A decade ought to be enough time to make sense of the financial crisis of 2008—to unearth the relevant facts and sort through, with some scholarly distance, the most important debates.
While there is no shortage of books that have sought to explain the causes and events of the crisis and offer lessons for the future, many of them amount to little more than “crisis porn” meant to stimulate the emotions; they are lurid, pandering, and dripping in schadenfreude or grievance. But the vast literature also includes solid, smart books, artfully written.
A reader wishing to get a handle on the financial crisis, what was done about it, and what the future might hold should start with one or more histories of the episode (to learn what happened), dip into some memoirs (for depth about the dilemmas that decision-makers faced), and then study some critical analyses of causes, consequences, and policy recommendations.
The financial crisis was not a single event in one place. It occurred across time: The cycle of contraction began with the bust of the housing bubble in early 2006 and its aftershocks can still be felt today. It occurred across space: It was largely a North Atlantic crisis, reverberating between the United States and Europe. No single book can treat the complexity of the crisis with finality.
The completist or the historian might start with reading books by the prophets who cried in the wilderness—the economists whose pre-crisis writings seem prescient, like Yale professor Robert Shiller, whose Irrational Exuberance (in its 2005 edition) noted the bubble in housing prices and the decline in lending standards. Subprime Mortgages (2007), by the University of Michigan’s Edward Gramlich, is dry and academic in tone but reading it evokes a sense of foreboding like that felt when reading about Sarajevo in 1914.
The most entertaining book about the lead-up to the crisis is Michael Lewis’s The Big Short, which was adapted into an Oscar-winning movie. To be “short” in this context was to have sold claims on subprime housing debt in anticipation of the collapse of that market—in other words, to have bet against the over-optimism of the crowd. Lewis profiles a handful of individuals who saw the massive overpricing of mortgage-backed securities and decided to act: “The people on the short side of the subprime mortgage market had gambled with the odds in their favor. The people on the other side—the entire financial system, essentially—had gambled with the odds against them.”
Where Shiller, Gramlich, and Lewis go deep into particular antecedents of the crisis, Bethany McLean and Joe Nocera go broad. Their All the Devils Are Here is an excellent survey of decades of innovations in government policy and the business behaviors they elicited. The government-sponsored lenders Fannie Mae and Freddie Mac receive special attention as promoters of the housing boom and credit expansion that ultimately led to the bust.
Andrew Ross Sorkin’s Too Big to Fail gives the best summary of the agonies of business and government leaders at the epicenter of the crisis in 2008. Sorkin acknowledges those leaders’ plight but finally draws a stern judgment:
Sorkin’s book, rich in interviews, was adapted into a movie for HBO.
U.S. markets would not hit bottom until March 2009, when the economy began an anemic recovery. Alan Blinder’s After the Music Stopped carries the story through to 2012. “The strangest legacy of the financial crisis,” he writes after describing the rise of Occupy Wall Street and the Tea Party, may be “the stunning combination of policy success and political failure.” (In work published after the book, Blinder gave evidence of a considerable economic return after the government bailouts and rescues—showing, for instance, government earnings of $25 billion on the Troubled Asset Relief Program [TARP] bailout.)
Meanwhile, as the United States slowly recovered, Europe headed toward the cliff. Neil Irwin’s The Alchemists is one of the best treatments of the international dimension of the financial crisis, vividly written and drawing on many interviews. The book’s most important insight is that the European crisis was not simply imported from the United States. French president Nicolas Sarkozy (among others) scorched the United States for causing the European crisis. But, as Irwin shows, the depth and duration of the European crisis owed much to Europe’s own lax regulation, poor coordination among government agencies, fraudulent reporting, asymmetries in economic performance among members of the eurozone, and ultimately the fact that the eurozone is a currency union, not a fiscal or political union. Irwin is largely sympathetic to the “alchemists”—the technocrats from the European Union and the European Central Bank, and the finance ministers of Germany and France, who managed the crisis—but criticizes them for “hesitation and delay in the face of the Eurozone crisis” and for “moving slowly and timidly in addressing [Greece’s] deteriorating financial position.” In the United States, the Federal Reserve launched its program of quantitative easing (the predominant economic stimulus in response to the crisis) in 2008; not until late 2010 did the European alchemists commit to strong collective action to fight the crisis.
