Back during the go-go days of the mid-naughts when housing prices were appreciating at dizzying rates, Nouriel Roubini put out a prediction that the increase was unsustainable and would lead to a crash. For that he earned the nickname “Dr. Doom”, which was not meant as a compliment. As we have all painfully learned, his analysis was correct. Today, Roubini wears the mantle as a badge of honor, frequently appearing on CNBC to remind everyone that he told you so.
Nonetheless, Roubini and co-author Stephen Mihm have written a very readable analysis of the origins of the Great Recession. After starting with a quick flyover of Keynesian vs. Austrian debate, Roubini (and I do believe the thoughts in the book are mostly Roubini) describes the steps that led to the situation we faced in the middle of the past decade, placing particular blame on Alan Greenspan for his decision not to intervene in the apparent housing bubble (anyone who states that “no one could have seen it coming” is either a fool or a liar), the development of the shadow banking industry (and the government for failing to place it under the regulatory umbrella) and the over-the-counter trading of derivatives. In each of these situations, supposedly the market was rational and would always appropriately value assets and assess risk. One can only hope that idea has been permanently buried.
As for the Federal Reserve’s response to the crisis, Roubini basically agrees with the opinion that flooding the economy with liquidity was a terrible thing that had to be done for fear of more devastating alternatives. However, it has consequences that need to be addressed. Roubini spends two chapters on what those steps should be. The first of those chapters deals with the less controversial recommendations including aligning compensation on Wall Street with long-term goals, reforming the ratings agencies and requiring derivative contracts to be traded through a clearinghouse and banning credit default swaps.
The tougher recommendations come in the next chapter. Here he recommends breaking up the biggest banks, creating a new and improved Glass-Steagall and having the Fed intervene to prevent asset bubbles. He presents solid arguments for each of these ideas, but political realities make it unlikely that any of these will be implemented.
This is a book targeted at the layman. I was able to understand most of the concepts presented in the book. Of course, some (or many) of the complexities in the description of the Great Recession have been glossed over. But, all in all, this appears to be a level-headed view of where we were, where we are and where we should go. If you feel confused and frustrated by this recession, this book will help you understand why.
|Crisis Economics: A Crash Course in the Future of Finance|