A Few Books

It’s holiday season again, which means that I have time to read books again, and you may be looking for last-minute gifts. (If you haven’t used it yet, you can get a free 30-day membership to Amazon Prime, which gives you free two-day shipping; you do have to manually cancel before the thirty days are up or you will get charged. Or you could go to a bookstore.) There have obviously been many books about the financial crisis, and I have only read a few of them, and I’m only going to mention a few of those here. You shouldn’t think of this as a “best of” list, just four books that different people may enjoy.

For simple reading enjoyment, Too Big to Fail by Andrew Ross Sorkin is the book to get. It’s the only crisis book I’ve read that comes remotely close to “can’t put it down” status. It’s a blow-by-blow, meeting by meeting, conference call by conference call account of the period from the acquisition of Bear Stearns in March 2008 through the recapitalization of the big banks in October 2008. Most people who read this blog (or simply read the newspaper regularly) won’t learn anything big that they didn’t know already, but the book is full of behind-the-scenes details, like Robert Kindler’s “2BG2FAIL” license plate, Jamie Dimon’s September 13 speech to the JPMorgan cafeteria about icebergs and lifeboats, and Tim Geithner not carrying enough cash to pay for a taxi. It also did the remarkable job of making me like Henry Paulson (there’s a story about him wearing the same overcoat for twelve years; then, when he finally bought a new cashmere one, his wife made him take it back because it was too expensive).

At the other end of the spectrum is Too Big to Save by Robert Pozen, head of a big asset management firm (and a Yale Law School graduate). It is pretty easy to put down (sorry!) but it does a very good job of explaining all of the complicated aspects of the financial crisis that you (or your parents) may have been wondering about–not just the usual like credit default swaps and mortgage-backed securities, but also short selling and the uptick rule, Basel I and Basel II, regulation (or not) of hedge funds, the organizational structure of financial regulation, and so on. The book is organized by topic, so there’s no real narrative, but Pozen clearly explains each topic and then moves on to recommendations. I don’t agree with some of the recommendations, but he generally outlines the problem clearly and in a non-partisan way. Think about it as a handbook for many of the problems with our financial system.

For a well-written account of the boom and bust in America as a whole, not just on Wall Street, I recommend Our Lot by Alyssa Katz, a book I feel like I’ve cited a zillion times already, which focuses on the impact of the subprime lending, the housing bubble, and the crash on different communities around the country. Katz folds together personal drama, economics, and politics in a narrative that manages to remain compelling even though we all know how it turns out, and that also makes the reader even more infuriated at people we already knew were bad before we picked up the book.

The most informative crisis book I’ve seen, at least for me, is This Time Is Different by Carmen Reinhart and Kenneth Rogoff, whose earlier papers (based on their dataset of financial crisis across sixty-six countries and several countries) played an important role in shaping understanding of the crisis back in 2007-08. This Time Is Different dwarfs the competition in the amount of new information it provides–not surprisingly, since it is based on many years of research. Now, when you take the statistical approach, all financial crises do start to look the same–they are all the product of excess borrowing and then a rapid loss of confidence–and the real question is why that excess borrowing took place. But Reinhart and Rogoff still have important lessons (or warnings) for our situation; for example, in their sample of similar financial crises, government debt rose on average by 86% in the post-crisis period due to collapsing tax revenues (p. 224). For people who enjoy reading about economics and economic history, this might be the one.

Disclosure: I got a free copy of Too Big to Fail–not that anyone sent me one, but Simon gave me one of the multiple unsolicited free copies he got. The rest I paid for with old-fashioned cash money. I also saw Sorkin and Pozen present at Yale Law School; Pozen was great, and even cold-called the audience (which is more than most YLS professors do).


Update: I should have said, feel free to suggest others in the comments for people who are looking for last-minute gifts.

By James Kwak

36 thoughts on “A Few Books

  1. I’m in the middle of “This Time is Different,” now. It’s a little dry, but very clearly written and quite accessible even to lay people like myself. James is correct, if you like economic history then this is the book for you.

  2. I really liked TBTF, and recently finished The Greatest Trade Ever, which I found good too. I have given up trying to finish Myth of the Rational Markets because every time I try something else comes up.

    I think I am going to get – This time is different, now based on your recommendation.

    On a totally different note, I watched Avatar last night and liked it quite a bit. Another thing to do this holiday.

  3. I haven’t picked up Sorkin’s book, mostly due to reviews that paint it as gossipy. But I’ll check it out based on your rec.

    The poor souls on my Xmas list (the ones I think may actually read them) are getting End The Fed and Henry Hazlitt’s Economics in One Lesson.