Notable for its synthesis but not for objectivity or nuance is the latest major account of the crisis, Columbia University historian Adam Tooze’s Crashed. Tooze understands that financial crises have deep roots—his history goes back to the Nixon shock of 1971—and that their ramifications extend for years afterwards. But his book offers little insight beyond Neil Irwin’s. Tooze colors his narrative with sentiments reminiscent of an older ideology: capitalism as exploitation, the crisis as a manifestation of class conflict in the tottering globalist economy, and corruption and conspiracy among the elites as the cause. Crashed is foremost a polemic, sometimes right but never in doubt, that wears thin long before its last page.
There have been at least 14 memoirs of the crisis written by government figures; 5 of those written by Americans stand out for being both readable—far from a certainty in writing about economics—and substantive.
Timothy Geithner’s Stress Test is the best in class for its intellectual insight, style of exposition, humility, and candor; if you read only one memoir of the crisis, it should be this one. Geithner, who was president of the New York Fed in 2008 and then Treasury secretary in the Obama administration, is the most articulate advocate of the controversial view that to prevent another Great Depression, the government first had to rescue distressed institutions, let executives collect their bonuses, and inject billions into financial markets; reform and relief for stricken homeowners and the unemployed would have to come later, after the system was stabilized. Even a decade later, the decision to prioritize rescue over relief remains the focus of bitter debate about the U.S. government response to the crisis.
As Federal Reserve chairman during the crisis, Ben Bernanke took enormous heat for his innovations in Fed policy. But the special value of his book, The Courage to Act, is in its comparison of the Great Depression and the crisis of 2008. Bernanke is a leading authority on the Depression, and his insights lend intellectual justification to the government’s actions during the crisis.
On the Brink is Henry Paulson’s brief for the defense of his policies as Treasury secretary during the George W. Bush administration. Paulson depicts himself as a dynamic action hero. Compared with the books by Geithner and Bernanke, Paulson’s makes a rather lame case in support of his decision to let Lehman fail and of his hasty preparation of a proposal for TARP. Perhaps he decided too much too soon; historians will judge after the archives open years from now.
From 2006 to 2011, Sheila Bair was chairman of the Federal Deposit Insurance Corporation, the entity created during the Great Depression to insure money deposited in American banks. During the financial crisis, she was a thorn in the sides of both the Federal Reserve and the Treasury Department. In her memoir, Bull by the Horns, she describes how she resisted the liberal deployment of taxpayer money to rescue the financial system, withstood the pressure of lobbyists seeking to influence the actions of agencies, fought against the drive to permit financial executives to receive bonuses, and bucked the general “overreaction.”
Paul Volcker, now 91, was a prominent figure in the Nixon shock of 1971. As chairman of the Federal Reserve, in 1980 he instigated the Volcker shock, which helped bring on the savings and loan crisis. He survived an “attempted coup” by Fed governors in 1986. And he helped lead the Obama administration’s response to the 21st-century crisis. Given his long experience, it’s no surprise that in his just-released memoir (written with Christine Harper), Keeping At It, he writes about crises with equanimity, even gravitas. In April 2008, Volcker said that the Fed had acted at “the very edge of its lawful and implied powers” when it had funded the takeover of Bear Stearns by JP Morgan Chase—remarks that were an apparent rebuke of Bernanke, Geithner, and Paulson for exceeding the Fed’s mandate. Volcker elaborates in his memoir: “The Fed should not be looked to as the lender of last resort beyond the banking system.” Volcker instead favored the creation of a separate agency to buy assets and recapitalize distressed firms, rather like the Resolution Trust Corporation created to clean up the S&L crisis.
