Books That Matter: Crisis Economics, by Nouriel Roubini & Stephen Mihm
I just finished reading: Crisis Economics – A Crash Course in the Future of Finance, by Nouriel Roubini & Stephen Mihm. It was really good… great even.
In January of 2009, in the final days of the Bush Administration, Vice President Dick Cheney was asked why the administration had failed to see the biggest financial crisis since the Great Depression. He answered: “Nobody anywhere was smart enough to figure it out. I don’t think anybody saw it coming.”
Who could have possibly known?
Well, Nouriel Roubini, a Professor of Economics at New York University knew. In fact, he was very specific in his warnings about the crisis to come, as early as September of 2006, while he was speaking to an audience from the International Monetary Fund. Of course, back then, many in the audience found his warnings absurd.
He told his audience that the United States “would soon suffer a once-in-a-lifetime housing bust, a brutal oil shock, sharply declining consumer confidence, and inevitably a deep recession.” And he went on to explain, “as homeowners defaulted on their mortgages, the entire global financial system would shutter to a halt as trillions of dollars worth of mortgage backed securities started to unravel.”
Roubini was unquestionably the most prescient of all of the economists that were talking about what was to come, back in the fall of 2006. He described the crisis as one that would take down hedge funds, Wall Street’s investment banks, and the government sponsored behemoths, Fannie Mae and Freddie Mac. And he was, at best listened to with skepticism, and at worst almost laughed at, as a “doom and gloomer.”
By early 2008, when most economists were talking about the crisis as is “liquidity trap,” and a problem caused by “sub-prime borrowers,” Roubini was forecasting a credit crisis that would affect everyone from Main Street to Wall Street and back again. He even went so far as to predict that two major broker-dealers, as in Bear Stearns and Lehman Bros., would go bust, and that the other major firms would cease to function as independent entities. Bank of America, obviously, bought Merrill Lynch, and Morgan Stanley and Goldman Sachs were forced to submit to the increased regulatory environments when they both become bank holding companies. All told, Roubini wasn’t just right, he was dead on right.
He also predicted that the crisis that would begin here, would also consume the rest of the world, hammering the economies of Europe and Asia, and that it would ultimately cause the world to “teeter on the edge of a deflationary spiral,” the likes of which had not been seen since the Great Depression of the 1930s.
There were others, too, that predicted economic trouble ahead and tried to sound an alarm, but no other economist in the world saw what was coming with the same degree of clarity or specificity. Yale University’s Robert Schiller saw the stock market bubble in advance of the dot-com bubble’s demise, and more recently, he was one of the first to see impact of the housing bubble coming to an end. Others talked about how Wall Street’s compensation structures would encourage people to take on too much risk. Wall Street legend, James Grant, warned that the Federal Reserve had created an enormous credit bubble. And the list goes on and on.
Those economists were also ignored. The thinking was that the financial markets were self-regulating. No one thought that countries like ours, in this day and age, were subject to systemic meltdowns, and if anything along those lines did ever happen, we would rebound quickly… because we always had. Well, maybe not “always,” but at least “always” in the last 50 years.
Now, Roubini has finally written his book on what caused the economic calamity we are currently experiencing… I just finished it, and it is excellent, although I will admit that it is not for someone with no base knowledge of economics. You don’t need a PhD to enjoy it, or learn from it, by any means, but you probably do have to be someone who wants an in-depth discussion of the causes of, and responses to, the crisis. If that describes you… well, then I pretty darn sure you’ll LOVE this book.
Roubini’s thinking on all aspects of the crisis are nailed down and tight as a drum. He gives it to the reader straight, and makes each point understandable and indisputable. He makes clear that today’s crisis was not caused by sub-prime borrowers buying homes they could not afford. He explains that booms and busts are reoccurring events in a capitalistic society, but he then he goes on to paint a picture that we all need to see more clearly, and he does it in such a way that I found compelling to say the least.
You might remember that I also reviewed Joseph Stiglitz’s book, Freefall, which also documents the events that brought us to today, but I want to make clear that this is NOT a carbon copy of anything written to-date. Roubini explains things I didn’t previously understand, such as the details of Federal Reserve Chairman Ben Bernanke’s and Treasury Secretary Geithner’s response to the meltdown.
Oh, I knew some of what those two had done, but not enough in terms of the details, and I was thrilled when I read the chapters that provided clear insight, not only into what they did, and continue to do, but also why it isn’t, and won’t work to fix what is so clearly broken. In fact, having finished Crisis Economics, I now understand why some of what they did is causing more problems today, and will most definitely cause further problems tomorrow, both here and around the globe. And that’s just one of the unique aspects of this book that makes it a great read.
Look… here’s the deal… today’s crisis is going to be around for a long time, and you’re going to want to know more about what’s happening around you soon enough, if you don’t feel that way already. Without that knowledge, I’m afraid things are going to be awfully scary going forward. And we’re talking about a global pandemic, a very complex series of problems that we’ve allowed to develop over at least 30 years. So, it’s not the kind of thing you can expect to pick up in a book or two.
So far, I’ve read nine. And I’m only reviewing the ones I think are really great reads. I don’t like reading text books either, I like to be entertained while I’m learning. Well, I just finished Roubini’s Crisis Economics about an hour ago, and rushed to get my review done in order to share it with you…. Which is not something I’ve done before. So, take it for whatever it’s worth… it’s a good one… you should read it.
And if you do… I hope you’ll consider clicking the link below, because that way I make 6% of the sale as an Amazon Affiliate. I know… it’s not really much money, but I don’t sell advertising on my site, so every little bit does help. I mean… if you’re going to buy it anyway, why not buy it here?