Books about the Financial Crisis of 2007-2008 continue to
dribble out. (This is the sort of
shocking insight which keeps people coming back to this here blog.) I continue to assign such books to undergraduates. (This is the sort of useless information which
makes the aforementioned people think, “Why do I bother reading this blog?”) I then proceed to write up ruminations about these
books on this blog. Every now and then I
pause and think, “What about the poor Reader?”
Such concern for the Reader is, to be sure, atypical. However, I assigned four books about the financial
crisis last semester, I never got around to writing up a review of any of them,
so now I am faced with spending four consecutive posts on the same topic or
lumping all the reviews into one post.
Prudence dictates the latter. The
Reader can now express heartfelt thanks.
1. Lewis, Boomerang: Travels in the New Third World
If you are a normal person, and if you are curious about
Matters Economic, this is the top choice from this list. But, putting here is cheating a bit. It’s not really clear that it belongs on this
list. The New Third World in the
subtitle is the former first world.
There are chapters on Iceland, Greece, Ireland, Germany and the US. As with all of Michael Lewis’ books, it is
clever, amusing, and offers some genuine insight. It is, in short, a crowd pleaser—though it probably
won’t generate a mega-movie deal (cf. Moneyball, The Blind Side). The Iceland story was the most
fascinating. How did a tiny fishing
outpost turn into the most spectacular rise and crash in the financial
crisis? This is a whole country which
went all in on activities which makes the US housing bubble look like Child’s Play. Then the whole country went bankrupt. It’s really incredible when you think about
it. The heart of the book is a nice tour
of why the European situation is hopeless.
And then, the coup de grace—if you think the US has weathered the
worst crisis of your lifetime, think again.
The big problem is still looming, and nobody is paying attention. City after city, state after state, and ultimately
the federal government itself, are heading for a massive fiscal problem for which
there is no easy solution. Cities,
states and the federal government all have huge (as in worthy of Gargantua and
Pantagruel) pension obligations and there is literally no money to make those payments. If these government were private operations,
they would be bankrupt. We are starting
to see the beginnings of this problem.
Lewis talks to the former governor of California, moves onto San Jose
(my old home town) and then to Vallejo (Vallejo!) documenting the process of
bankruptcy. Vallejo is the future. It’s not pretty.
But, cheer up. At least
the government is on the job
2. Morgenson and Rosner, Reckless Endangerment: How
Outsized Ambition, Greed, and Corruption led to Economic Armageddon
Never mind about that cheering up bit. This is a book all about Fannie Mae and
Freddie Mac. The book suffers from typical
journalistic sensationalism—the subtitle alone makes one cringe. That being said, I knew that Fannie Mae and
Freddie Mac were corrupt, but even still, I was surprised (well actually shocked)
to discover just how corrupt they actually were (are?). This is a really ugly story of a quasi-governmental
organization gone terribly wrong. And
all in the name of the public good. Fannie
Mae and Freddie Mac were set up to help poor people get mortgages so they could
buy homes. That sounds like a really
nice thing to do. Then the directors realized
they could make large amounts of money and pay themselves large salaries simply
by making large donations to the politicians who were ostensibly regulating them. Houses for the poor and everyone involved got
rich. Win-win. Well, except for the taxpayers who got to foot
the bill in the end.
But, cheer up. At least Economists have figured out how to
make sure it doesn’t happen again.
3. A book with 15 authors, The Squam Lake Report: Fixing
the Financial System
I’m not joking about the 15 authors—this book has that many
listed authors. And it isn’t a collection
of essays by 15 different people—it is one book with 15 authors. So, with 15 authors, a veritable Who’s Who of
the Monetary Economics world, it must be pretty impressive, right? Sigh.
Forget about that cheer up line in the previous paragraph. What a tedious book. It reads like…a committee report. Safe, dull, over-worked recommendations based
on safe, dull detail-light explanations.
That’s what happens, I suppose, when 15 people co-author a book. Who is the audience for this book? I have no idea. I assigned it in Money and Banking. The chief virtue according to my
students: it’s short. Hardly a ringing endorsement. If this is the state of the art in thinking
about how to find our way past the financial crisis, it’s time to despair.
But, cheer up. At least
there are technical economists working on detailed technical proposals which could
clear up everything.
4. Acharaya, Cooley, Richardson, Walter, eds. Regulating
Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance
It’s pretty funny when you see a book with four editors and
think, that’s not so bad compared to a book with 15 authors. This book is economics for economists. Technical economists. Eighteen chapters with detailed analyses of
the problems in the financial sector and detailed suggestions on what can be done.
For example, one of the chapters describes an important idea thus: “Contingent
capital (often referred to as reverse contingent convertible bonds or Coco bonds)
constitutes a form of uninsured debt that converts automatically into equity
when certain prespecified triggers are hit….Contingent capital is designed to
facilitate a transfer of losses when a firms’ equity is being depleted by
converting some debt into equity, thereby ensuring that the bank still
maintains a sufficient level of capitalization.” (Acharaya, Kulkarni and Richardson authored
those sentences—a mere three authors!)
That’s an example of the sort of clever ideas which are being floated
these days. And if you liked those two
sentences, then this book is for you. If
you skipped them, then walk on by, but while strolling past those guys in the
white lab coats:
Cheer up! With economists
working hard at solving the big problems in the big, bad world, there is every
reason to be happy.
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