DR AIDAN KANEreviews Crisis Economics: a Crash Course in the Future of FinanceBy Nouriel Roubini with Stephen Mihm Allen Lane 353 pp, price £25
WHEN NOURIEL Roubini speaks, financial markets and governments now take notice. He is one of a small band who foresaw, against a complacent consensus, the path from speculative excess and regulatory failure to economic crisis in the US and world economies.
With co-author Stephen Mihm, he sets out to cover an ambitious agenda, ranging from the origins of the crisis through to its particular manifestations in the US financial system, the responses of policy makers and their inadequacies, remedies both immediate and longer-term, and an assessment of prospects for the global economy.
Much of this will be familiar to those already attempting to follow the unfolding drama: it is nevertheless useful to bring together these global themes in an accessible way.
Roubini and Mihm expertly document the ad hoc escalation of policy responses as financial contagion spread to markets in the US and out to the world.
The need for unprecedented improvisations from central banks and finance ministries alike was not so much “unthinkable” as simply “not thought”, as policymakers and academics had mostly forgotten the impulses towards crises within capitalism and the prudence of preparing for them.
An intriguing – if underdeveloped – chapter explores the forgotten wisdom of a variety of thinkers on the underlying dynamics of capitalist economies, from Smith and Marx, through Keynes, Schumpeter and onwards to the much neglected Austrian school of thought.
In all this, the authors are perhaps unduly dismissive of dominant neo-classical perspectives. After all, the now reflexively derided neo-classical school constituted “the future once” for particular reasons, not just by accident. It emerged in part in response to demonstrable conceptual and real-world failures of a Keynesian orthodoxy, failures which are a little underplayed in this work and by many more besides.
Modern economists have allegedly neglected not just economic thought, but also the lessons of economic history in anticipating market pathologies.
In the realm of action, Roubini and Mihm prescribe both “first steps” and “radical remedies”, moving from reform of compensation systems for bankers and reining in the ratings agencies, to more fundamental restructuring of the US and global financial systems.
The analysis centres on the threat to stability delivered by the “shadow banking system”, the complex set of institutions and activities which grew enormously while participants and regulators remained ignorant of the eye- popping scale of risks it stealthily piled up.
Financial liberalisation meant that traditional banks were at the table with high-roller investment banks and hedge funds and, thanks to implicit government guarantees for banking systems, so were we all.
Roubini and Sihm support a return to a strict separation of financial institutions according to the risks inherent in their activities, the break-up of “too big to fail” institutions and much more fire-power for (and co-ordination among) regulators.
This would be to check the ability of institutions to simply shop around for the weakest regulatory regime, thereby undermine the strongest.
In this, and in later chapters reviewing prospects for policy and the global economy, the authors provide a comprehensive, if by now surprisingly conventional, view of where we are, and where we might end up.
The speed of developments means that the most considered account of today may be the one most obviously overtaken by events tomorrow. In that light, Roubini and Mihm have provided a useful and accessible, if inevitably incomplete, guide.
Dr Aidan Kane is a lecturer in economics at NUI Galway
