I alluded to this a few times yesterday, so I think I should offer my recommended readings on the Panic of 2007 and the ensuing recession. These are real recommendations, actual advice about what you should do, so things like length and readability count. Rogoff & Reinhardt have done a really praiseworthy empirical research program, but you should just look up their conclusion with Google you don’t actually need to read the book. There are also books like John Cassidy’s or Justin Fox’s that I hope do well and shift conventional wisdom but that I don’t think habitual readers of liberal blogs will necessarily learn a ton of brand new ideas from. By contrast, read these:
— Gillian Tett Fool’s Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe. This book has the strengths and weaknesses of excellent reporting, with the weakness being that it seems too soft on its main sources at JP Morgan. The strength is that you really get to see what investment banks were doing to create these assets. The key takeaway point that I wish were better understood is that a lot of the innovations were designed with the specific intention of exploiting regulatory loopholes.
— Gary Gorton, Slapped By the Invisible Hand: The Panic of 2007. This is almost the reverse of Tett’s book—an account of why a collapse in asset prices leads to a generalized financial panic that abstracts away from all the particulars. This is important because the goal of financial regulation should be not just to avoid an exact repeat of the financial crisis but to resolve the structural features of the system that make it vulnerable to panics.
— Raghuram Rajan, Fault Lines: How Hidden Fractures Still Threaten the World Economy. Here we start to shift away from the shadow banking run and the “financial crisis” to the larger macroeconomic picture. Money from Germany, Japan, China, and petrostates was exported as loans to the US and Club Med where it financed both construction and consumption of exports from Germany, Japan, China, and the petrostates. This is the cycle that the panic disrupted, leaving everyone unemployed. The global economy needs to find a way to achieve decent labor market outcomes in the developed world without this dependency on unsustainable debts.
— Stephen Cohn and Brad DeLong The End of Influence: What Happens When Other Countries Have the Money. This is a book about the really big picture—the fall of the US-centric neoliberal economic order, written by two people who sympathize with the project and appear to regret its passing. The upshot here is that even though reform proposals sometimes seem like efforts to (for better or for worse) just go back to how things were, this not only won’t work it actually can’t be done.
— George Akerlof and Robert Shiller Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. I think Shiller takes this idea too far in some of his columns, but the basic idea here is to try to really take seriously the “mania”/”panic” metaphors and see that non-rational considerations (I think “irrational” is a loaded word) drive boom/bust cycles. One important thing here is that it’s easy to look back at a crisis and point to the people who called it right and say “wow, those were smart guys, we should have listened to them” but by definition bubbles occur at times when the majority and the powers that be aren’t prepared to listen to doubters.
There have also been a lot of tick-tock narrative books about the crisis, several of which are interesting but none of which I think are particularly vital to understanding things. Michael Lewis is one of the best writers around, so his version of the crisis narrative is the most enjoyable to read.