In scathing 2009 remarks, Volcker derided financial innovation as a contributor to the crisis—he said that “the most important financial innovation that I have seen” banks create in recent decades is the ATM—but he adds nothing on that subject here. Indeed, the reader is likely to hanker for more color from Volcker, more scoops, more insight into policies for future crises. He has little to say about his successors at the Federal Reserve, Alan Greenspan and Bernanke, although he does bless Geithner for his “character and competence.” Volcker affirms commitments to both zero inflation and the Democratic party, but he doesn’t explain how he squares that circle. His memoir reads like he speaks: tersely and without flair. One imagines a cigar in his hand as he dictated into a recorder.
Europe has produced two compelling memoirs of the financial crisis. Alistair Darling’s book, Back from the Brink, recounts his experience as Britain’s Chancellor of the Exchequer from 2007 to 2010. He argues that the crisis should be understood not merely as a story of bankers’ actions but in the context of “a crucial point in history”—a shift toward economic globalization. He is candid about the stresses of dealing with the avalanche of bad news and of collaborating with monumental personalities, especially his prime minister, Gordon Brown. They had “an often fraught and increasingly difficult relationship”—although they were sometimes allied in frustration against Mervyn King, the governor of the Bank of England (whose own book we shall turn to later). Darling’s account of the chaos of events makes for dramatic reading, and his worries about the actions of other countries’ governments—especially in Ireland, where the banking crisis was particularly dire—illustrate his point about economic globalization.
The most engaging memoir of the crisis is one that focuses not on 2008 but on subsequent events in Greece. Yanis Varoufakis was Greece’s finance minister for 162 days in 2015. An academic and political outsider, he was appointed by the far-left Syriza party on the strength of his criticisms of the waves of austerity imposed by bailouts from the European Central Bank and the International Monetary Fund. With each new round of bailout money came demands for more budget cuts—cuts that, Varoufakis argued, only accelerated the debt-deflation spiral exacerbating the economic and humanitarian crisis in Greece. His book, Adults in the Room, focuses on his failed negotiations to replace the bailout terms with a new debt-reduction scheme. Bargaining from a position of weakness, he ultimately brought Greece to the brink of exit from the European Monetary Union—nearly to “Grexit.” At that point, his prime minister, Alexis Tsipras, dumped him. As a latecomer to the Greek disaster, Varoufakis is perhaps to be forgiven for understating the extent to which the Greeks were the authors of their own fate: Corruption was endemic in Greece; economic inefficiency was legendary; at one point, tax evasion amounted to almost a third of the country’s budget deficit; and the government willfully cooked its books in 2009 to underreport the national deficit (the highest in the world as a percentage of GDP). Still, his book, filled with searing condemnations of European officials, reads like a thriller and warrants top honors for elegant prose. Once begun, it will be difficult to put down. Read it with ouzo.
All these memoirs reveal the high stress associated with leadership during a crisis. They also show the difficulty of mobilizing collective action. Financial crises are not engineering problems; they cannot be solved with finely wrought outputs of economic models. Such solutions as are possible result from a process of bargaining in which power, persuasion, threats, bluffs, cognitive biases, and risk aversions all play a part. Compare the narratives of Geithner, Bernanke, Paulson, and Bair at critical moments—they fought in shifting coalitions over what to do about Lehman, Wachovia, Citigroup. Notable in the Bernanke-Geithner-Paulson memoirs is a “band of brothers” spirit of fraternity that Sheila Bair seems to have resented. Yanis Varoufakis wanted to lead Greece to Grexit; his prime minister did not. Alistair Darling, too, clashed with his prime minister and central banker. And of course all these authors placed different values on the aims of rescue, relief, recovery, and reform. Given all the drama, it’s a wonder that we emerged from the crisis at all.
Even after devouring histories and memoirs, you are likely still to hunger for understanding. Why did the crisis happen? What should we do differently hereafter? Three themes stand out in the immense literature of analysis and prescription: the problem of overconfidence, the failure of governance, and the abuse of leverage.
