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| | Description | This myth shattering book reveals the methods Nouriel Roubini used to foretell the current crisis before other economists saw it coming and shows how those methods can help us make sense of the present and prepare for the future.
Renowned economist Nouriel Roubini electrified his profession and the larger financial community by predicting the current crisis well in advance of anyone else. Unlike most in his profession who treat economic disasters as freakish once-in-a-lifetime events without clear cause, Roubini, after decades of careful research around the world, realized that they were both probable and predictable. Armed with an unconventional blend of historical analysis and global economics, Roubini has forced politicians, policy makers, investors, and market watchers to face a long-neglected truth: financial systems are inherently fragile and prone to collapse.
Drawing on the parallels from many countries and centuries, Nouriel Roubini and Stephen Mihm, a professor of economic history and a New York Times Magazine writer, show that financial cataclysms are as old and as ubiquitous as capitalism itself. The last two decades alone have witnessed comparable crises in countries as diverse as Mexico, Thailand, Brazil, Pakistan, and Argentina. All of these crises-not to mention the more sweeping cataclysms such as the Great Depression-have much in common with the current downturn. Bringing lessons of earlier episodes to bear on our present predicament, Roubini and Mihm show how we can recognize and grapple with the inherent instability of the global financial system, understand its pressure points, learn from previous episodes of "irrational exuberance," pinpoint the course of global contagion, and plan for our immediate future. Perhaps most important, the authors-considering theories, statistics, and mathematical models with the skepticism that recent history warrants—explain how the world's economy can get out of the mess we're in, and stay out.
In Roubini's shadow, economists and investors are increasingly realizing that they can no longer afford to consider crises the black swans of financial history. A vital and timeless book, Crisis Economics proves calamities to be not only predictable but also preventable and, with the right medicine, curable. | |
| | Product Details | | Author: | Nouriel Roubini | | Hardcover: | 368 pages | | Publisher: | Penguin Press HC, The | | Publication Date: | May 11, 2010 | | Language: | English | | ISBN: | 1594202508 | | Product Length: | 9.3 inches | | Product Width: | 6.3 inches | | Product Height: | 1.5 inches | | Product Weight: | 1.35 pounds | | Package Length: | 9.13 inches | | Package Width: | 6.3 inches | | Package Height: | 1.34 inches | | Package Weight: | 1.32 pounds | | Average Customer Rating: |  based on 82 reviews |
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162 of 169 found the following review helpful:
 How economic crises are probable and predictable, and how to get out of them May 11, 2010
By Todd Bartholomew
Nouriel Roubini gained great notoriety as one of the few economists who correctly predicted our current financial crisis, specifically pointing to the 90 percent increase in home prices from 1997 to 2006. While Roubini has written other books, "Crisis Economics" is his first foray into economic literature aimed at the mass market and serves to expound on his argument that most financial bubbles are not only predictable, but avoidable. To borrow a phrase from Nassim Taleb, these are not unpredictable "black swan" events, but can be forecasted with some degree of probability. The authors aptly point out the difficulty in defusing bubbles as they inflate as no one within the financial markets or the regulatory structure typically wants to take the punchbowl away from the party. As bubbles inflate they typically open the door for schemers and opportunists who become the inevitable scapegoats for the inevitable crisis, conveniently deflecting criticism from those who deserve it. Worse still there's little accountability in either the public or private sector for those who should have known the bubble was over-inflated and took no corrective measures to stop it. What compounds the problem this time is governments are re-leveraging the system by taking on massive debt to prop up the private sector, leaving them vulnerable and unable to respond when the next crisis inevitably comes. Worse still, these "balance-sheet" crises hobble government finances resulting in anemic recoveries that drag on as happened in Japan in the 1990s. And for all the talk of the private sector de-leveraging there's little real proof that's occurring and instead it appears to be stabilizing at unsustainably high levels, setting the stage for the next liquidity crisis.
