Nouriel Roubini & Stephen Mihm's "Crisis Economics"

This book has the same "feel" as an interview with Nouriel Roubini. Yes the book is well informed. Yes it is opinionated. But it is a bit scattershot and breathless in its approach. It is a sound overview. It is a bit more pessimistic than I think facts justify. But it is a great vehicle to understand the Great Recession. It covers the historical background of financial crises, the roots of this crisis, the bare bones of what went wrong, and material trying to point the way forward. The one disconcerting bit is that Roubini sees this Great Recession to be longer and deeper than most other observers. He talks of zombie banks and the similarities to the hestitant and inadequate response of the Japanese to their 1989 collapse.

There is much that I like about the book. It is unvarnished. It tells the story as Roubini sees it. Example:

... finance's "contribution" -- if that's the word -- to the U.S. gross domestic product has soared from 2.5 percent in 1947 to 4.4 percent in 1977 to 7.7 percent in 2005. By that time financial firms accounted for upwards of 40 percent of the earnings of the companies listed in the S&P 500, and these firm's share of the total S&P 500 market capitalization doubled to approximately 25 percent. Even more startling, the combined income of the nation's top twenty-five hedge fund managers exceeded the compensation of the combined income of the CEOs of all companies listed in the S&P 500. In 2008 no less than one in every thirteen dollars in compensation in the United States went to people working in finance. By contrast, after World War II a mere one in forty dollars in compensation went to finance workers.

This outsize and excessive growth of the financial system did little to create any "added value" for investors. ...

The cancerous growth of finance has arguably had significant social costs too, as innovation and creativity have fled from manufacturing and other old-fashioned industries in favour of Wall Street. Indeed, since the 1970s, ... finance has attracted an ever-growing number of intelligent, highly educated workers. As compensation soared, graduates of elite schools increasingly went to Wall Street. In fact, among Harvard seniors surveyed in 2007, a whopping 58 percent of the men joining the workforce were bound for jobs in finance or consulting. In a curious paradox, the United Statesnow has too many financial engineeers and not enough mechanical or computer engineers.

Not coincidentally, the last time the United States saw comparable growth in the financial sector was in the years leading up to ... 1929. In the 1930s, compensation in the financial sector plummeted, a victim of regulatory crackdowns that made banking a boring, if more respectable, profession. Reforming today's warped compensation structure is a necessary first step toward making banking boring once more.

In the 'conclusion' section of the book the authors lower their guns and blast away:

For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets, and the limitless benefits of financial innovation. This crisis dealt a body blow to that belief system, but nothing has yet replaced it.

That's all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisi in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

That's preposterous. As we've made clear throughout this book, the crisis was less a function of subprime mortgages than of a subprime financial system. Thatnks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become over the years, a gangrenous mess.

The road to recovery will be a long one.

This is one of the better books on the financial crisis. Read it.