First, overconfidence biased the decisions of consumers, investors, business executives, and government officials. Investing in real estate seemed like a sure thing; prices could only go up. As Sir John Templeton, the famous investor, once said, “The four most dangerous words in investing are ‘This time is different.’ ”
The latest book to address the danger of overconfidence is A Crisis of Beliefs by economists Nicola Gennaioli and Andrei Shleifer. Their book is extremely wonkish in certain sections, but the general reader can skip those without losing the argument: that we should pay more attention to investor “sentiment,” not only in financial markets but in the real economy. “People tend to overweight future outcomes that become more likely in light of incoming data,” Gennaioli and Shleifer write. “Good macroeconomic news makes good future outcomes more representative, and therefore overweighted, in judgments about future states of the world. The converse is true for bad macroeconomic news.” Distorted beliefs lead to excessive leverage in the upswing of a bubble and to panic exiting of the market in the downswing.
The books of Yale economist Gary Gorton illuminate why overconfidence reliably precedes financial crises. In Slapped by the Invisible Hand and Misunderstanding Financial Crises, Gorton argues that information asymmetries are a cause of runs, panics, and crises. Banks are complex institutions, making it difficult for depositors and investors to discern their condition. In normal times, a bank’s creditors tend to be sleepy: As long as the bank’s assets (the collateral) are high grade, creditors tend to feel indifferent about the details of the bank’s condition. After all, government guarantees and the bank’s equity holders will absorb the shock of losses, up to a point. But when a sudden shock—such as the collapse of house prices—casts doubt on the value of a bank’s assets and its solvency, the sleepy creditors quickly become information-sensitive and with the arrival of adverse news, they begin to run.
Perhaps banks can be made more information-insensitive by having bigger capital bases or by enlarging government guarantees of their liabilities. But Gorton argues that the problem of runs on banks is not really a problem of capital adequacy; it is one of illiquidity. Misunderstanding this, he says, has resulted in some misplaced metrics of systemic stability. A related problem is that in 2008 the worst runs occurred mainly outside of the regulated banks, among dealer banks, where regulators were not expecting them.
Which brings us to the second big lesson to be gleaned from the post-crisis literature: that governance failed us. Regulators slept; private watchdogs did not bark; CEOs and boards of directors chased returns while ignoring risks; and market discipline proved lax. Activity moved from the sunlight into the shadow financial system, where guardians could not see. Financial innovations deepened linkages among firms and made it harder to know what was going on.
One critique holds that government regulators were “captured” by the bankers, forming a powerful oligarchy that thwarted democratic will. This is the central thesis of Simon Johnson and James Kwak’s 13 Bankers. The remedy Johnson and Kwak propose is to break up (or nationalize) the large banks—to reduce both their threat to the stability of the financial system and their power to capture the regulatory machinery.
Or perhaps the failures of governance arise from the very efforts to regulate. Charles Calomiris and Stephen Haber argue in Fragile by Design that populist policy resulted in an over-banked U.S. financial system. At the peak, early in the 20th century, the United States had nearly 30,000 banking institutions, most of them small and undercapitalized. Although that figure is now under 10,000, it is still much higher than in other countries, leaving the American financial system vulnerable to systemic shocks. By comparison, Canada’s financial system consists of a small number of very large banks with nationwide branches—and the Canadian financial system sailed through the crisis of 2008. “Why can’t all countries construct banking systems capable of providing stable and abundant credit?” Calomiris and Haber ask. Their answer is that “political conditions constrain what is possible. . . . Every country’s banking system is the result of a Game of Bank Bargains, which determines the rules that define how banks are chartered, how they are regulated, and how they interact with the state. Those outcomes, in turn, determine how well the country will perform along two key dimensions: the degree of private access to credit and the propensity for banking crises.” The failure of governance in the United States is owed to balkanized regulators, regulatory capture, and the inability of the regulatory regime to keep up with the financial services industry.
