deflation poses the greater risk - these are all briefly considered. Finally, in a nice reference to Joseph Stiglitz
, they consider 'Globalization and Its Discontents' (P298). The current crisis is, they suggest, a huge opportunity for the introduction of changes that, although unlikely to eliminate the boom/bust cycle, will significantly ameliorate its most destructive effects. Whether this opportunity will be seized is a moot point.
Overall then, this is a fascinating and highly readable account of the current economic crisis. It is interesting to note that, although Roubini embraces an approach based on Keynes and Schumpeter, he is quoted and/or referred to in books by Marxist writers like Chris Harman
and Alex Callinicos
, as well as the former director of the LSE, Howard Davies
. Personally though, I believe that the Goldman Sachs Vampire Squid and the Kleptocracy have got far too firm a hold and we are more likely to see the rise of a new form of feudalism. We are so doomed.