The authors look over economic history and point out a well reasoned argument, namely that economic collapses are both likely to occur and are predictable. They are not freakish, unforeseen occurrences, but oncoming events whose warning signs are ignored by policy makers, executives, and politicians. Even recent history proves this to be correct, pointing out crises limited to specific countries over the past few decades (Thailand, Mexico, Argentina, Indonesia, etc) that have led to more large scale economic problems. By now you'd be inclined to feel that Roubini truly is living up to his "Dr. Doom" nickname, but he is hardly finished. The authors roundly criticize the current tendency to socialize losses and privatize gains and calls on governments to do more to break up too-big-to-fail institutions before they do fail, as the temptation to bail them out when they do fail (and they will) will prove irresistible for policy makers and politicians alike. The sad reality is that policy makers have not yet learned their lessons and are tinkering at the margins when a more massive overhaul is required. While keeping interest rates near zero percent has kept the economy from totally collapsing it is unsustainable and new bubbles are appearing in the form of commodities prices, which have surged greatly in price.
But the authors do offer ways in which policy makers, executives, and politicians can get out of our current situation and avoid recurrences. Sadly they are not easy or palatable situations, and its all to easy for all three groups to ignore taking hard steps to reign in economic growth during robust growth periods. And that's the problem. Societies are predicated on growth and expansion. We detest the idea of tamping down economic growth as it is so contrarian, yet that's what essential. Thankfully Roubini and Mihm make economics and finance relatable and easy to understand, yet without dumbing it down significantly. As academics both write with a flair and élan uncommon in economics, yet they certainly do tend to get readers to despair at times. Their solutions seem reasonable; one can only hope that policy makers, executives, and politicians would not only read this but find the will to actually do what is necessary to prevent the next crisis.
98 of 106 found the following review helpful:
MUST READ book of the Year - Why It's Worse this Time Around & What to Expect. Buy a Copy for Friends & Family May 11, 2010
By javajunki
"javajunki"
Dr. Doom sounds more dire than ever...and with good reason. As a college instructor and business writer, Nouriel Roubini has been a personal favorite since properly predicting the real estate and resulting financial fiasco. However, this book takes everything to the "next level". Here is why you MUST buy this book (and a copy for friends or family)...
1. Compares alternatives...doesn't just complain. Many economists make a living from finding fault in current policy but when it comes time to making a suggestion they fall silent. Not so with Roubini and co-author Mihm. This book sorts through the clutter to discuss the pros and cons with each course of action, the limitations and the illusions to current and past policy...and the missed opportunities.
2. Future Trends...unlike other books that focus on the past, this book provides a firm foundation for what you can expect next. Unfortunately, the news isn't good. In fact, it's more than a bit troubling but those that fail to heed good advice are the ones likely to suffer the most. At times such as these there are two types of people...those that prepare and those that simply believe it is all "doom and gloom" so ignore it all at their own peril.
Roubini provides the reader with a firm foundation to understand how we arrived at this point and what the likely outcomes will be in the future. In fact, he clearly spells out exactly the type of scenario currently taking place with Greece...the default of nations rather than just banks and the resulting social-political and financial outcomes. There are no quick/easy fixes - just tough choices.
3. Inflation/deflation/gold and other debates. Although not the focus of this book, the authors don't shy away from taking on these hot button debates. Inflation versus deflation, the role of gold (if any), the position of the dollar, China and global positioning plus much more.
Other points. The book provides the novice with exceptional history surrounding the current economic condition while managing to include sufficient detail sure to entice the informed reader. Elusive points including the role of Basel Committee on Banking Supervision and other pertinent organizations/entities are explored without becoming tedious or boring. The book is data packed and does not rely on filler or fluff to make a point. Pure information, exceptionally balanced with positive and negative considerations on each and every point made.
Bottom Line: Must read for every informed citizen, investor or anyone else interested in the current financial situation and the likely aftermath to be experienced by the nation. This time things are different...find out why and what is likely to be coming soon to a nation near you.
