May 13, 2010


Crisis Economics: A Crash Course in the Future of Finance. By Nouriel Roubini and Stephen Mihm. Penguin. $27.95.

     This book’s subtitle is doubly unfortunate. First of all, the primary meaning of “crash course” – a quick study – is subsumed within an economic context by that word “crash,” which indicates a level of pessimism that the book’s two authors do not fully communicate in the text itself. Second of all, the subtitle refers to the future, but the book itself is mostly a dissection of the lessons that can be learned from the past (and to some extent from the present) rather than a look at what is likely, or even reasonably likely, to occur in the future.

     This is nevertheless a closely argued, well-thought-through book whose contents are better and more cogent than its subtitle would indicate. Nouriel Roubini, former White House advisor and professor of economics at the Stern School of Business at New York University, and Stephen Mihm, associate professor of history at the University of Georgia and a frequent contributor to The New York Times, The Boston Globe and other publications, analyze the most recent financial meltdown not just through the often-used but now-tired comparisons with the Great Depression but also by delving into the Panics of 1825, 1837, 1847, 1857, 1866, 1873, 1893 and 1907. Among other things. Roubini wears his “Dr. Doom” sobriquet proudly, having been awarded it (if that is the right way to put it) after he predicted the coming global recession back in 2006. But Roubini and Mihm manage not to discuss other famed market prognosticators who got it right until they got it wrong and fell into obscurity – such as, say, Joseph Granville, perpetual bear (even after 1982) and perhaps the most-admired technical analyst of the 1970s, whose pronouncements actually did move the market. It would be wonderful to know how much confidence Roubini personally had in his advance warning of the global recession -- what changes did he make to his personal investments, and how did they weather the market plunge? Did he, perhaps, go to all cash in 2006 and miss more than a year of extraordinary (if ultimately unsustainable) gains? No word on that in Crisis Economics – because this is a macro look at the periodicity of downturns, not a “do what I do” book of investment advice.

     So Roubini and Mihm discuss, for example, the way J.P. Morgan singlehandedly strong-armed the bankers of 1907 into ending that year’s panic, and the way Treasury Secretary Henry Paulson unsuccessfully tried something similar 101 years later. Why did Morgan succeed where Paulson failed? There are many reasons, from the systemic to those involving personality, but again, this is not what Crisis Economics is about. The authors instead focus on the results of Paulson’s failure: the collapse of Lehman Brothers, the ruination of the credit rating of AIG, the run on and eventual closing of the once-prominent Reserve Fund money-market fund, and so on. It is the interconnection of apparently disparate elements of the economy that interests Roubini and Mihm – a state of affairs that, they argue, makes it very important to understand that recessions and other apparent economic “hurricanes” are not in fact rarities but are integral to the functioning of the United States and world economies. This in turn makes it crucial to plan for crises, to understand what they have in common and how they spread.

     There is a bit of self-contradiction here. If crises are in fact predictable, and if Roubini’s and Mihm’s ideas for handling them were to be accepted – but if crises are also inherent elements of economic life – then the implementation of those recommended policies cannot possibly succeed, since crises will occur anyway, perhaps in some new form less closely related to those of the past. However, a book like Crisis Economics would be of interest only to historians if it did not include prescriptions as well as descriptive elements; so the authors, after arguing effectively for the periodicity of economic crises, proceed to offer ideas that they say will blunt those inevitable recurrences. The ideas are not particularly new, and Roubini and Mihm underplay and underestimate the political realities that make them difficult to implement. But they are certainly reasonable proposals from the point of view of economists: break up huge companies to eliminate the notion of institutions being too big to fail; create a new form of the Glass-Steagall legislation of 1933, strengthening it through transparency and tough requirements to keep different aspects of financial institutions truly separate; use the powers of central banks to prevent asset bubbles from getting out of control; and so on. The authors do acknowledge disagreement with some of their ideas: “In all fairness, the reluctance of central banks to prevent bubbles from forming reflects the fact that the idea remains controversial in academic and policy circles.” But they tend to be dismissive of counterarguments, sometimes through ad hominem comments: “[Ben] Bernanke and other apologists for the status quo have countered by arguing that central banks can’t possibly intervene against rising asset prices because of ‘uncertainty.’ This is nonsense: all monetary policy decisions are plagued by uncertainty.” At another point, they say of Goldman Sachs CEO Lloyd Blankfein’s argument that massive new regulation should not be based on an unusually deep recession, “That’s ridiculous.” Not a lot of room for reasoned discussion there.

     Roubini and Mihm would no doubt argue that the issues discussed in Crisis Economics are too important to mince words, and they would have a point. But wide-ranging and complex policy changes are unlikely to come about with a “my way or the highway” attitude – the recent healthcare debate being one case in point among many. What changes are eventually adopted will of necessity, if not by design, end up being messy, imperfect and far from anyone’s original ideal – again, look at what emerged from the healthcare morass. Furthermore, as Roubini and Mihm accurately note, decisions made in the United States must be implemented within a world grown increasingly skeptical of the U.S. dollar as a reserve currency and of the U.S. government’s ability and political will to manage its huge and growing debt. “The recent [economic] cataclysm …marks the end of the financial stability ushered in by the Pax Americana,” the authors write. Nevertheless, they say that there is a “road to redemption,” through a series of reforms ranging from the radical to the “even more radical.” But how likely is anything radical to emerge from the sausage-making machinery of Congress? What is the real-world chance that “regulations can be carefully crafted with an eye toward the future, closing loopholes before they open”? Unfortunately, Roubini and Mihm, for all their understanding of the historical inevitability of severe economic shocks, seem not to know about, or at least not to accept, the equally historically inevitable imperfection of the governing process and its laws and regulations. Just as “this time it’s different” is a dangerous phrase when applied to investing, so “this time it’s different” is self-delusional when applied to the U.S. political establishment and the elected and appointed people who run it and ultimately profit from having it continue to do business mostly as usual.

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