  4. Not necessarily about the current financial crisis, but “A Nation of Counterfeiters: Capitalists, Con Men, and the Making of the United States,” by Stephen Mihm and “The Match King: Ivar Kreuger, The Financial Genius Behind a Century of Wall Street Scandals,” by Frank Partnoy are two of my favorite books about economic history and financial scandals. They manage to be both very informative and extremely entertaining at the same time.

  5. I also learned a lot from the Reinhart and Rogoff book. And I also asked, “Why did the excess debt take place?”

    The easy answer is humans are neither rational nor virtuous. But why here, why now? Why, over the last three decades, has the USA gone from bad to worse to awful?

    A much better answer is that humans love to make babies. After having been banished to “the third world” for two hundred years, TR Malthus is coming home. Surely “the first world” has gained from the new global division of labor, as the neolibs like to say (over and over). Unfortunately, however, “the first world” also is tumbling into the age-old Malthusian trap because the new global system–both the market system and the competitive state system–has opened the trapdoor.

    The fossil-fuel party was great fun while it lasted but the IT revolution can’t stop it from winding down. Only another energy revolution, and perhaps another earth, could sustain nine billion of us. Will that happen? The future is dark and obscure.

  6. An old book, but one that lays out the roots of the crisis, is “Liar’s Poker” by Michael Lewis. If you haven’t had a chance, well worth a read (or re-read).

  7. I would like to second your recommendation of ‘This Time Is Different’ by Carmen Reinhart and Kenneth Rogoff. It is an excellent book. As you imply, it reveals a great tragedy – namely that the US and other advanced countries have fallen into the debt trap. We were so critical of Latin America and other developing countries for doing just that. And now we are in danger of repeating some of their immediate post-crisis errors (prior to reversion to positive savings growth) by becoming still more indebted.

    In my book also published this year (if I may be permitted a plug!) I discuss the parallels between ‘capitalist crises’ and ‘development crises’, noting they often have similar institutional roots. I make the same point Carmen Reihart has been emphasizing recently regarding regulatory catch-up, and which is now recognized as a truism: “The design and effective utilization of optimal regulatory architecture by governments inevitably lags behind profit-driven innovations in products and processes of leading branches of the economy.”

    In detail I explain that good social science knowledge of crisis causes and crisis solutions have been with us since Weber and Schumpeter wrote their treatises on economic sociology in the first half of the twentieth century. There is a tendency for leading scholars of institutional economics to tell us repeatedly that, regretfully, there is no certain knowledge of effective institutions and effective institutional change. They are wrong!

  8. Maybe everybody here has read it, but a timeless classic is “Extraordinary Popular Delusions and the Madness of Crowds”, by Mackay. :)

  9. I also recommend Justin Fox – The Myth of the Rational Market. Very strong history of the efficient market theory and its abuses. Also, Richard Posner – A Failure of Capitalism.

  10. I’ll echo what you and others have said of Rogoff and Reinhart. I really enjoyed Fox’s The Myth of the Rational Market and Akerloff and Shiller’s Animal Spirits.

    Outside of econ/finance– Sandel’s Justice; Kleiman’s When Brute Force Fails; Kilcullen’s Accidental Guerilla.

    Though I just started reading it, I’d give a near blind endorsement of Sen’s The Idea of Justice.

  11. IMHO you have omitted the most important, well written and superbly resourced book of all: “Web of Debt” by Ellen H. Brown. Ms Brown has researched her subject exhaustively and the book is a gem.

  12. Rogoff and Reinhart was excellent, though I haven’t read any other “crisis” books so I have nothing to compare them to. My favorite book of the year was “It’s Our Turn to Eat” by Michela Wrong. A great book about Kenya. “The Bicycle Diaries” by David Byrne was pretty good too… he has some interesting thoughts about cities.

  13. There are to two books that changed by perception about capital market, economics, role of luck etc. Both are written by Nicholas Nasim Taleb titled as (a) Fooled by Randomness and (b) Balck Swan. These books are not subject specific, it touches subject like finance, role of luck, randomness, literature, philosophy and epistemological issues. Its a bit difficult to generalize the ideas in these books but nevertheless its fun read.

  14. Russ – that’s a very interesting review and I’m tempted to side with you. Gillian Tett does a fantastic job with reporting on the crisis in the UK press (years of experience reporting on finance combined with a background in anthropology would leave her well placed), but many have echoed your criticism re. being too close to JP Morgan, not critical enough of “innovation” – which isn’t to say she’s uncritical.

  15. It has been out for a couple of years but I think R. Parker’s biography of J.K. Galbraith is well worth reading. It’s more than a conventional biography in that it’s a running critique of the economics profession over the last half century.