92 of 101 found the following review helpful:
Excellent - Every Page! May 11, 2010
By Loyd E. Eskildson
"Pragmatist"
Most books on economics are boring and predominately filled with vacuous philosophy. Not so with "Crisis Economics." Nouriel Roubini, Professor of Economics at New York University, is best known for his detailed forecasts of the recent U.S. financial meltdown. Co-author Stephen Mihm, is a journalist and professor of history at the same school. The authors begin by demonstrating that financial cataclysms are as old as capitalism itself (China inflated its way out of financial problems in 1075), not 'Black Swans' (rare events, per fellow author Nassim Taleb). Then, the authors provide an excellent summary of varying economic schools' perspectives on today's problems.
Today it is fashionable to see the economy as a self-regulating entity that, left alone, stabilizes at full employment and low inflation. A prominent example is Alan Greenspan, who took his basic economics lessons from philosopher Ayn Rand. Karl Marx, on the other hand, was the first thinker to see capitalism as inherently unstable; Marx contended that capitalism would inevitably plunge into chaos because continual cost-cutting by owners would eventually leave so many unemployed that a revolution would result. 'Behavioral economists' try to explain why markets are inefficient - explanations include the naive jumping on the bandwagon, and various other biases and irrational inclinations. Keynes, like Marx, also undercut conventional wisdom, stating that deflation will occur and demand will fall if wages are cut and workers fired. Keynes' solution was to have the government create the needed added demand. Milton Friedman et al (the Chicago school), explained the Great Depression as a result of the decline in bank deposits and reserves, coupled with the Federal Reserves' failure to cut the discount rate. Hyman Minsky recently revitalized Keynesians by pointing out that capitalism contains the potential for runaway expansion powered by an investment boom. The problem is due to an excess of borrowers - 'hedgers' can cover their interest and principal payments, but 'speculators' can only cover their interest payments and 'Ponzi' borrowers can't cover either. Irving Fisher added the idea that government should revive a stagnant economy by flooding it with easy money ('reflation') - that's what we did in 2007 and 2008, in addition to throwing out lifelines of liquidity out to one financial institution and business after another. Finally, the Austrian school (Schumpeter et al - 'creative destruction') argue that even Hoover did too much in the Great Depression, and our recent actions only ensured the survival of zombie banks and firms needing endless lines of credit and special legislation. This burden, however, eventually causes the government to default or inflate its way out of debt. FDIC deposit insurance and the 'Greenspan put' are folly, per Shumpeterians.
Who's right? The authors contend the Austrians are heartless and wrong in the short-term, but have validity in the median to long-term. Roubini believes "the successful resolution of the recent crisis depends on a pragmatic approach that takes the best of both camps, recognizing that while stimulus spending, bailouts, lender-of-last-resort support, and monetary policy may help in the short term, a necessary reckoning must take place over the longer term in order to achieve a return to prosperity."
Many bubbles begin when an innovation heralds the dawn of a new economy. Examples include the 1840s railroad boom in Great Britain, the Internet dot.com boom of the 1990s, and the financial services boom in the 2000s. The 'good news' is that society was left with additional rail assets in the 1840s, and unused Internet cable lines in the early 2000s. Today's latest excess - vacant houses, are not such a boon as they are subject to vandalism and deterioration, in addition to having been grossly overpaid for.
Roubini and Mihm contend that our most recent crisis is not the result of sub-prime mortgages infecting an otherwise healthy financial system, but rather a system sub-prime in its major aspects - from 'top to bottom.' The first problem is our 'shadow banking system' that looks and acts like banks, greatly exceeds the impact of banks, but has never been regulated like banks. The second is the financial services industry's moving beyond the 'originate and hold' model for home loans that had gotten S&Ls into trouble earlier when they held onto bad assets. Unfortunately, this new paradigm eliminated concern over loan quality, and was expanded to student, car, and credit card loans.
