Crisis Economics and The Road from Ruin

Crisis Economics: A Crash Course in The Future of Finance, by Nouriel Roubini and Stephen Mihm, Penguin £25, 368 pages, FT Bookshop price: £20

The Road from Ruin: How to Revive Capitalism and Put America Back on Top, by Matthew Bishop and Michael Green, Crown Business $27, 384 pages

During the past three years Nouriel Roubini, the Italian-American economist, has become famously – or infamously – known as “Dr Doom”. After all, back in the middle of the last decade, when most economists were championing the credit bubble, Roubini boldly predicted it would end in tears.

That won him few friends at the time; hence the name. But these days Roubini is looking so vindicated by recent events that numerous traders, politicians and regulators now hang on his words. Indeed, he is now so popular he is even considered something of a heart-throb on the New York celebrity circuit.

Given that, you might have thought that a book he has just co-authored with Stephen Mihm on the banking collapse, Crisis Economics, would be pretty racy and melodramatic too. But think again. Instead, what Roubini and Mihm offer is a sober and sensible analysis of what has gone so badly wrong in finance in the past few years, coupled with a list of proposals about what could now be done to fix these woes.

Many of their ideas might have sounded radical five years ago. But it is a sign of the magnitude of the recent crisis – and the intellectual journey that western governments have been forced to make in response to it – that Roubini’s ideas now sound almost mainstream. Or as he and Mihm write: “Financial crises have a funny way of making radical reforms seem reasonable. Much of what we’ve described [in terms of bank reforms] would have seemed radical and unnecessary in advance of the crisis that hit in 2008. That’s no longer the case.”

That should not detract from the value of the book; on the contrary, what Roubini and Mihm offer is one of the most readable and sensible accounts to date of the financial disaster. This is framed around their core assertion that (contrary to most policymakers’ assumptions in the past two decades) free-market financial systems are inherently unstable and prone to frequent bouts of panic. For Roubini and Mihm, in other words, crises are not “black”, but “white swans”, occurring with painful regularity. Thus the book calls on policymakers to build a financial system assuming there will be periodic bouts of panic. It also suggests that regulators and investors alike should be forced to study financial history, if nothing else, to understand the context in which fashionable economic theories spring up.

That relativist approach prompts the authors to call for a kind of controlled “creative destruction” in response to the recent economic mess. During a crisis, Roubini and Mihm argue, governments need to be “Keynesian” and spend plenty of taxpayers’ money to ward off disaster and prop up the financial system; after the crisis, however, non-Keynesian policies are needed, to apply free-market principles, and cut government debt.

Meanwhile, as far as finance is concerned, the two authors also draw on a range of intellectual traditions to propose numerous reforms. These range from “first steps” (such as an overhaul of the compensation culture, securitisation business, credit rating agency structure) to more “radical” ideas (the introduction of a new bankruptcy regime, measures to break up banks, the adoption of a new monetary policy that explicitly tries to prick bubbles).

As such, this list of ideas does not look so outlandish; after all, similar ideas are being advanced by many other mainstream economists too. They are also echoed in The Road from Ruin, another, admirably clear book written by Matthew Bishop, the US business editor of the Economist, and Michael Green, a London writer. Like Roubini and Mihm, Bishop and Green are broadly pro-market and pro-capitalist; however, they also recognise that governments need to act in moments of crisis, and accept that recent financial practices, such as banking cronyism, have discredited capitalism. Thus, they also call for financial reform, global macro-economic rebalancing – and a judicious combination of Keynesian policies (during a crisis), followed by a pro-market policy reversal once the crisis is over.

But just because Roubini has now become more mainstream, does not necessarily mean that he is wrong. On the contrary, the fact that this all sounds so sensible is probably a reason for hope. If, that is, the governments would just put this reform agenda into practice. And today – sadly – that remains a very big “if”.

Gillian Tett is the FT’s US managing editor and the author of ‘Fool’s Gold’