I greatly enjoyed David Smith's book, a very clear and lively explanation of the global banking crisis. He traces the origins of the disaster not simply to the global house price bubble and global imbalances but to something rather more fundamental: the hubris of financial capitalism that followed the fall of the Berlin Wall.
Alan Greenspan, the formerly much admired US central banker and the epitome of free market hubris, is firmly in Smith's sights. Smith also notes the ineptitude of the International Monetary Fund whose hair-shirt response to the 1997/98 Asian crisis encouraged China and others to build up massive official reserves that, once invested, helped feed the West's housing bubble. The bubble was also the creation of Alan Greenspan's policy of keeping interest rates very low after the dot com bubble burst, a policy Smith suggests that was part of America's war on terror. A prolonged US recession after 9/11 would have been interpreted "as a success for America's opponents". The prescient warnings of Bill White at the Bank for International Settlements - ironically known as the central bankers' bank - were routinely ignored by, amongst others, central bankers.
The intricacies of the "shadow" banking system and of CDOs, CDSs and other fancy securities are explained with admirable clarity, although Smith is perhaps a little too forgiving of the regulators. The near banks appeared to be in the shadows only because the regulators had on their Ray Bans. Although some of the details are now familiar, the tale of the collapse of the big names - Northern Rock, Bear Stearns, Lehman, AIG - and the behind-the-scenes rescue plans cannot fail to excite anyone with a good sense of the macabre and who enjoys Greek tragedy. The events are told with panache and with a reporter's eye for personalities and detail.
The book goes well beyond lively reportage. The crisis has shaken the intellectual consensus and is causing a reappraisal of the way policy makers and economists think about the world. Smith has a very strong section on what went wrong with economists' models and with the idea that financial markets are always efficiently priced. He reminds us that most economists are not involved in "high-level macroeconomic modelling" but also highlights some of the deficiencies in the models used by central banks. The models do not contain a proper representation of the banking system. Perhaps a greater problem is that most economists knew nothing about shadow banks, CDOs and CDSs, thinking these to be the preserve of credit specialists and the regulators who set the rules for global capitalism. Smith reports one central banker as saying "It was our fault; we messed up".
The book ends with a what-comes-next question: for bank regulation, for the structure of banks and for policy, including the new buzz topic of "macroprudential regulation". Smith stresses the problem of getting the home central banker and regulator to agree on the right course of action; he might have added that there is an even bigger problem of securing macroprudential agreement between policy makers across countries who have oversight of the same global banks. Smith highlights a number of themes for the future. It is not a jolly picture: high unemployment, big government, high taxes, constrained consumers. But there is a silver lining: obeisance to financial capitalism is over ... at least for now.