Financial wizardry was the second major contributor. "Tranching" took a bunch of risky eg. BBB-rated sub-prime loans and put about 80% into senior tranches given an AAA-rating. The more exotic products had 50-100 levels, and others involved CDOs of CDOs (CDO-squared), and even CDOs of CDOs of CDOs (CDO-cubed). These complexities made it difficult or impossible to value the instruments by conventional means - instead mathematical models were used that relied on optimistic (eg. no real estate value declines) assumptions. The result was completely opaque and ripe for panic.
'Moral hazard' was the third major piece of our latest bubble, and consisted of several components. Inappropriate bonuses (based on single-year performance, paid in dollars instead of the dodgy securities being created) was the first. In 2006 the average bonus accounted for 60% of total compensation at the five biggest investment banks, and encouraged excessive risk-taking and leverage. Shareholders didn't have much incentive to rein these practices because the firms were employing high levels of leverage, giving shareholders 'little skin in the game' and over-sized upside potential. Even bank depositors, the ultimate source of much of the funding, had no reason to care, thanks to FDIC insurance. Regardless, in the event of a downturn, the Federal Reserve could be counted on as a lender of last resort, and even that protection was backstopped by the 'Greenspan put' (his being always ready to lower interest rates). In fact, the 2007 bubble was preceded and fed by low rates instituted to get out of the 2000 dot-com bubble.
The fourth major component of this bubble was largely courtesy of former Senator Phil Gramm, who successfully had much of the derivatives market ($60 trillion of CDS by 2008) placed off-limits to regulation. (Senator Gramm, along with Robert Rubin (Clinton's former Sec. of Treasury), Greenspan ('The Maestro'), and others also brought about the repeal of Glass-Steagall limitations.) This was followed by the SEC allowing investment banks to increase leverage to 25X+ vs. 12.5X for their more regulated commercial bank brethren.
Debt-levels increased everywhere. In 1981 U.S. private sector debt was 123% of GDP, and by 2008 it was 290%. Household debt increased (48% GDP in 1981, 100% in 2007) more than industrial debt, and financial sector increased the most of all (22% of GDP in 1981, 117% in 2007). Nor did leverage stop there. Roubini relates how a borrower would obtain eg. $3 million from a bank, add $1 million of his own, and then invest the $4 million in a hedge fund. The hedge fund would then borrow another $12 million (still 4:1 leverage) and have $16 million to invest - backed by as little as $1 million. Hedge funds often didn't even stop there, increasing leverage even further.
Some blame the Community Reinvestment Act of 1977 as a major contributor to the real-estate bubble. Roubini believes this is misplaced, even though the law was augmented in the 1990s to require 42% of loans to come from those with below average income within their areas. Roubini adds that most of the growth in sub-prime came from private lenders like Countrywide. (I suspect the truth lies somewhere in the middle. Freddie and Fannie both ended up operating with 40:1 leverage ratios.)
Citibank and others then added another twist - 'Structured Investment Vehicles' (SIVs) used as off-balance-sheet vehicles to hold mortgages prior to their being sold off as CDOs, etc. The applicable reserve ratios for SIVs were only 10% those for ordinary bank assets. Citibank held $100 billion in 7 SIVs, and was ultimately forced to take them back onto its balance sheet when things went sour. Meanwhile, woe to unaware investors.
The U.S. was not alone in these new frontiers of perilous finance. Fortunately, not all participated - India benefited from greater regulation and reserve requirements.
Everyone knows how it all began falling apart. Roubini focuses instead on what the government did. Initially the Federal Reserve faced a 'liquidity trap' (akin Japan) in which the central bank was unable to spur loans, even by lowering the discount rate to 0%, because banks were afraid of the future, and had too great a proportion of toxic assets. The Fed/Treasury then bought up many of their toxic assets, provided added capital (preferred stock) and looked the other way while the banks placed overly high values on their remaining assets. The Treasury also bought up a great deal of government obligations in an effort to force down their yields and encourage banks to move their money out of these safe havens and back into loans. The key points, per Roubini, are that these actions again strengthen the moral hazard pattern, set up a possibly even worse situation down the road, and added trillions to the federal deficit. (Roubini is not against these moves, believing there was no alternative. However, he's emphatic that we're nowhere near out of the woods.)
