Crisis Economics: A Crash Course in the Future of Finance [Hardcover]

The book of Roubini and Mihm is really interesting and well written. It is not difficult but not trivial: it seeks to explain fairly well economic concepts and theories, so that the reader can learn something about economic theory.
It focuses mainly on the financial roots of the 2007-08 crisis and on the so-called global imbalances. Less attention is paid to deeper problems realted to income distribution and it doesn't say anything about why finance has achieved prominence in the last 20-30 years vis-a-vis other business sector. In this sense it doesn't go back that much.
Nevertheless, it refuses the most optimistic and semplicist visions of the working of our economic system and provides, within the so-called imperfectionist mainstream, a very good, detailed and realistic analysis.

Nouriel Roubini predicted the financial crisis of 2007-9, and in some detail. This made him extremely unusual among macroeconomists. 'Crisis Economics', written in collaboration with the financial journalist Stephen Mihm, gives Roubini's historical and theoretical perspective on those events, an analysis of where we are now and concrete suggestions for the future from a non-ideological, pragmatic perspective.

Roubini's central insight, informed by his reading of economic history, is that there is nothing unusual about crisis in the economy. On the contrary: he argues against Nassim Taleb's 'black swan' model of unpredictable extreme events that the recent crisis was eminently predictable precisely because it resembled in its course so many other crises in the past. Roubini's is a 'white swan' theory - crisis is normal and inseparable from capitalism - though he agrees with Taleb that within that paradigm crisis can and should be managed and mitigated.

Roubini begins by offering an historical overview of crises caused by an asset bubble that boiled over into the rest of the economy. He argues that the current generation of macroeconomists were fooled, with few exceptions, by an unusually extended period of relative stability (and their own predilections) into believing that stability was the normal state of the economy.

The author then moves from his detailed - and fascinating - account of historical crises to consider how economists have modelled crisis in the past and more recently. Again, this historical perspective reveals significant irrational and extra-economic influences on the question of which model became dominant in academic economics, and why its dominance left economists so unprepared for the crisis of 2007-9.

There follows a detailed analysis of the novel aspects of that crisis, with particular attention paid to the structure of remuneration in the financial sector, the growth of a largely uncontrolled 'shadow banking sector', the unusual degree of interconnection between the parts of the system, and the failures of existing regulation. From this, Roubini moves to an account of the course of the crisis itself, at every stage pointing up the regularity and typicality of its process, and then to a consideration of how a US housing market bubble burgeoned into a 'global pandemic' - and why this might not be the best metaphor for the crisis. For Roubini, this was not an example of global 'infection' from a rogue American economy. As the crisis unfolded, it merely exposed similar structural problems that had grown up independently in other sovereign states. Finally, we are given a view of the truly epic levels of government intervention that were deemed necessary to contain the crisis, whether this was wise, and what this implies for the future.

Roubini then offers detailed policy prescriptions for the future: a series of 'first steps' to address the most glaringly dangerous features of the current system, followed by a systematic overhaul of the financial system and world economic governance. He concludes with an analysis of the near- and medium-term prospects which draws attention to immediate dangers - such as one or more sovereign debt crises, and the possible collapse of the EMU - and a more insidious problem: that the real lessons have not been learned, so that there is a real danger that the system that generated the crisis will not be reformed, for reasons of political convenience and economic dogmatism.

This is an excellent book. Written for the intelligent general reader, highly readable, with no reliance on graphs or mathematics, it offers the best single account of the crisis I have encountered. It is highly recommended.

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.
:-)