Economix Blog: Financial Crisis Reading List

Phillip Swagel is a professor at the School of Public Policy at the University of Maryland, and was assistant secretary for economic policy at the Treasury Department from 2006 to 2009.

Andrew Ross Sorkin’s recent business-focused summer reading list leaves out books about the financial crisis to avoid naming his own best-selling “Too Big to Fail.”  This modesty is admirable, but knowledge of the crisis and policy response is essential for understanding today’s economy. The Fed’s current quantitative easing, for example, stems from the crisis, and the debates over financial regulation and housing finance reform reflect the events of the crisis and its aftermath.

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There are many worthwhile books on the crisis, with Mr. Sorkin’s volume among the essential reads.  The list below is informed by my experience at the Treasury Department, where I was assistant secretary for economic policy under Secretary Henry M. Paulson from December 2006 through the end of the Bush administration.  I worked on a variety of crisis-related issues at Treasury, many of which I detailed in an April 2009 paper, but not on the transactions related to Bear Stearns, Lehman Brothers and A.I.G. that are the focus of much crisis writing. Even so, obviously I am an interested party, and this list should be considered with that in mind.  Matthew Yglesias provided a crisis reading list from a different perspective in May 2010 and might usefully consider an update.

I think of crisis books as falling broadly into three groups: journalistic blow-by-blow accounts (what Mr. Yglesias calls “tick-tocks”); analytic assessments that sacrifice colorful details for a broader perspective; and screeds with half-baked conspiracy theories and infeasible “magic wand” policy alternatives.  On the latter set, my suggestion is to disregard books that claim that Lehman could have been saved, that losses could have been imposed on A.I.G.’s creditors or that the actions taken during the crisis were a conspiracy or undertaken to save one particular firm. Wrong, wrong, and wrong.  The comments section at the bottom of this Web page provides an outlet for frustration at that assertion.

What Happened in the Crisis

Mr. Sorkin’s “Too Big to Fail” tells what everyone said and did during the crisis, with fascinating insider details of efforts to save Lehman and other failing firms. This book won’t tell you why the crisis happened but is essential for appreciating the frantic pace and harried circumstances under which the response was formulated. Also useful is a September 2009 article in the New Yorker by James B. Stewart that focuses on the “Eight Days” of Lehman’s death throes.

In his memoir “On the Brink,” former Treasury Secretary Henry M. Paulson concludes that the efforts he led succeeded in stabilizing the financial system, even while acknowledging various hiccups. I’m far from unbiased, but I think this conclusion is right.  Policy makers faced the prospect of a financial collapse when short-term money markets locked up after Lehman’s failure, and wrapping the government’s metaphorical arms around banks averted catastrophe. No amount of positive return on the TARP investments will quell criticism of the interventions, but Mr. Paulson in his book is forthright about the trade-offs involved.

The slim “Diary of a Very Bad Year: Confessions of an Anonymous Hedge Fund Manager” written with Keith Gessen captures the struggles of the anonymous co-author in dealing with the crisis while trying to understand and adapt to the evolving government response.  This mini-M.B.A. course of sorts gives an accessible introduction to financial markets and the securities into which mortgages were bundled.  This is the book I suggest to students looking for an introduction to Wall Street and the crisis.  “The Big Short,” Michael Lewis’s book about investors who saw the crisis coming, is enormously entertaining but narrower than “Diary.”

Causes of the Crisis

The second category of book helps readers understand the factors behind the crisis, the policy response and its aftermath. A first stop for readers is the dissenting report by three members of the Financial Crisis Inquiry Commission (Keith Hennessey, Douglas Holtz-Eakin, and William Thomas) that zeros in on the key causes of the crisis. With these 27 pages as background, the book-length treatments below provide full analysis.

“Fault Lines,” by the University of Chicago professor Raghuram Rajan, is an economic tour de force that shows how economic and social factors converged to bring about the crisis. As I noted in a 2010 review, Professor Rajan explains that Americans borrowed too much, enabled by financial innovation and seemingly generous foreign lenders, with contributions from weak regulation, faulty rating agencies, out-of-control executive compensation and widening income inequality.

Roger Lowenstein’s “The End of Wall Street” mixes explanation with journalistic anecdote. The story about the former Citigroup chief executive Vikram Pandit’s discarding of expensive wine makes the book worth reading all by itself, but Mr. Lowenstein gives readers both the fun tidbits and insightful analysis.

Assessing the Full Financial Crisis Policy Response

A problem with the selections listed above is that they stop too soon, covering the period through the introduction of TARP in late 2008 but not much beyond.  Neil Irwin’s fascinating “The Alchemists: Three Central Bankers and a World on Fire” goes through 2012 but is narrowly focused on monetary policy and misses out on much of the policy action at the Treasury and White House under Presidents Bush and Obama.  Alan Blinder’s “After the Music Stopped” is comprehensive in covering the financial crisis and ensuing recession, but the analysis has a mild yet noticeable partisan flavor.

Future memoirs from Timothy Geithner and Ben Bernanke might fill in some of the gaps and eventually take their place on the list of essential crisis books.

I suspect that authors covering the broader sweep will note the remarkable continuity of crisis efforts across the two presidential administrations. Policies to stabilize the financial system included the TARP capital injections into banks, debt guarantees from the F.D.I.C. and targeted interventions into particular markets and industries by the Fed and the Treasury Department. These latter efforts stabilized money market mutual funds (including actions by the Treasury and the Fed); commercial paper markets (Fed); securitized lending (Treasury and Fed); the auto industry (Treasury); and individual entities like A.I.G., Citigroup, Bank of America, Fannie Mae and Freddie Mac (Treasury and Fed).

In a Feb. 24, 2009, address to Congress, President Obama said that he was “infuriated by the mismanagement and the results” of the assistance for struggling banks. And yet the financial rescue programs listed above were begun before Jan. 20, 2009, and continued by the Obama administration.  On top of these efforts would be added the quantitative easing purchases of Treasury bonds and mortgage-backed securities first announced by the Fed in late November 2008 and now in a third round.  The early 2009 fiscal stimulus was an Obama innovation, but its effectiveness remains the subject of considerable debate.

President Obama has received considerable criticism lately for continuing a range of Bush-era security policies.  An irony, then, is that this observation applies as well to the financial policy crisis response. As detailed in the books above, these efforts did not head off the Great Recession, but on the whole they succeeded in stabilizing the financial system and avoiding an even worse catastrophe.

Article source: http://economix.blogs.nytimes.com/2013/07/15/financial-crisis-reading-list-2/?partner=rss&emc=rss