Peter Wallison’s Hidden in Plain Sight expands upon his dissenting opinion to the report of the Financial Crisis Inquiry Commission (2011). He describes the role of decades of government policy and regulations in promoting homeownership and the liberalization of credit, arguing that “the U.S. government’s housing policies caused the crisis.” The “bumbling of government officials made a bad situation considerably worse,” he writes, and a “false narrative about the causes of the financial crisis”—that the crisis was caused by lax regulation—“has both saddled the financial system with the Dodd-Frank Act and made it likely that the same mistakes in housing policy that were responsible for the crisis will be repeated in the future.” Wallison’s riposte to the dominant narrative is a helpful reminder that well-intentioned government policies can lead to very
bad ends.
Some critics assert that the bailouts and other government actions were illegal or even unconstitutional. But Philip Wallach points out that the long history of government responses to financial crises is characterized by a certain degree of flexibility, especially in moments when it is impossible to distinguish insolvency from illiquidity. In To the Edge, Wallach argues in favor of “adhocracy”—agile government responses that extend to “the very edge of . . . lawful and implied powers,” as Paul Volcker said after the Bear Stearns rescue. Wallach argues that four factors determine the legitimacy of such responses: legality, widespread agreement (or “democratic legitimacy”), trust, and accountability. More than just a book about responding to financial crises, To the Edge is a bracing exploration of resilient governance.
However, if we allow for “adhocracy,” what prevents the takeover of democratic governments by technocrats? This is the subject of Unelected Power, Paul Tucker’s exploration of the benefits and dangers of the delegation of authority to independent agencies, which over time have come to make up a massive “administrative state” within the U.S. government. Congress delegates authority to agencies because it lacks the time and expertise—or the political courage—to set rules itself. In the case of the financial crisis of 2008, the improvisations of central bankers stunned some democratically elected representatives into asking whether the powers delegated needed to be curtailed. With the exacting care of an engineer, Tucker examines how authority can be yielded to independent agencies while still protecting democratic prerogatives. “Broad public discussion and acceptance” are essential for the credibility and legitimacy of central banks, he concludes—but putting that notion into practice would require open debate about the profound authority granted to central banks and greater constraint for central bankers “to go no wider than is necessary to preserve stability in the monetary system.”
The third overarching lesson of the crisis books is that borrowers at every level abused financial leverage. Homeowners borrowed against the equity in their homes, then borrowed more to speculate irresponsibly in condominiums and second homes. Financial firms operated on thinner capital bases. Governments borrowed to fund deficits. Financial innovations increased systemic risk in unexpected ways. In House of Debt, Atif Mian and Amir Sufi give an excellent analysis of the role of mortgage debt as a cause of the crisis. The authors, both professors of economics and public policy, observe that “economic disasters are almost always preceded by a large increase in household debt.” This is such a “strong pattern”—“the correlation is so robust that it is as close to an empirical law as it gets in macroeconomics”—that Mian and Sufi argue we need to “fundamentally rethink the financial system” to take it into account.
I am always skeptical of efforts to boil the ocean into a quart of wisdom; financial crises are so idiosyncratic that grand efforts to generalize from them can trivialize the differences among them. But Ray Dalio avoids that fatal error in Principles for Navigating Big Debt Crises, his just-published book that synthesizes 48 case studies to offer a template for anticipating future crises. He presents the crucial roles of inflation and overleveraging in the creation of bubbles and busts, and he sees clearly the interdependencies among politics and economics, financial markets and the real economy, discretion and commitment. Dalio’s prose style is that of a busy CEO. For instance, he writes, “The worst thing a country, hence a country’s leader, could ever do is get into a lot of debt and lose a war because there is nothing more devastating. ABOVE ALL ELSE, DON’T DO THAT.” For breadth of review, empirical grounding, simplicity of exposition, rich use of graphics, and integration of fiscal and monetary perspectives, Dalio’s book warrants attention among the best texts on crises.
