Books on the Global Financial Crisis: An Annotated Field Guide

Jan 12 '11

Here is our “second article”:https://themonkeycage.local/2011/01/collaboration_with_the_apsa_po.html from _The Political Economist_, this one by Professor “Mark Copelovitch”: of the University of Wisconsin.


Three years on from the start of the global economic crisis, hardly a day passes without the arrival of yet another highly touted book on what has come to be labeled the “Great Recession.” Indeed, bookshops’ shelves now buckle under the weight of a towering pile of bestsellers (and not-so-bestsellers) on the causes, consequences, and lessons of the crisis. Broadly, these books fall into three genres. First, there are the “current histories” – fast-moving, journalistic accounts detailing the exploits (or treachery) of Wall Street banks, government officials, and other relevant actors prior to and during the crisis. The best of these accounts include: Fool’s Gold by Gillian Tett; The Big Short, by Michael Lewis; In Fed We Trust, by David Wessel; and Too Big to Fail, by Andrew Ross Sorkin. Second, there are the “crisis handbooks” – general interest volumes by prominent economists, all of whom claim to know precisely what caused the crisis and precisely what the solutions are to prevent a reoccurrence. The most prominent of these are: Thirteen Bankers, by Simon Johnson and James Kwak; Crisis Economics, by Nouriel Roubini and Stephen Mihm; and the updated version of Return of Depression Economics, by Paul Krugman. Political economy scholars are likely to be familiar with the main arguments of these volumes, since they are mostly pithier versions of previously published academic work or media articles by the authors. Finally, we have the “efficient markets” critiques (e.g., The Myth of the Rational Market, by Justin Fox; How Markets Fail, by John Cassidy) – books that blame investors’ and policymakers’ blind faith over the last decade in free market ideology and the efficient markets hypothesis as the primary cause of the crisis. An important subset of this last genre is the “Keynes was right after all” volume, epitomized by Robert Skidelsky’s book, Keynes: The Return of the Master (but see also Richard Posner’s fascinating article in the New Republic, “How I Became a Keynesian,” September 23, 2009).

To be sure, there is much to learn from each of these genres, and the titles cited above are certainly worth the reader’s time and effort. From the standpoint of research on the political economy of financial crises, however, these books are substantially less rewarding. In their attempts to sell copies and highlight colorful characters, the “current histories” spin neat and tight stories about the causes of our financial turmoil, most of which focus on the actions of a handful of villains (usually Wall Street bankers) or a few broad factors (deregulation, securitization, etc.) related to the complexities of modern financial markets. Consequently, books in this genre heavily discount or overlook entirely many of the longer-term trends and structural economic and political factors that have contributed to the onset and severity of the Great Recession. Similarly, while the “crisis handbooks” do emphasize many of these deeper political economy factors, their authors generally spend far too much time advancing grandiose proposals to reform both domestic policies and global financial governance – proposals that political scientists will readily identify as infeasible due to a wide variety of political factors that the authors (like most economists) fail to adequately take into account. In this regard, the current crisis is no different than previous ones (most notably the Asian financial crisis), in which global financial turmoil is followed by grand yet soon-to-be-discarded plans to reform the “international financial architecture.” Finally, while the “efficient market” critiques are not without merit, they, too, tend to reduce the cause of the crisis to a single “magic bullet” – in this case, ideas and ideology – when in reality the truth is much more nuanced and complex.

That said, those in search of richer alternatives need dig only a bit further into the pile to be rewarded. What follows is a brief annotated bibliography of books – both new volumes and older ones worthy of review – that rigorously tackle the complexities of the global financial crisis and, in my opinion, provide a solid foundation for further thinking and research on the topic. While this list is certainly not exhaustive, I believe it is a useful starting point for scholars of political economy interested in developing a richer understanding of the causes, consequences, and policy implications of the Great Recession.

Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crises (Wiley, Fifth Edition, 2005; first edition, 1978).

This is the canonical volume on financial crises from one of the foremost economic historians of the twentieth century. Building on his renowned history of the Great Depression (The World in Depression, 1929-1939), Kindleberger leads the reader through discussions of the “big ten” financial bubbles in global economic history, from the Dutch tulip bubble in the 1600s, through the US stock market bubble of 1995-2000. The book is rich in entertaining anecdotes, even as it clearly delineates the common features of all financial crises and rigorously analyzes possible policy responses at both the domestic and international levels. Although much from this volume has subsequently been reiterated elsewhere in more recent books and articles, the original remains very much worth reading. Indeed, this is the logical starting point for any serious scholar interested in understanding the current global financial turmoil.

Carmen M. Reinhart and Kenneth S. Rogoff, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009)

Perhaps the most widely lauded book to emerge from the current crisis, this volume is, in many ways, the quantitative companion to Kindleberger’s elegant narrative history of financial crises. In fact, I would argue that Reinhart and Rogoff’s true contribution is not this book (which, to be frank, is rather tedious to read) but rather the massive, rich database that they have constructed and made available to researchers. With impressive care and exhaustive detail, Reinhart and Rogoff have collected and measured the economic characteristics of countries and crises back to twelfth-century China and medieval Europe. Thus, This Time is Different documents the “remarkable similarities” of financial crises over time and across cases – most notably, the presence of “excessive debt accumulation” by governments, banks, corporations, or consumers. In separate chapters, the authors also analyze multiple types of crises (including sovereign defaults, banking crises, and exchange rate crises) in an effort to make clear precisely how and why “this time” is rarely (if ever) truly “different.” As David Singer notes in his piece in this newsletter, this treasure trove of data is merely a starting point for political scientists: documenting similarities across crises (even in the rigorously detailed way that Reinhart and Rogoff have done) explains neither variation in the timing, frequency, and severity of crises nor the reasons why policymakers across countries and over time repeatedly adopt the types of policies that lead to crises. Nevertheless, This Time is Different is a magisterial contribution to the field that is required reading for political economists interested in the determinants, consequences, and responses to financial crises.

Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy (Princeton University Press, 2009)

Though firmly in the “crisis handbook” genre, Rajan’s volume stands out for two reasons. First, Rajan is one of the few economists who can credibly claim to have predicted the crisis, as evidenced by his well-known contrarian paper presented at the Jackson Hole conference in 2005. Consequently, Rajan’s volume is a more credible handbook than many others’ and therefore more worthy of detailed attention. Second, and more importantly, Rajan moves quickly past the “most proximate suspects” (the heroes and villains of the “current history” and “crisis handbook” genres) to emphasize deeper, underlying macroeconomic trends – the “fault lines” of the book’s title – that led to the crisis. These include: 1) rising income inequality and wage stagnation in the US, which fueled policymakers’ incentive to provide cheap credit (in the form of subsidized mortgages and lax monetary policy) to maintain middle class living standards; 2) macroeconomic imbalances between surplus and deficit countries in the world economy (on this, see more below from Martin Wolf); and 3) tensions between the different financial system models across countries (in particular, between the US/UK on the one hand and China/Japan on the other). Thus, Rajan eschews the neat, “magic bullet” explanations advanced by many other writers, concluding instead that there is plenty of blame to go around, with bankers, regulators, governments, households, and economists all sharing some responsibility for bringing about the current crisis. While this is less satisfying in one sense (to blame all is to blame none), it is much more in line with a political economy perspective of the world, in which variables interact, causal effects are conditional, and outcomes in the international economy are frequently the result of a complex web of interests, policies, and trends over many years.

Martin Wolf, Fixing Global Finance (Johns Hopkins University Press, 2008)

Wolf, the Financial Times’ chief economics commentator, is widely acknowledged to be the preeminent newspaper columnist writing on global finance today. Wolf’s knowledge, insight, and expertise are so valuable that one could arguably remain well briefed on developments in the global economy simply by reading his FT column on a regular basis. In fact, I would highly recommend an afternoon reading Wolf’s columns from 2007 through 2010, in sequence, as an excellent way to get up to speed on the developments and policy debates surrounding the crisis, from the collapse of Bear Stearns and Lehman Brothers through the negotiation of Basel III and the recent IMF voting and lending reforms. In addition, Wolf’s book, published in 2008, is also well worth the time. In contrast to the “genre” books mentioned earlier, Wolf focuses on how the macroeconomic policies of key countries (particularly the U.S. and China) have resulted in the “global imbalances” that lie at the heart of current tensions about exchange rates and “currency wars” in the global economy. In Wolf’s view, these macroeconomic imbalances are both a precondition for financial crises and an ongoing impediment to exiting the Great Recession. From a political economy perspective, this argument is important, as it shifts our focus away from the microeconomics of finance (e.g., mortgage-backed securities, credit default swaps) toward deeper problems (exchange rate regimes, persistent payments imbalances) that must be addressed in order to rebuild the global economy. Not surprisingly, this leads Wolf to focus more than others on politics; indeed, in both his columns and in his book, Wolf exercises a well-trained eye for identifying how domestic politics and international relations shape economic policy and have constrained governments’ ability and willingness to cooperate at the global level in addressing the causes and consequences of the crisis. Finally, Fixing Global Finance also contains an extremely useful introductory chapter on the “Blessings and Perils of Global Finance,” which highlights the critical tradeoffs facing countries in a world of financial globalization. This reminder of the purposes of financial markets, the costs and benefits of international capital flows, and the various government policy options available to address the core problems of financial markets (incomplete/asymmetric information, moral hazard) are an extremely useful starting point for shaping discussions about the politics and policies of international finance.

Jeffry A. Frieden, Global Capitalism: Its Rise and Fall in the Twentieth Century (W.W. Norton, 2006).

Global Capitalism was published before the current crisis engulfed the world economy, and it is not, strictly, a book about financial crises. Nevertheless, it is required reading for those interested in understanding the political economy of financial crises, for two reasons. First, it is the best single-volume history of the modern world economy over the last 150 years. Given the rampant and often selective use of various past crises (the Great Depression, Japan in the 1990s, etc.) as analogies for explaining the current situation, it is clear that most observers lack the solid foundation of historical knowledge about the world economy that Global Capitalism provides. Second, Global Capitalism provides a rich, comprehensive discussion of how domestic and international political factors have systematically and repeatedly shaped national economic policy choices and global economic governance over the last two centuries. Frieden’s conclusion – that the evolution of economic globalization ultimately depends upon domestic and international political factors as much (if not more) than economic variables – reminds us that scholars of international political economy are perhaps best positioned to analyze the complex questions and issues arising from the Great Recession. Frieden’s actual book on the current crisis, The Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (co-authored with my colleague at Wisconsin, Menzie Chinn), will be published this coming September. Based on the brief preview already circulating, it looks to be another worthy addition to this reading list. In the meantime, a thorough reading (or re-reading) of Global Capitalism is certainly in order.