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Crisis Economics
Cover of Crisis Economics
Crisis Economics
A Crash Course in the Future of Finance
Borrow Borrow Borrow
This myth shattering book reveals the methods Nouriel Roubini used to foretell the current crisis before other economists saw it coming and shows how those methods can help us make sense of the present and prepare for the future.
Renowned economist Nouriel Roubini electrified his profession and the larger financial community by predicting the current crisis well in advance of anyone else. Unlike most in his profession who treat economic disasters as freakish once-in-­a-lifetime events without clear cause, Roubini, after decades of careful research around the world, realized that they were both probable and predictable. Armed with an unconventional blend of historical analysis and global economics, Roubini has forced politicians, policy makers, investors, and market watchers to face a long-neglected truth: financial systems are inherently fragile and prone to collapse.
Drawing on the parallels from many countries and centuries, Nouriel Roubini and Stephen Mihm, a professor of economic history and a New York Times Magazine writer, show that financial cataclysms are as old and as ubiquitous as capitalism itself. The last two decades alone have witnessed comparable crises in countries as diverse as Mexico, Thailand, Brazil, Pakistan, and Argentina. All of these crises-not to mention the more sweeping cataclysms such as the Great Depression-have much in common with the current downturn. Bringing lessons of earlier episodes to bear on our present predicament, Roubini and Mihm show how we can recognize and grapple with the inherent instability of the global financial system, understand its pressure points, learn from previous episodes of "irrational exuberance," pinpoint the course of global contagion, and plan for our immediate future. Perhaps most important, the authors-considering theories, statistics, and mathematical models with the skepticism that recent history warrants—explain how the world's economy can get out of the mess we're in, and stay out.
In Roubini's shadow, economists and investors are increasingly realizing that they can no longer afford to consider crises the black swans of financial history. A vital and timeless book, Crisis Economics proves calamities to be not only predictable but also preventable and, with the right medicine, curable.
This myth shattering book reveals the methods Nouriel Roubini used to foretell the current crisis before other economists saw it coming and shows how those methods can help us make sense of the present and prepare for the future.
Renowned economist Nouriel Roubini electrified his profession and the larger financial community by predicting the current crisis well in advance of anyone else. Unlike most in his profession who treat economic disasters as freakish once-in-­a-lifetime events without clear cause, Roubini, after decades of careful research around the world, realized that they were both probable and predictable. Armed with an unconventional blend of historical analysis and global economics, Roubini has forced politicians, policy makers, investors, and market watchers to face a long-neglected truth: financial systems are inherently fragile and prone to collapse.
Drawing on the parallels from many countries and centuries, Nouriel Roubini and Stephen Mihm, a professor of economic history and a New York Times Magazine writer, show that financial cataclysms are as old and as ubiquitous as capitalism itself. The last two decades alone have witnessed comparable crises in countries as diverse as Mexico, Thailand, Brazil, Pakistan, and Argentina. All of these crises-not to mention the more sweeping cataclysms such as the Great Depression-have much in common with the current downturn. Bringing lessons of earlier episodes to bear on our present predicament, Roubini and Mihm show how we can recognize and grapple with the inherent instability of the global financial system, understand its pressure points, learn from previous episodes of "irrational exuberance," pinpoint the course of global contagion, and plan for our immediate future. Perhaps most important, the authors-considering theories, statistics, and mathematical models with the skepticism that recent history warrants—explain how the world's economy can get out of the mess we're in, and stay out.
In Roubini's shadow, economists and investors are increasingly realizing that they can no longer afford to consider crises the black swans of financial history. A vital and timeless book, Crisis Economics proves calamities to be not only predictable but also preventable and, with the right medicine, curable.
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  • From the book For the past half century, academic economists, Wall Street traders, and everyone in between have been led astray by fairy tales about the wonders of unregulated markets and the limitless benefits of financial innovation. The crisis dealt a body blow to that belief system, but nothing has replaced it.

    That's all too evident in the timid reform proposals currently being considered in the United States and other advanced economies. Even though they have suffered the worst financial crisis in generations, many countries have shown a remarkable reluctance to inaugurate the sort of wholesale reform necessary to bring the financial system to heel. Instead, people talk of tinkering with the financial system, as if what just happened was caused by a few bad mortgages.

    Throughout most of 2009, Goldman Sachs chief executive Lloyd Blankfein repeatedly tried to quash calls for sweeping regulation of the financial system. In speeches and in testimony before Congress, he begged his listeners to keep financial innovation alive and "resist a response that is solely designed to protect us against the 100-year storm".

    That's ridiculous. What we've experienced wasn't some crazy once-in-a-century event. Since its founding, the United States has suffered from brutal banking crises and other financial disasters on a regular basis. Throughout the 19th and early 20th centuries, crippling panics and depressions hit the nation again and again. The crisis was less a function of sub-prime mortgages than of a sub-prime financial system. Thanks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.

    The road to recovery will be a long one. For starters, traders and bankers must be compensated in a way that brings their interests in alignment with those of shareholders. That doesn't necessarily mean less compensation, even if that's desirable for other reasons; it merely means that employees of financial firms should be paid in ways that encourage them to look out for the long-term interests of the firms.

