Editor’s Note: As you know, we’re big fans of book lists, like the ones we always read at Five Books. Last month, we posted Amy Willis’s recommendations for the five best books for Introductory Econ. You can look forward to more such lists…
Most recently we were struck by this Five Books list, in which Francis Fukuyama described his nominees for the best books on the Financial Crisis. So we asked our crack book reviewer and former Freddie Mac executive Arnold Kling if he would offer his suggestions, and here they are… Only one title also appears in Fukuyama’s list.
Here’s Kling:
Frankly, my favorite overview of the financial crisis is the one I wrote, Not What They Had in Mind.* But here are five other books I recommend:
1. There are many competing narratives about the causes of the crisis. My experience in the mortgage business leads me to highlight the role of capital regulations. In Engineering the Financial Crisis, Jeffrey Friedman and Wladimir Kraus take this point of view. I reviewed their book here at Econlib.
2. Most other narratives I find less convincing. But one alternative narrative that is worth considering emphasizes the role of political influence leading to a decline in mortgage lending standards. Peter Wallison’s Hidden in Plain Sight makes the strongest case in that genre.
3. Of the journalistic accounts of the crisis, my favorite is Bethany McLean and Joe Nocera, All the Devils are Here. I think that it helps to bring out two important aspects of the crisis. One aspect is the lack of awareness that many senior executives at financial firms had about the complex risks embedded in their firms’ portfolios. Another aspect is the role played by lobbying by Wall Street firms and Fannie Mae in shaping the mortgage finance system as it evolved in the decades leading up to the crisis.
4. Days of Slaughter, by Susan Wharton Gates, presents an insider’s account of the poor decision-making at Freddie Mac, one of the key firms that failed during the crisis. I reviewed her book here at Econlib as well.
5. Finally, there are the entertaining stories of investors who were able to anticipate the crisis and find ways to profit by selling short some of the exotic securities. The most well known of these is The Big Short, by Michael Lewis (the movie is also well done). But my personal favorite is The Greatest Trade Ever, by Gregory Zuckerman.
So… what are YOUR recommendations for the best books on the crisis???
* As an Amazon Associate, Econlib earns from qualifying purchases.
READER COMMENTS
Kevin Erdmann
Nov 14 2019 at 2:27pm
Arnold,
All of these sources treat some empirical factors as facts, such as:
(1) Americans were greatly increasing their real consumption of shelter compared to previous norms, leading to a massive oversupply of houses. And, this was partly made possible by (2) a groundswell of lending to households with lower incomes who were not capable of paying off a mortgage.
These premises form an important backdrop for all of these sources. Yet, they have been debunked, or certainly strongly questioned, by researchers such as Adelino, Schoar, and Severino, Albanesi, DeGiorgi, and Nosal, or Foote, Loewenstein, and Willen. Not to mention that homeownership rates declined during the private securitization boom, and real shelter consumption, as measured by the BEA, never increased at a sustained pace higher than real incomes.
Would you say that your confidence in the premises underlying these sources is stronger or weaker than it was 5 or 10 years ago?
Christophe Biocca
Nov 14 2019 at 10:50pm
According to FRED: “The homeownership rate is the proportion of households that is owner-occupied.”.
This means speculative purchases of new construction by people who already own a home would actually decrease the homeownership rate. This matters because the homeowner vacancy rate nearly doubled in the last years of the boom, and the rental vacancy rate went during that time as well.
The BEA’s definition for shelter consumption, as far as I can tell, is defined as rent/owner’s equivalent rent. That’s not a good measure when most of the increases in home prices were not reflected in the rental prices, leading to a growing discrepancy.
People were not increasing their consumption of housing (deciding to get a house with an extra garage for their cars, separate bedrooms for the kids, a home office), they were buying homes as speculative investments. Increased consumption wouldn’t have caused the shift in ratio between rental and purchase prices.
Kevin Erdmann
Nov 15 2019 at 4:37pm
Christophe, those are plausible criticisms, but they unfortunately aren’t as empirically strong as you might think. And the reasons for that aren’t even on the radar screens of these authors.
First, these sources do frequently assume that increased homeownership, overbuilding, and consumption were part of the story.
But, on your points, increased vacancy rates in the bubble cities were from a demand crash, not overbuilding. What happened in places like Phoenix was that they were hit with a migration surge out of housing deprived cities like LA, which were depopulating at the time as a result, and collapsing demand meant that suddenly in 2007-2008 migration to Phoenix ground to a halt. Without that shock, it wouldn’t even have been possible for Phoenix to build more than a few months of inventory. These authors treat the source of Phoenix’s collapse as a solution to a secondary issue that has gathered far too much attention and was never necessary or helpful.