"Crisis Economics" recommends more effective government regulation (consolidating existing agencies, and ending 'regulation arbitrage' - shopping for the most lenient regulation; re-instituting a stronger Glass-Steagall Act - "on steroids"), and breaking up those 'too big to fail' (eg. Citigroup and Goldman Sachs) . Unfortunately, we are mostly back to business as usual, and Roubini is concerned that these changes will not take place.
We now owe $3 trillion to the rest of the world, and are running current account deficits of $400 billion/year. Increasingly the U.S. will have to borrow shorter term, making us more vulnerable to future crises and sudden collapse. Roubini is worried this will lead to disruptions to Free Trade (I hope so), even though he recognizes that there are 2.0 billion people in developing nations ready to join China and India in selling to America, and former Federal Reserve Vice-Chair Alan Blinder foresees up to 25% of Americans vulnerable to additional off-shoring. The dollar's days may be numbered in years, rather than decades, though the Chinese don't seem to want the lead currency role - yet.
The unemployment rate + discouraged + underemployed (< 40 hours) now approximates 17%. Many/most offshored jobs won't return. Adding the fall in averge work-hours (equivalent to 3 million more unemployed) to the 8.4 million jobs lost by the end of 2009, recognizing that 30% of capacity is now idle in the U.S. and Europe, that 42 states and the District of Columbia have already articulated plans to cut government jobs, and that the 2003-07 'boom-years' fueled by a credit bubble won't return, leads Roubini to conclude that this recovery will be U-shaped, not a "V," and fortunately not a "W" (double-dip). But, because U.S. interest rates are near zero, speculators are borrowing dollars and investing in risky assets elsewhere, then repaying the loans in depreciated dollars. Roubini asserts this technique has easily created 50-70% profits since March, 2009, can't continue, and is building the "mother of all asset bubbles."
Roubini sees Japan and Europe in no better economic shape. The U.K. is having problems, but taking corrective steps. However, problems with the 'PIIGS' (Portugal, Ireland, Italy, Greece, Spain) may break up the European Monetary Union. China needs to boost consumer spending, and its infrastructure exceeds current needs, says Roubini. (I'll take their problems, and their economists!)
Roubini's 'Bottom-Line' - the coming era may best be described as one of "Great Instability."
39 of 42 found the following review helpful:
 Dr. Doom Explains It Sep 18, 2010
By Omer Belsky
The economic crisis of 2008 has caught almost all observers unaware. Here and there, a few voices issued warnings, pointing out the existence of the housing bubble and the dangerous effects of the global financial imbalances and America's growing deficits. Chief amongst these Cassandras, the man whose dire predictions proved most accurate, was Nouriel Roubini. Nicknamed "Dr. Doom" in a New York Times article written by Stephen Mihn, Roubini's reputation as a forecaster, almost a prophet, is today unmatched.
Roubini's sterling reputation was the reason I chose to read "Crisis Economics", a further collaboration between Mihn and Roubini. Of the half a dozen or so books about the crisis that I have read (Richard Posner's A Failure of Capitalism: The Crisis of '08 and the Descent into Depression and The Crisis of Capitalist Democracy, Robert Shiller's The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It, Vince Cable's The Storm: The World Economic Crisis & What It Means, etc), Roubini and Mihn offer the most wide ranging look, discussing the roots of the crisis, the government's response, and suggestions for reform. Roubini and Mihn write well, and their book is an excellent introduction for the crisis to the uninitiated. Unfortunately, "Crisis Economics" offers rather less to those of us who have spent some time on the subject. Those readers might, like me, find little new in the early chapters of the book (the ones discussing the origin of the crisis) and much to disagree with in the later chapters (the ones outlining the authors' suggested way out of it).