    Securitization must be overhauled as well. Simplistic solutions, such as asking banks to retain some of the risk, won't be enough; far more radical reforms will be necessary. Securitization must have far greater transparency and standardization, and the products of the securitization pipeline must be heavily regulated. Most important of all, the loans going into the securitization pipeline must be subject to far greater scrutiny. The mortgages and other loans must be of high quality, or if not, they must be very clearly identified as less than prime and therefore risky.

    Some people believe that securitization should be abolished. That's short-sighted: properly reformed, securitization can be a valuable tool that reduces, rather than exacerbates, systemic risk. But in order for it to work, it must operate in a far more transparent and standardized fashion than it does now.

    Absent this shift, accurately pricing these securities, much less reviving the market for securitization, is next to impossible. What we need are reforms that deliver the peace of mind that the Food and Drug Administration (FDA) did when it was created.

    Let's begin with standardization. At the present time, there is little standardization in the way asset-backed securities are put together. The "deal structures" (the fine print) can vary greatly from offering to offering. Monthly reports on deals ("monthly service performance reports") also vary greatly in level of detail provided. This...

Reviews-
  • Publisher's Weekly

    June 21, 2010
    Roubini (Bailouts or Bail-ins), a professor of economics at NYU, was greeted with skepticism when he warned a 2006 meeting of the IMF that a deep recession was imminent. Along with economics historian Mihm, (A Nation of Counterfeiters) Roubini provides an in-depth analysis of the role of crises in capitalist economies from a historical perspective. With thumbnail sketches of nineteenth and twentieth century economic thought from Smith, Keynes, and others, they provide a context for understanding financial markets and the ways in which bankers and politicians relate to them. The authors also offer a theoretical context for understanding the current economic crisis and for using it as "an object lesson... , prevent them, weather them, and clean up after them." Dismissing the "quaint beliefs" that markets are "self-regulating," they take issue with the simplistic populist assumption that the present crisis was caused by greed or something "as inconsequential as subprime mortgages." They blame Alan Greenspan's refusal to use the power of the Fed to dampen unbridled speculation, choosing instead to pump "vast quantities of easy money into the economy and it there for too long." This will be a useful guide for readers attempting to get a handle on the present crisis.

  • Kirkus

    April 15, 2010
    Two professors explain how we got into the current economic mess and offer a prescription for the way out.

    Roubini (Economics/New York Univ.; co-author, New International Financial Architecture, 2006, etc.) and Mihm (History/Univ. of Georgia; A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States, 2007, etc.) define crisis economics as"the study of how and why markets fail." The origins of the current upheaval, they contend, are deeply structural—far more severe than simply a housing bubble and the securitization of bad loans—and the storms will persist. They preface their proposed remedies with a whirlwind tour of past crises, a survey of economic thinkers who offer insights into why markets collapse, an analysis of how today's unstable moment compares with past market traumas and a look at the special dangers posed by our integrated global economy. Critiquing the unprecedented emergency measures taken recently to right the economic ship, they warn of the unintended consequences likely to flow from hasty decisions made under extreme pressure. We should use this moment of relative calm, they argue, to institute necessary changes. These range from the fundamental—reform of Wall Street's compensation system, the securitization process and private ratings agencies, and a crackdown on derivatives and bank supervision—to the radical—thoroughly rethinking the nature and composition of regulatory agencies, tackling the problem of financial institutions currently deemed"too big to fail" and using the government's tools to discourage predictable and disastrous economic bubbles. Notwithstanding their argument's scholarly scaffolding, Roubini and Mihm manage a smooth translation of the dismal science. Their challenging yet accessible narrative will reward general readers, many of whom are stunned by recent developments and suddenly seized with questions about how our economy works—and doesn't.

    An impressive, timely argument on behalf of transparency and stability for a financial system conspicuously lacking both.

    (COPYRIGHT (2010) KIRKUS REVIEWS/NIELSEN BUSINESS MEDIA, INC. ALL RIGHTS RESERVED.)

  • Library Journal

    July 1, 2010
    Roubini (economics, New York Univ.), who famously anticipated the 2007–09 financial crisis, has worked quickly to produce a textual autopsy, prelude, and discussion of the consequences. In collaboration with Mihm (history, Univ. of Georgia), Roubini explains the role of ratings agencies, shadow-banking institutions, legislators, regulators, and foreign and domestic investors leading up to the financial crisis. The authors illuminate the murky subject of derivatives, which helped bring the finance world to its knees, although at times their explanations seem long and redundant. The strength of the book is in depicting the crisis as not an anomaly but rather one of many historical financial crises sharing similar origins and resolutions. The authors are most lucid in the chapters discussing history and outlook, and Roubini's forecasting notoriety adds weight to the predictions and remedies proposed. VERDICTThose looking for a simple explanation of the financial crisis should pass on this book, but readers interested in details will learn a great deal about not only how the crisis formed but also how the financial system should be developed and global financial stability enhanced going forward.—Jekabs Bikis, Dallas Baptist Univ.

    Copyright 2010 Library Journal, LLC Used with permission.

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A Crash Course in the Future of Finance
Nouriel Roubini
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