Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Crisis related books

My favourite crisis related book, Raghuram Rajan’s Fault Lines won the Financial Times and Goldman Sachs Business Book of the Year award last week. That gives me an excuse to write about the various crisis related books that I have read. There are clearly many important books on the crisis I have not read, and so I cannot comment on them. My list is not therefore intended to be comprehensive.

First of all are the books that provide a theoretical analysis of the crisis in its entirety and not just a few aspects of it.

  • Of the books that I have read in this genre, the one that I liked the most was Raghuram Rajan’s Fault Lines. It provides a comprehensive analysis of the crisis covering both the domestic factors in the US and the global factors.
  • A close second was Nouriel Roubini’s Crisis Economics. Roubini’s writings during the depths of the crisis were perhaps the most insightful discussions that one could get in real time. (I remember that Roubini was also the most insightful commentator on the Argentine crisis of 2001 in real time and next only to Krugman in real time analysis of the Asian Crisis in 1997-98). Perhaps it was because I read Roubini’s book with such high expectations that I found his book a little rushed. That pushed the book to second place in my ranking. Yet, I think that Roubini is also a book that anybody who wants an analytical understanding of the whole crisis must read.

Then there are books that provide important but partial theoretical perspectives on the crisis.

  • Simon Johnson’s 13 Bankers is a wonderful book. We know a lot about emerging market crises because there have been so many of them; and Simon Johnson applies that knowledge to the crisis in the United States. The idea that the US has behaved like an third world country during the crisis is an important idea to which I am very sympathetic. I talked about Mahathirism in the US and UK in a blog post in April 2008. Yet I somehow found his May 2009 article The Quiet Coup in the Atlantic more powerful and satisfying than the book itself.
  • Animal Spirits by George Akerlof and Robert Shiller, is a book length analysis of what Keynes discussed in a single paragraph in the General Theory. It appears to me that “Animal Spirits” needs more than a paragraph, but less than a book.
  • Martin Wolf, Fixing Global Finance is a book that I liked very much, despite its heavy focus on global imbalances.
  • Robert Shiller’s The Subprime Solution is a masterly analysis of the housing bubble by an economist who did warn about the bubble long before it burst. Similarly, Andrew Smithers’s Wall Street Revalued comes from an economist who made his name by warning about the dot com bubble.
  • Are the Golden Years of Central Banking Over? by Stefan Gerlach and others deals at length with the monetary policy and financial regulation implications of the crisis. Richard Koo’s The Holy Grail of Macroeconomics about balance sheet recessions and the lessons from Japan is also an interesting book.
  • Among the books in this genre that I read but did not enjoy to the same extent were ECONned by Yves Smith, How markets fail by John Cassidy, The origin of financial crises by George Cooper and POP: why bubbles are great for the economy by Daniel Gross.

The third category is books that provide a detailed factual narrative of the entire crisis.

  • By far the best book here is the magnum opus by Andrew Sorkin – Too Big to Fail. He has been able to put together eye witness accounts from so many sources that the book makes it appear that Sorkin was a fly on the wall watching and listening as the momentous events unfolded.
  • Another must read book is Henry Paulson’s On the Brink. Despite being written so soon after Paulson stepped down as Treasury Secretary, the book is surprisingly frank and detailed. He does seek to justify what he did, but manages to do so without becoming jarring. I am tempted to say that Paulson has done a far better job as an author than he did as Treasury Secretary.
  • I am waiting eagerly for Bernanke’s long promised book Before Asia Opens. If Bernanke serves as Fed Chairman for as long as Greenspan did, we might have forgotten about the crisis by the time we get that book.

Another important category of crisis books look at specific actors or groups of actors that made or lost a fortune in the crisis.

  • The Big Short by Michael Lewis and the Confidence Game by Christene Richard are among the most enjoyable crisis related books that I have read. (I have yet to read Gregory Zuckerman’s Greatest Trade Ever).
  • William Cohan chronicles the demise of Bear Stearns in House of Cards, while Roger Lowenstein has a broader sweep covering Bear, Lehman, AIG and the rest of the infamous cast in his End of Wall Street. I believe however that no book on Lehman is likely to match the dull prose of the 2,200 page report produced by the court examiner Anton Valukas.
  • Several great books about hedge funds, quants and nerds helped me understand the crisis much better though they are only partly (or in some cases, only peripherally) about the crisis. Sebastian Mullaby’s More Money than God, Scott Patterson’s The Quants, David Leinweber’s Nerds on Wall Street, and Richard Bookstaber’s Demon of Our Own Design are all books from which I learned a lot. They are also well written and immensely enjoyable. Lecturing Birds on Flying by Pablo Triana gives an extreme anti-quant view, but I found the book unconvincing. Gillian Tett’s fabulous book on the origin and growth of credit default swaps – Fool’s Gold – is another must read. Selling America Short by Richard Sauer is also a very good book; all regulators should definitely read this.

I now turn to official reports related to the crisis.

  • On the crisis as a whole, the IMF’s Global Financial Stability Report, the BIS Quarterly Review and Annual Report were indispensable in making sense of the crisis as it unfolded. But if I ask myself which of these would one like to re-read years later, it would be the BIS Annual Report for 2007-08, particularly its first chapter, “The unsustainable has run its course”. The Financial Crisis Inquiry Commission in the US is due to submit its report at the end of the year, but expectations are rather muted about this.
  • On individual firms, I have already mentioned the Valukas report on Lehman. The Shareholder Report on UBS’s writedowns, and the subsequent Transparency Report are good sources of information on UBS. The report of the Special Investigation Commission in Iceland provides detailed information about the failure of the big Icelandic banks. Some information is available about AIG in the reports of the Congressional Oversight Panel, but we still know too little about that company.

I have not mentioned the books on financial history without which one cannot make sense of the crisis at all. This however is a subject for a separate blog post that I hope to compose in the next few days. So in this post, I will confine myself to only one book in this genre – This Time is Different – by Carmen Reinhart and Kenneth Rogoff. This is a book that simply cannot be dropped from any reading list on the crisis

Postscript: I have cheated a little. Many of the books that I have mentioned have a long subtitle in addition to the main title that I have mentioned here. I was too lazy to type these subtitles; moreover, the title is usually much more pithy without the subtitle. I have also consciously avoided giving links to Amazon or any other book site for any of these books in the belief that any half decent search engine will make up for this omission.


One response to “Crisis related books

  1. Avinash November 27, 2010 at 9:43 pm

    One problem which I feel with Fault Lines is too much of the blame is attributed to the government. Rajan alleges that the government induced the bankers to provide more loans to the sub-prime sector which is difficult to believe, Obama time again and again asked to the private sector to increase lending which the private sector has refused to do so.
    Also bashing freddie fannie for the crisis seems a bit cruel and also the arguments to increase the intrest rates in face of high unemployments also seems a bit strange to me.

    Prof Krugmam also provides some rebuttal on the same issues

    The good points brought forward in the book are that the university education in US is slipping and governments look to short term solutions to long terms problems.

    A new book has also come up “All the Devils are Here” by Bethany McLean and Joe Nocera. Maybe a review of it in future posts.

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