Crisis Economics: A Crash Course in the Future of Finance


Having just read two books on the economic crises by journalists, I am feeling the need to find out what some actual economists think about these crises.

One economist this leads me to is Nouriel Roubini.  I have found that he, along with Stephen Mihm, has written the book Crisis Economics: A Crash Course in the Future of Finance. The interview with Roubini at the above link gives some idea of what may be in the book. Here is just one set of questions and answers from that interview.

Bremmer: In the book you propose radical reforms of the system of regulation and supervision of banks and other financial institutions and criticize the more cosmetic reforms now considered by the US Congress and in other countries. Why the need for radical reform?

Roubini: If reforms will be cosmetic we will not prevent future asset and credit bubbles and we will experience new and more virulent crises. The currently proposed reforms of “too-big-to-fail” financial institutions are not sufficient: imposing higher capital levies on these firms and have a resolution regime for an orderly shutdown of large systemically important insolvent firms will not work. If a financial firm is too-big-to-fail it is just too big: it should be broken up to make it less systemically important. And in the heat of the next crisis using a resolution regime to close down too-big-to-fail firms will be very hard; thus, the temptation to bail them out again will be dominant.

Also, the modest Volcker Rule – that may not even be passed by Congress because of the banking lobbies power – does not go far enough. It correctly points out that banking institutions that have access to insured deposits and to the lender of last resort support of the Fed should not be allowed to engage into risky activities such as prop trading, hedge funds and private investments. But more needs to be done: we need to go back to the more radical separation between commercial and investment banking that the Glass Steagall Act had imposed. Repealing this Act was a mistake that led to excessive risk taking and leverage by both banks and non-bank financial institutions.

Finally, the government should regulate much more tightly toxic and dangerous over-the-counter derivative instruments; and compensation of bankers and traders should be subject to radical “clawbacks”: bonuses should not be paid outright but go into a fund and clawed back if the initial investments/trades turned out to be risky and money losing over time.

I think I’ll have to put this book on my reading list.

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