  16. I recommend Lords of Creation (which is not the same as Lords of Finance, much overrated in my opinion). It was written by Frederick Lewis Allen and published in 1935 and can be found used in a 1966 paperback. Allen covers the period from 1900 to 1933, with the same relative immediacy to his subject as, say, Sorkin, during which Wall Street captured the economy and plunged the nation into an economic abyss. Imagine that! Point by point by point, especially in Allen’s last 100 pp., the reader confronts an exact echo of what we are going through. It’s like a game plan repeated play by play. This suggests that Mr.Bernanke, acclaimed as He Who Knows Most about the 1929 Crash and 1930s Depression, has not done his homework.Amazingly, one firm, notable for its collapsed 1920s investment periods, isn’t mentioned. See if you can its name. Initials are GS.

  17. Thanks. Give in to temptation!

    I recently finished Cohan’s House of Cards which also involved lots of insider access and yet comes off as far more skeptical of the subject.

    Cohan simply lets Cayne bury himself with his own words.

    (Though I gotta say Cayne and the Bear guys are at least colorful. They come off as human beings, albeit criminal ones. Not like the technocratic fas cists Tett describes at JPM.)

    He also eviscerates Cioffi and Tannin. How those clowns ever got acquitted is a mystery…In Cohan’s NYT op-ed on the subject he says the prosecution was incompetent. But how can you be that incompetent?

  18. I concur with Robert’s recommendation wholeheartedly. A very good companion to Web of Debt is “The Lost Science of Money” by Stephen Zarlenga. Both examine monetary systems in effect since the dawn of human history, their strengths, weaknesses and consequences, and offer common sense solutions to our currently flawed monetary system.

  19. uncle billy – like James said, “This Time is Different” is probably the book of all of these in which you’re likely to find information about large destabilizing countries. It’s a fantastic collection of data, presented clearly.

  20. I agree both TBTF and House of Cards are great books. House of Cards covers the BS failure in 3/08 and TBTF picks up from the day after.

    Reading them in order makes you wonder and doubt the competence of the many characters that were involved from Gov’t and WS side of this crisis.

  21. I read In Fed we Trust, House of Cards – Bear, A Collosal Failure of Common Sense – Lehman, To Big to Fail, Fools Gold – JP Morgan and To Big to Fail. Tett’s book is the most descriptive of the CDS environment, very little of which is covered in the other books. Your review is spot on. I would just add that the book is required reading for the lay person(which I am)to get some sense of derivatives. I am finishing up It Takes a Pillage which is a detail discussion of the aggregate picture. I recomment all to get some sense of what went on, however it is some what depressing to understand all of what went on.

  22. Thank you Kurt for your concurrence. I will read your recommended book, “The Lost Science of Money” too. The common sense solution describes in “Web of Debt” has been in use in North Dakota for nearly 100 years and because of that it is the ONLY state with NO FINANCIAL CRISIS!

  23. about the only books I don’t own is TBTF & Fool’s Gold, primarily for the latter’s narrow focus. However, if you like “this time it’s different” for the historical sweep you’ll love E.H Gombrich’s “A Little History of the World” Which finally got an English translation.

    It’s the history of man, from the stone age to the atom bomb in 40 concise chapters, originally written in 1935.

    Anthony Grafton of the WSJ said this of it:

    “Lucky children will have this book read to them. Intelligent adults will read it for themselves and regain contact with the spirit of European humanism at it’s best”

    Failing that, Galbraith’s final (short) book “the economics of Innocent Fraud” is a quick read, you could polish it off in an afternoon.

  24. Sorkin, Tett, Gasparino? Why do people turn to journalists who missed the boat in efforts to understand why it sank? Journalism isn’t writing, it’s typing. Try these:

    Traders Guns & Money by Satyajit Das, The Looting of America by Les Leopold, Two Trillion Dollar Meltdown by Charles Morris, anything by Frank Partnoy.

    In the Morris book, don’t be put off by chapter one, which is very weak and immaterial to his study of the bubble, which is excellent and was written before the #hit hit the fan.

  25. “It Takes a Pillage: Behind the Bailouts, Bonuses, and Backroom Deals from Washington to Wall Street” by Nomi Prins should be mentioned here.

  26. “The Fourth Turning” by Neil Howe and William Straus; they did a pretty good job of predicting the last dozen years and the outlook for the next 20 is pretty dark.

  27. Since Naked Capitalism is one of the links here, let’s point out that Yves Smith is at the final proof stage of her book on the crisis . . .

  28. Many (enjoyable) books have given the ‘up close’ journalistic narrative of recent turbulence. Fine, but my two most illuminating reads this year have observed events from further out but, for me, more revealingly. Justin Fox – The Myth of the Rational Market and (not new this year) Eric Beinhocker – The Origin of Wealth provide, respectively, the history and an intellectual critique of the theories which underpin our financial markets.Both outstanding.

    I also strongly agree with engineer 27 about Michael Lewis’s Liar’s Poker. My old copy recently came to light in a house move. Rereading about Salomon Bros and its mortgage dept in th 1980s shows that many of the clues were already there a quarter of a century ago.

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