The first half of the book described combines a run of the mill description of the crisis's formation, mixed with standard history of economic thought (from Smith to Keynes), only partially enlivened by the rather unorthodox focus on economic crisis and failure rather than success.
The authors employ mostly conventional Keynesian perspective on the crisis, and so should be applauded for their discussion of the Austrian school views about it. But although they explain the Austrian position in full, they ultimately discard it with a superficial analysis that would not convince any Austrian. Later they argue that they are offering a synthesis of the Austrian and Keynesian perspectives, but no self respecting Austrian could possibly accept their call for massive government intervention, while Keynesians would find little to disagree with the notion that the problems of twisted incentives caused by the necessary intervention should be addressed, or at the very least taken into account.
For me, the book only became interesting in earnest about halfway through, when the authors discussed the response to the crisis. Particularly, they emphasize the role of Fed. I knew that the Federal Reserve played a huge part in the bailouts of such players as Goldman Sachs and AIG. But Mihn and Roubini's account highlighted a fact that I was insufficiently aware of - how America's central Bank acted not only as a lender of last resort, saving the financial system from collapse, but also as an almost ordinary lender, lending money to more and more non-bank institutions in order to stop the credit freeze. It seems to me that while the Fed's action as lender of last resort was probably necessary, the active intervention in the markets more questionable. Monetary tools are effective in restraining an overheated economy (as Paul Volker did in the early 1980s), and in unleashing willing investors, but they are generally no good for promoting economic activity when there's no will for it. Ben Bernanke took very extreme actions to try to encourage economic activity and especially lending, and it is far from obvious that the relatively meager results were worth the effort.
The classic Keynesian account places the onus of reigniting the economy on the government's fiscal rather than monetary powers: Crudely speaking, Keynes taught that governments should spend their way out of depressions. Oddly enough, beyond criticizing the stimulus for being a political bargain and thus far from ideal, the authors have little to say about the government's direct role in creating demand, focusing their discussion on the various ways it underwrote risks taken by other institutions.
The bottom line may be that both fiscal and monetary policy focused excessively on "reigniting" markets rather than on stimulating the economy via government spending on public works and other government projects. This arguably prevented the "work" of the crisis - culling out the weak firms from the good ones - from taking place, and increased the amount of irresponsible players who gained from the bailouts.
Moving forward, the authors make several proposal for reforms. Unfortunately, I think many of these proposals are extremely problematic. Take compensation - the authors point out that traders and managers in financial firms to excessive risks, because they had wrapped incentives - they would make a fortune if the gambles paid off, but would lose very little if they didn't. In the short run, the traders and the firms both did very well, but in the long run, the firms had to be bailed out, while the trader's bank accounts remained as healthy as ever. The authors therefore make a series of proposals, all meant to link the compensation of executives with the long term prospects of the firm they work in. The problem with these plans is that in the long run, the well being of the firm is likely to be determined by a host of factors, few of them in any person's control. Delaying compensation cuts the link between the employees' pays and their performance - which is, ironically, exactly what self dealing executives want (see Pay without Performance: The Unfulfilled Promise of Executive Compensation). Furthermore, in trying to align the interests of firms with those of the executives, the authors ignore the fact that part of the cost of a firms' downfall is carried by its creditors and suppliers (and as we see in this crisis, by the taxpayers). When the a cost of an activity are born by those other than the parties involved in the activity, the cost is what's known in economic terms as an externality. Negative externalities (costs), unborn by the firm, are not taken into account by it. Which means that from a social perspective, even rational, income maximizing firms are taking excessive risks.
Another problematic proposal is an overhaul of America's financial regulators. The authors point out that America has a host of bodies meant to regulate finance, all of them work in an uncoordinated and inefficient way. The argue that America should reform its regulators to make them more streamlined and centralized - somewhat like Britain's Financial Services Authority. But the FSA did not seem to spare Britain the crisis. Is it really a great model for a regulating agency?
