THE financial crisis has had many victims but for book publishers it hasn’t been so bad. For a start, the banking collapse, followed by drastic measures to stop it leading to a global depression, have made many standard economics textbooks look dated. So, students and libraries around the world will soon need to stock up on the revised editions that the textbooks’ authors are busy working on.
More important, there has also been a boom (a bubble, perhaps?) in books explaining, dissecting and apportioning the blame for the crisis. Our finance editor discusses them with our books and arts editor in this audio chat, and our Wall Street editor lists his favourites here.
Many of these books have also been reviewed in our pages. Our look at an early batch of credit-crunch books, in June last year, recommended Philip Augar’s “Chasing Alpha” and Gillian Tett’s “Fool’s Gold”, among others, the former a broad, highly readable account of how the crisis developed, the latter focused on the murky world of credit derivatives.
Michael Lewis’s “The Big Short” and Harry Markopolos’s “No One Would Listen” are about the prophets of doom who foresaw the crisis but who were mostly not listened to. In Mr Lewis’s book, some of those prophets profited very nicely from putting their money where their mouths were. Mr Markopolis was an analyst who smelled something fishy about the remarkable investment returns of a money manager called Bernie Madoff, who it turns out was running the world’s biggest Ponzi scheme. In “The Road to Financial Reformation”, another Cassandra of the credit crunch, Henry Kaufman—whose constant warnings about debt bubbles earned him the nickname “Dr Doom”—spends 260 pages relishing reminding us how he told us so.
As the world’s financial system teetered in 2008, no one was closer to the centre of the action than America’s then treasury secretary, Hank Paulson, whose book “On the Brink” contains some jaw-dropping revelations and an admirably frank assessment by Mr Paulson of what he did well, and not so well, in the crisis.
Another prominent figure in the crisis and its aftermath is the former treasury secretary’s namesake, a hedge-fund manager called John Paulson, who is the subject of Gregory Zuckerman’s “The Greatest Trade Ever”. This Mr Paulson came from nowhere to make a fortune by betting that the housing bubble would pop. (Unfortunately his lucrative bets made him part of the dramatis personae of the Securities and Exchange Commission’s fraud case against Goldman Sachs.) Our review of Mr Zuckerman’s book also looked at Scott Patterson’s “The Quants”, which described the mathematical whizzes who sought their fortune by means of applying complex modelling to exploit anomalies in the markets. They conquered Wall Street, says Mr Patterson, but nearly destroyed it.
David Wessel’s “In Fed We Trust” focuses on the Federal Reserve and its boss, Ben Bernanke, giving a vivid description of how they fared as the crisis unfolded, starting with the collapse of Lehman Brothers. The rise and fall of Lehman was itself such a sizzling tale that it has merited several books all to itself. “A Colossal Failure of Common Sense”, by Lawrence McDonald and Patrick Robinson, describes the hubris of the bank’s boss, Dick Fuld, who so riled Mr Paulson that the then treasury secretary became determined to let Lehman go bust. In the same review we looked at Carmen Reinhart and Kenneth Rogoff’s comprehensive look at eight centuries of financial folly, “This Time is Different”, which is ideal for anyone looking for a more academically grounded analysis of crises past and present.
“The Devil’s Casino”, by Vicky Ward, contains some fascinating pen-portraits of Lehman’s characters—Mr Fuld and his sycophantic court; Joe Gregory, the bank’s obsessively politically correct president; and the “desperate housewives” who found that they and their husbands were married to the bank. But perhaps the best of all the fly-on-the-wall books giving the inside story of Lehman’s collapse and the broader ensuing crisis is Andrew Ross Sorkin’s “Too Big to Fail”, which is meticulously researched and littered with colourful anecdotes.
A meltdown on this scale was bound to offer plenty of scope for axe-grinding and blame-spreading. Joseph Stiglitz’s “Freefall” and Simon Johnson and James Kwak’s “13 Bankers” both take a potshot at financial policymakers. Mr Stiglitz traces the origins of the crisis to a deregulatory fervour fuelled by the “ideology” of free-market fundamentalism and Wall Street’s influence on politics; he argues for tough action, including the break-up of the biggest banks. Messrs Johnson and Kwak also worry about the excessive influence of an “oligarchy” of American bankers, and reach the same conclusion: banks that are “too big to fail” are too big.
The volcanic ash from American banking’s eruption spread far and wide. Three books on how Ireland’s “Celtic tiger” economy was brought low by the credit crunch dish out plenty of blame to politicians, bankers and property speculators. They all agree that greed and ineptitude on the part of the country’s wealthy and the powerful are to blame for Ireland’s economic crash-landing being more violent than its peers’.
While other authors point accusing fingers, in his book, “Don’t Blame the Shorts”, Robert Sloan leaps to the defence of short-sellers who, as he describes, have long been scapegoated for market crashes, and are being once again in the wake of the recent crisis. The Dutch East India Company was blaming its troubles on them as far back as 1609.
A spectacular market collapse was bound to provoke a re-examination of assumptions about the trust that modern societies place in markets. John Cassidy’s “How Markets Fail” recounts the story of America’s housing boom and bust, arguing that its roots lie in the “Utopian” idea that society is best served when individuals are left to pursue their self-interest by means of free markets.
In a similar vein, “The Myth of the Rational Market”, by Justin Fox, argues that the whole crisis was the result of an idea that failed: that markets are rational and efficient. Mr Fox provides a fascinating and entertaining history of how this powerful idea, the efficient-markets hypothesis, inspired a wave of innovative financial products, such as derivatives and securitised subprime mortgages, that believers claimed would let their users exploit the wonders of the market. Then it turned out that the market was not rational after all and trillions of dollars were wiped out. Mr Fox talks about his book in this video interview.
Reinhart and Rogoff’s book was one among several notable attempts to set the recent crisis into historical context. Another is Harold James’s “The Creation and Destruction of Value”, which illustrates how financial crises provoke a reconsideration of values, not just the value of investments but in a more fundamental sense. At the moment everything from the ethics of debt and the nature of capitalism to the continued dominance of the dollar is up for debate. Past crises, Mr James argues, show that this sort of ferment can lead to changes in political power.
Liaquat Ahamed’s “Lords of Finance” describes how the central bankers of the Great Depression were obsessed with a single idea, rather like their successors today. Then, it was maintaining the gold standard; now, he says, it is controlling inflation at all costs. History doesn’t repeat itself but it does rhyme, and once again the central bankers’ big idea has been so compelling that they have ignored its unintended consequences, in this case the bubbles in the housing and stockmarkets.
After the massive stimulus packages we are all Keynesians now, so it is only natural to expect a clutch of books celebrating John Maynard Keynes and declaring “victory” for his ideas. One of them, Robert Skidelsky’s “Keynes: The Return of the Master”, uses an exposition of Keynes’s insights to argue that much modern economics is bunk.
Some day a great novel will be written about the credit crunch, along the lines of Anthony Trollope’s 19th-century classic, “The Way We Live Now”. In the meantime, those who want to make sense of it all will have to make do with the factual analysis of John Lanchester, a British writer of fiction. His ability to explain complex stuff in a down-to-earth and witty style makes his short book, “IOU: Why Everyone Owes Everyone and No One Can Pay”, ideal reading for financial novices.
So many post-crisis books have now hit the stands that even the most voracious bookworm will have difficulty digesting them all. Which of them is the definitive account? Perhaps none: remember that J.K. Galbraith’s masterly work, “The Great Crash, 1929”, did not come out until a quarter-century after the event. Maybe we will have to wait just as long this time.