Christophe Biocca
Nov 15 2019 at 7:32pm
I guess I’m doubly-confused, both as to what you claim is the common narrative that you consider so inaccurate, and what you propose as the alternative.
Let me phrase what I understand the usual thesis to be and you can either agree that that’s what you have in mind (and point to why it’s wrong) or explain what I’m not getting right about the standard story:
A variety of factors (securitization introducing a principal-agent problem, organizational changes in banks/GSEs, regulatory encouragement, etc.) led to much looser standards for lending. This included:
No-documentation loans.
A growth in subprime lending.
Shrinking requirements on down payments.
This led both to an increase in for-occupancy home purchases by people who used to be renters, and in speculative home purchases (which were now easier to finance, and looked profitable as home prices were rising).
This rise in home prices was not sustainable (80% increase in 6 years, much faster than inflation), and eventually slowed/ended, this happened concurrently with raises in the interest rate (and thus in the rates of adjustable mortgages)
This would not have created a crisis by itself (housing markets have had downturns in the past) except for the fact that many homeowners either:
Couldn’t afford their mortgages and could no longer refinance them using new equity from price appreciation.
Had “negative home equity” and lived in no-recourse states, making it cheaper to default than to keep paying their mortgages.
This led to a snowballing increase in delinquency rates which started prior to the crisis and lasted through the recession. It was also unique in that it happened in a correlated fashion across the country, unlike prior downturns which tended to be local.
This then impacted the financial sectors as many instruments built on securitized mortgages were discovered to be worthless, and entire companies went bankrupt.
Kevin Erdmann
Nov 16 2019 at 1:23am
Christophe,
That’s a nice summary of the standard narrative. I decided it would be worthwhile to respond via blogpost, so that it is a little more accessible to read. It is here:
https://www.idiosyncraticwhisk.com/2019/11/a-review-of-crisis-narrative.html
Jeff Hallman
Nov 17 2019 at 6:23am
No, but declining long-term nominal interest rates would. And that’s been going on for a long time.
Jeff Hallman
Nov 17 2019 at 6:08am
This doesn’t make sense as stated. An increase in consumption of shelter is an increase in demand, not supply.
Alan Goldhammer
Nov 14 2019 at 6:04pm
Andrew Ross Sorkin’s book, “Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves” is very good about what was happening in real time as the dominoes began to fall.
I would also recommend Adam Tooze’s book, “Crashed: How a Decade of Financial Crises Changed the World” which goes beyond the US to other countries. It also goes beyond the 2008 meltdown.
Todd Ramsey
Nov 15 2019 at 9:21am
+1 on Too Big To Fail. Fascinating and instructive to learn what real decision makers were thinking in real time.
Thaomas
Nov 14 2019 at 6:19pm
No doubt there are valuable lessons to be learned about financial regulation from uncovering the causes of the 2008 financial crisis, but the much bigger question is how the Fed can have allowed it to turn into a recession that did not end (at least as measured by employment) until 2016 or thereabouts.
robc
Nov 15 2019 at 10:26am
That is easy. By attempted to soften the recession. If they had let the crash crash, it would have been over much quicker and on to the recovery phase.
Kevin Erdmann
Nov 15 2019 at 5:59pm
robc, I think you’ve hit on one aspect of what these authors miss. They treat the crisis as a problem to be avoided and structural issues in credit markets as the cause of something bad.
But as you point out, the crisis was quite popular. Many people like you would have preferred that it be much worse. Even though the Fed started paying interest on reserves in October 2008 because, according to Bernankes memoir, they were running out of treasuries to sell, you would have preferred even more contraction. What these authors don’t account for is that the panicked financiers were part of a popular narrative being created in real time. The demands for this were widespread and explicit.
These narratives are like tying concrete blocks to Jimmys feet and pushing him off a bridge and then at his funeral saying you always saw this coming because for years he refused to take swimming lessons. That story may be true, but it’s just not that relevant to the actual cause of death once you decided to invoke it.
Lat
Nov 15 2019 at 1:20pm
Having read Not What They Had In Mind, I just ordered your earlier Unchecked and Unbalanced. What would you say are the main differences in these two after six (?) years of additional insight?
Jeff Hallman
Nov 17 2019 at 6:19am
William K Black’s The Best Way to Rob a Bank Is To Own One describes how what he calls “control fraud” caused much of the Savings and Loan Crisis of the 1980’s. While I don’t agree with much of his politics since then, his examples of how S&L owners and executives gamed the system are compelling. An awful lot of the 2008 bad actors (Countrywide, AIG, Citi, Lehman Brothers, etc.) seem to have been following similar scripts, with the regulators, as usual, way behind the curve. It just isn’t credible that these guys didn’t know what they were doing.
Comments are closed.