The Financial Crisis - Who is to blame ? [Hardcover]

There is an old joke that goes something like: "Put two economists in a room, and they'll come out with three opinions". Howard Davies, Director of the London School of Economics and well-known in the media, goes somewhat better: in separate chapters he considers no fewer than 38 opinions as to who is to blame for the 2007 world financial crisis, and in chapter 39 gives his own views about who is right. The book, which appears to have been completed just before the 2010 General Election, is not light reading, but presupposes a serious interest in, and understanding of, the complex issues involved. Each chapter is basically a resume of the reasons put forward for the opinion being discussed, with a list of references for further reading. Chapters 35-38, under the general heading "Wild Cards", discuss some relatively unconventional views, such as that proposed by the scientist Susan Greenfield that it is all the fault of video games, with which the younger members of the banking fraternity were brought up. These 4 chapters are probably more accessible to the reader unfamiliar with the complexities of the U.S. subprime market, fair value accounting, derivatives, hedge funds, and the many other topics discussed in the previous chapters. But for the initiated, and for those willing to learn, this is an excellent and comprehensive summary of the possible causes of a crisis about which the Queen, quoted on page 161 in a chapter about fraud, asked "Why did no one see it coming?".

a pretty decent overview of the recent financial crisis. some odd ball pyschological angles thrown in at the end - at least in my version which added little to the main thrust of the principal points emerging from the post mortem.

Some primary observations:

a) Macroeconomic background - not the best part of the book although clearly very pertinent. Not too many big conclusions here. plenty of economic biased analyses out there though and Davies highlighted the main points I have seen outlined elsewhere.

b) Financial regulation - excellent section outlining important areas for domestic and international consideration. A nice fit into Davies other books on financial regulation and central banking (both with David Green). Critical time for choosing how to 'catch up' on domestic and financial regulation of FS (don't forget other sectors) - a long boom since liberalisation in the 1970's does not provide much real impetus for (appropriate risk based and systemically focused) regulatory change and in fairness I don't think this current debacle will either. Dare I say it - we'll need a few more to crack the nut on this one. Heaven forbid. Bigger than the one just gone perhaps? Would that do the trick?

c) Institutional strengthening - There have been many crises over preceeding decades and booms and busts are not new to financial markets since the first Dutch stock market. So while I liked this section and its emphasis on quality of risk management, corporate governance, incentive schemes - in truth, if institutions ensure they don't do business their senior management and boards do not understand,or recruit management and boards who do, and establish checks and balances to underline this this will be half the battle - back to basics. As for incentive schemes this is undoubtedly an issue and the solution (in the absence of an effective approach to risk based profit measurement for bonus pools - quantifying risk a problem generally) seems to point towards longer term tie in to company shares and brands and a restructuring of the compensation package. First mover risk is an issue in FS and the solution will have to come from a regulatory led approach (guidelines and so on). Been here before, got the t-shirt and so on. Don't expect too many big changes on this front. Markets and participants have very short memories!

d) Role of quasi regulators

Useful section with an important critique on fair value accounting and rating agencies mainly being the new information. The audit profession as my former career is an area on which I have specific views and will decline further comment here - except to say I don't necessarily agree with the conclusions in this chapter - the book I received from Amazon at least!

e) Role of media

- glad to see this getting a bit of exposure even if just the financial press. An area of critical importance going forward and not only for financial services and the attendant financial sytemic risk there. We have just had a global crisis in financial services the unreal sector - and the fs sector has received the lion's share of the heat. The scrutiny should extend into the real economy and important sectors therein impinging on public health and attitudes - substantially behind the curve in terms of appropriate standards, regulation and supervision but no less of a systemic risk in some respects.

f) Overall

An excellent introduction and summary. As a former financial professional who has seen a few crises (local, global and institutional) many of the issues raised by the recent debacle are actually not new to me. Heard them before. Appropriate change in the wind? Financial services landscape changed forever? Real economy likewise? A new era of globalisation upon us and this the first real shock or test? Perhaps we will see. Then again when the easy money rolls in (easier for some than others anyway) memories are surprisingly short don't you think?

g) Are there any 'real' rogues out there who brought this plague upon us? Who benefited from the boom and did not pay a penny for the bust instead the cost being heaped upon the poor taxpayer (many of whom were happy to take the cheap credit while it was going without complaint it would seem with no thought for how it was to be repaid from earnings ??? - many would say evidence of a decline in real incomes rather than any immoral behaviour).

I am not inclined to scalp hunt per se but that said there is the general principle, no matter how hard to implement, that those who profit from a boom pay for the bust. If only the causality could be formulated the implications would be easier to enforce. I would not stop at shareholders and bondholders but also include bonused management and employees to some extent. Another reason to ensure incentive schemes going forward are sufficiently long term and tied to stock. But that's another story.

h) Booms and busts - examined in some depth in Davies other book on central banking. Is it possible to prevent an asset price bubble and so on. Over the long run economic growth trundles on (at least it has for a few hundred years anyway in the advanced economies) with from time to time dislocations or shocks that last a few years. Is this a pattern we must learn to live with, can we prevent the big rollers and ride the rest with minimal discretionary policy intervention (fiscal or monetary) and rely instead on automatic stabilisers. Perhaps the most interesting issue to emerge from the crisis and covered by a plethora of authors out there I am still wading through. The death of economics? I would say a shot in the arm - old issues reenergised for the modern global economy.

i) One final remark - the overwhelming influence of silo-mentality has tended to prevent holistic and optimal solutions to historical crises and this is brought out well in this book. All of the above areas are connected and must be viewed as a package of issues to address not as isolated challenges.

overall - 4/5.

G

You might find this a tough read. I had a semester of university economics, and I'm a bit of a news addict - I was only just hanging on. If you've no serious economics background you will find this impossibly tough in places.
Having said that, I found the analysis thorough, written in short, punchy chapters, and structured so as to walk you through all the various components of the crisis - regulation, accountancy and banking practices, market operation, bankers pay, even Lara Croft's alleged influence.
Of course the crisis has multiple and complex causes which interplay. Davies' describes his book as an 'opinionated guide to the arguments', he dismisses some things and gives weight to others on the strength of his own experience as an economist and regulator. Others will place the emphases in different places. This makes me think this book falls between two stools. It is a difficult and technical read cutting out the casual reader (I for one would have benefitted from a glossary), but it is opinionated, cutting out any seriously analytical reader.
I approached the book hoping to learn something of financial ethics, and I certainly gained insights in that regard. I also was able to get behind some of the political rhetoric which circulates about the crisis. Did I understand more about the reasons for the crisis? Certainly. Am I clear about who to blame? Not really.