Books on the credit crunch: First draft of history (The Economist)

자료: The Economist, http://www.economist.com/books/displaystory.cfm?story_id=13895063

Jun 25th 2009

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THE credit crunch may have caused a bust in the economy but it has created a boom in financial publishing. It seems as if every journalist or academic who ever entered a bank has rushed to bring his or her opinions into print. They have taken on a Herculean task.

The best financial books—“Barbarians at the Gate” or “The Smartest Guys in the Room”—have been built around specific deals or companies (the takeover of RJR Nabisco, the collapse of Enron). The credit crunch has been much more diffuse, involving macroeconomic imbalances, greedy and incompetent bankers and fraudulent American homebuyers. Try covering the lot and the book can seem rambling and shapeless; narrow your focus and you miss the broader picture.

The ideal book on the crisis would not only tell readers what happened during the crunch and why. It would also look ahead at how the system will change. And it would be accessible, even to readers who have not spent years studying the minutiae of the financial markets.

Philip Augar’s “Chasing Alpha” scores well on both historical explanation and readability. In a sense this book is a follow-up to “The Death of Gentlemanly Capitalism” (2000), in which he dissected the takeover of the British financial sector by Americans and Europeans. “Chasing Alpha”, again with a largely British bent, explains how the interplay between banks and investors ended up in an orgy of risk-taking. The analysis is excellent. It is a shame, however, that Mr Augar is let down by sloppy fact-checking. For example, Alan Greenspan’s “irrational exuberance” speech was given in 1996, not 2000. This is not the only error.

Gillian Tett’s “Fools Gold” is more narrowly focused on the world of credit derivatives, the alphabet soup of CDOs and SIVs that were at the heart of the crisis. The action is seen through the prism of the derivatives team at JPMorgan, which helped create the toxic products. While Ms Tett’s explanation of the technicalities is first class, the fact that JPMorgan survived the crisis better than most robs the book of some drama. One longs instead to have a similar inside view from Bear Stearns, Lehman Brothers and Merrill Lynch, the investment banks laid low by their exposure to dodgy American housing loans.

The alternative to the structure adopted by Mr Augar and Ms Tett is to take a thematic approach. Pablo Triana’s “Lecturing Birds on Flying” laments the way that mathematicians and financial economists have appeared to take over the markets. Economics is not a science like physics because humans are forever adapting their behaviour in the light of others’ actions. The models devised by the maths gurus were not just unlikely to work, he argues, they also gave bankers a false sense of security, leading them to take more risks.

Mr Triana compares one widely used system, the value at risk (VAR) measure, to a passenger airbag that works 95% of the time; unfortunately the other 5% includes the time when the driver has an accident. Rather than rely on models which can never capture the complexity of human interaction, banks and investors should instead trust the judgment of experienced traders and managers.

The book is fizzing with ideas but the reader has to wade through Mr Triana’s verbose and convoluted prose, of which the final sentence is surely the most depressing example. “Deliciously paradoxically, the Nobel could end up diminishing, not fortifying, the qualifications-blindness and self-enslavement to equations-led dictums that, fifth-columnist style, pave the path for our sacrifice at the altar of misplaced concreteness.”

Arguably, all this focus on derivatives and risk models ultimately misses the point. In the end, this financial catastrophe has been like every other; banks lent too much money during a property boom and now (together with the unfortunate taxpayers) they are paying the penalty. Andrew Gamble’s “The Spectre at the Feast” sees the downturn as the latest in a series of capitalist crises. And he uses the word crisis, not in the short-term sense of a tabloid headline, but as an historical turning point when the economic system is remade, just as the Great Depression led to the adoption of social safety nets.

Mr Gamble, professor of politics at Cambridge University, offers a brisk tour of economic history over the past 30 years, and argues that the financial sector was the chief beneficiary of the “neoliberal” policies introduced by Ronald Reagan and Margaret Thatcher. The fact that governments have had to nationalise, or prop up, many of the leading banks suggests that a rethink is in order. Unfortunately, the author does not produce any startling insight on what that rethink might involve.

Of this pile, the book that best combines history, analysis and prescription is “Restoring Financial Stability”, a series of essays by academics at New York University’s Stern School of Business. The 60-page prologue is packed with telling facts and sophisticated analysis, and alone is worth the steep cover price. The individual chapters deal methodically with the myriad issues raised by the crunch, and the policy changes that will be needed, covering everything from the American mortgage market to the need for international co- operation in regulating finance.

The Stern book may be careful to avoid academic gobbledygook and complex equations, but it cannot be described as a light read. That suggests it will not turn out to be the defining tome on this crisis. Producing that book may require a little more perspective. It is worth remembering that J.K. Galbraith’s masterly work, “The Great Crash, 1929”, was not published until a quarter-century after the event.