Adair Turner, chairman from 2008 to 2013 of the U.K.’s Financial Services Authority, takes up the vulnerabilities induced by rising debt: myopia, the susceptibility to “sudden stops” in credit supply, plummeting asset prices, and ultimately a debt-deflation spiral. His recommendation, powerfully argued in Between Debt and the Devil, is to curtail growth in the supply of credit. Inveighing against “debt pollution,” he advocates that banks hold 100 percent reserves against deposits, that the shadow banking system be reined in, and that the supply of credit for speculative purposes be generally curtailed. He knows how this will sound: These suggestions “will be criticized as dangerously interventionist, replacing the allocative wisdom of the market with imperfect public policy judgments.” But, he writes, “free markets do not ensure a socially optimal quantity of private credit creation or its efficient allocation.” Our goal should be “a less credit-intensive economy.”
Two other provocative books also tackle the problem of leverage inherent in banks. Typically, banks operate on a base of equity (the shock absorber in case of trouble) of around 10 percent of all the assets they carry—meaning that for every $1 of cushion, they carry $10 of assets. Anat Admati and Martin Hellwig argue in The Bankers’ New Clothes that unrealistically low capitalization requirements for banks render the system unstable. They advocate policies that would almost triple the required capital for banks. Morgan Ricks goes even further in The Money Problem: He proposes radical reform of banking and the imposition of capital requirements equal to 100 percent of bank assets.
If these bank-reform advocates are far on one side of the interventionist spectrum, John A. Allison, the famously libertarian former CEO of BB&T bank, is far on the other side. He argues in The Leadership Crisis and the Free Market Cure that the solution is less, not more, government regulation of the financial sector. And he is sharply critical of the moves made by Bernanke, Geithner, and Paulson to prevent economic spillovers from the financial crisis: “Almost every governmental action taken since the crisis started, even those that may help in the short term, will reduce our standard of living in the long term.” Allison’s view brings to mind Andrew Mellon’s remedy for depressions (as reported by Herbert Hoover): “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.”
Banks appear to engage in sleight of hand: They accept a relatively small amount of deposits and churn out a relatively large amount of credit. This is the “alchemy” to which Mervyn King—the governor of the Bank of England who clashed with Gordon Brown and Alistair Darling during the crisis of 2008—refers in his book, The End of Alchemy. (Don’t confuse it with Neil Irwin’s indictment of the technocratic Euro-banker “alchemists.”) In contrast to mainstream economics, which relies on assumptions of rationality, King makes the case for an economics of “radical uncertainty,” which accepts that the future is essentially unknowable. It’s an admirably humble acknowledgment of our limited ability to predict the future—or even to understand the present. An absence of this kind of radical uncertainty led to “expectations of continued steady growth” that proved “self-reinforcing” in the run-up to 2008.
As stimulating as King’s critique is, though, his prescriptions are anodyne: coordinate better among central banks; let exchange rates float; improve productivity as the source of all real growth; make stimulus, not austerity, the vehicle for growth; remember that economic growth reinforces democracy while contraction strains it. Perhaps King hopes that a reader will come away from these nostrums with an optimistic outlook. But it is striking that the creation of credit—the “alchemy” that supposedly interests King—is but a smallish contributor to the economic future he has in mind.
Dodges, pivots, and departures have characterized government policy since 2008—including, most prominently, the decision to lend no support to the rescue of Lehman Brothers. Ben Bernanke asserted that the Fed had no authority to support Lehman’s survival in the absence of a qualified buyer and sufficient collateral to support a loan. A new study by Johns Hopkins economics professor Laurence M. Ball challenges that explanation. Drawing on information available at the time and on evidence presented later in Lehman’s bankruptcy proceedings, The Fed and Lehman Brothers argues that Lehman’s collateral was sufficient and concludes that the decision to withhold support arose from political opposition to financial rescues. This is a controversial finding: Some critics think Ball’s estimates of Lehman’s solvency are wrong, and moreover Ball seems to shrug off the difficulties of analysis in the middle of a maelstrom and to discount political leaders’ legitimate concerns about moral hazard.
The major U.S. policy response to the crisis was the passage in 2010 of the Dodd-Frank Act. This law quickly became a piñata for critics from all over the political spectrum, and even its lead sponsor Barney Frank would go on to express regrets about it.
