The Benefits and Hazards of Crisis Economics
Coverage of the recent financial crisis has been rife with errors of fact and interpretation. Crisis Economics, by Nouriel Roubini and Stephen Mihm, belongs in a special category. The book weaves together underappreciated truths and common falsehoods and does so in ways that relatively few scholars can easily untangle, as Independent Institute Research Fellow and University of Georgia economics professor George Selgin explains in the Summer 2011 issue of The Independent Review.
For this brief write-up, two examples will have to suffice. Roubini and Mihm rightly castigate the Federal Reserve and other central banks for monetary policies that contributed to the recent worldwide housing boom and bust, but they seriously underestimate the role of the Community Reinvestment Act and the government-sponsored enterprises in facilitating the surge of subprime mortgage loans in the United States, according to Selgin. In addition, their proposals to prevent future financial crises rest on errors about the repeal of the Glass-Steagall Act and other matters of economic history.
Crisis Economics bills itself as a “crash course” in the future of finance, but the book’s mixed qualities pose a challenge for readers who would rely on it to gain mastery of its subject matter—say, in order to ace a hypothetical test on the origins of the real-estate bust and the resulting financial turmoil. “Readers will find in this book a great deal that is well worth knowing about the causes of the great subprime debacle and about ways to prevent similar debacles in the future,” Selgin writes. “If they are looking to pass with flying colors, however, they had better cram with caution.”
They Stumble Who Run Fast: Roubini and Mihm’s Crisis Economics, by George Selgin (The Independent Review, Summer 2011)
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[This post appeared first in the August 16, 2011, issue of The Lighthouse. To receive this weekly email newsletter of publication summaries and event announcements from the Independent Institute, enter your email address here.]