Among the handful of books written about this controversial legislation, two stand out. Connectedness and Contagion by Harvard law professor Hal Scott is an impressive (if dry) overview of America’s financial regulations. Scott criticizes Dodd-Frank for focusing too much on connectedness among banks as a source of systemic instability—especially the bill’s aim of preventing “too big to fail” institutions—when regulators should instead have focused on the need to fight contagion—that is, on the ways crisis spreads and on the supply of new liquidity. In Scott’s interpretation, the Dodd-Frank approach is something like putting a febrile patient on a diet instead of trying to lower his temperature.
Meanwhile, University of Pennsylvania law professor David Skeel criticizes Dodd-Frank as an unnecessary complication of bankruptcy law. Dodd-Frank’s “orderly liquidation authority” was intended to reduce uncertainty for depositors and investors in a failed bank, on the belief that such uncertainty drives panic. But in The New Financial Deal, Skeel argues that the standard bankruptcy procedures work just fine and would have resolved plenty of uncertainty if they had been allowed to function in 2008. Skeel also worries that the designation of “systemically important financial institutions,” created as part of Dodd-Frank to help make sure that large financial institutions are structured responsibly and won’t have to be treated as “too big to fail,” actually has the opposite effect: It enshrines a banking oligopoly that will enjoy lower cost of funds because of the implied government assurance of “too big to fail.”
These stacks of histories, memoirs, and analyses make clear that the 2008 financial crisis was what is sometimes called a “wicked problem”: confusing, difficult, and constantly morphing. The books to avoid are those that would offer a simple explanation for what happened or suggest a single measure to prevent future crises. Like war, poverty, and climate change, global financial crises are tremendously complicated and can have dire consequences: Global GDP fell below trend, according to one estimate, by between $6 and $14 trillion following the crisis. From peak to trough in 2008, 8.8 million jobs were lost and $19.2 trillion in household wealth evaporated.
Government officials muddled through, and their efforts probably allayed another Great Depression—albeit only with a mindboggling commitment of resources and the violation of longstanding norms and expectations. Still, doing nothing was not an option. In the midst of financial crisis, leadership is needed. As Milton Friedman and Anna Schwartz wrote almost 50 years ago,
The 2008 crisis exposed deep vulnerabilities in our financial system that have not yet been fixed, that might never be fixed, and that presage future instability. Markets have a propensity toward overconfidence. Systems of governance—the front-line defense against crises—can weaken. And credit will be abused. As a result, there will be more financial crises. In fact, as Carmen Reinhart and Kenneth Rogoff have documented, from 1800 to 2012 almost no year was free of financial crisis somewhere in the world. Financial crises are a fact of life. Familiarity with their causes, consequences, and remedies is valuable preparation for future leaders in business and government.
Sadly, memories are short. Today’s MBA students were in high school in 2008; today’s undergraduates were in middle school. Even among the older set there seems to be a desire to move on from the late unpleasantness. But collective memory is the bedrock of wisdom. Walter Wriston, the former CEO of Citibank, famously said, “Good judgment comes from experience; and experience comes from bad judgment.” Remembering the bad judgments that contributed to previous financial crises is essential to acting more wisely in the future.
Moreover, to understand crises is to know capitalism better. Karl Marx (among others) pointed to the recurrent financial crises in capitalist economies as proof of the terminal illness of the capitalist system. But Joseph Schumpeter (among others) argued that periodic slumps and crises are necessary cleansers of economic inefficiencies and therefore presage growth. Financial crises reveal the worst, and sometimes the best, in markets, institutions, instruments, entrepreneurs, and leaders.
Finally, to understand crises is to better understand ourselves. The Great Depression was the major economic event of the 20th century, one that profoundly affected national and world history, directly touching millions of families. It is too early to tell how—or even whether—the financial crisis of 2008 and its aftermath will settle into our collective memory. The books described here not only inform us about past events and suggest how we might act differently in the future but also help us better understand what it means to be human beings and citizens—who we are, how our characters and our limitations shape our communities, and how we ought to strive to live well and wisely together.