The book's final chapter describes the global financial imbalances - namely the huge deficits incurred by the United States and other rich countries, contrasted with the enormous surpluses amassed by such emerging countries as South Korea and especially China. The authors disagree with the "Global Saving Glut" hypothesis (advocated by the likes of Paul Krugman and Martin Wolf - see Fixing Global Finance (Forum on Constructive Capitalism)). They argue, in effect, that America and Americans are responsible for their choice to borrow excessively (p. 250).
But whether to save or spend is a question of benefits versus costs. As long as Americans are offered amazingly cheap credit (and correspondingly, few avenues for profitable and safe long term investments), they are unlikely to stop taking advantage of it. It is natural to borrow when the costs of borrowing is low - it is unnatural to lend money for meager returns
"Crisis Economics" is therefore an eloquent introduction to the financial crisis, and a thoughtful program on how to get out of it. I disagree with many of the authors' recommendations, but they are worth considering very carefully. After all, Roubini has been proven right before.
14 of 15 found the following review helpful:
5 Stars for those with the background of a layman May 29, 2010
By Yoda
Any review of this book would have to start with the intended audience for this book. That audience would definitely not be PhD or MA level economists, graduate students or financial professionals. The book is geared primary to the layman with little in the way of a macroeconomic or financial background. This is not to say that some knowledge of the theories of Keynes, Friedman, Hayek or Schumpeter would be unhelpful (it would provide some good perspective to the reader) but the book provides the necessary relevant background of these where necessary. This is also not to say that the book would be of no or little value to the more knowledgeable, however. Roubini provides many insights and tangents in this book that even they would find interesting.
In a nutshell, the book describes the problems that have caused the current economic and financial crisis (along with historical perspective), the steps that have been taken by various nations (with emphasis on the U.S.), the future dangers underlying those steps and actions that he believes would help mitigate, but by no means eliminate, the problems that have led to the current crisis (and will probably lead to future crisis).
With respect to the causal problems, Roubini discusses seven in-depth. They are moral hazard in the financial system, leverage, regulatory arbitrage, securitization, principal agent risks, loose monetary policy and current account balances. Moral hazard has led to financial institutions taking far too large risks due to an expectation of being bailed out by central banks. Leverage, primarily through the introduction of new financial instruments, has led to a massive expansion in lending vis-à-vis reserve requirements and the monetary base (thus greatly increasing both the volatility of aggregate financial instruments available as well as their quantity in dollar terms). Regulatory arbitrage involves financial institutions minimizing (or altogether avoiding) financial regulations currently in place by, in very sophisticated ways, moving themselves or the relevant financial instruments to spheres those regulatory agencies that either do not have the authority or ability to regulate. Securitization, combined with principal agent risk, has led to two problems. One is that it has permitted banks to off-load their loan portfolios to third parties and hence has eliminated the need to make decent and secure loans to begin with. After all, if the bank does not have to keep the loan on its own books, why would it have to worry about making a good loan to begin with? Related to this, third parties have done a very poor job at due diligence with respect to checking the quality of the loans they purchase... This, in turn, according to Roubini is due to 2 facts. The first is that they do not (in general) plan to hold them long themselves (and hence why worry about the risk inherent in them?). The second is that the rating agencies have done a poor job at rating the quality of these instruments due to conflict-of-interest and the fact that they are quite difficult to rate. These facts, combined with the fact that many players in the financial sector are only rewarded on a short term basis, has insured that far too much risk has been undertaken by the financial sector leading to a huge bubble. Not that these have been the only problems. The fact that many of the world's central banks had loose monetary policies in place too long after the 2000-2001 crash has not helped. Neither has the fact that huge current account deficits (especially in the U.S.) has led to a flood of capital flowing back from lending nations (particularly Asian surplus countries) thus further inflating financial instrument prices. These inflows have also made it much more difficult to control nations' money supplies. For example, when Greenspan tried to raise interest rates to cool down the economy in the mid to late 2000s very large capital inflows into the U.S., to a very large degree, counteraccted his attempts.
Roubini also discusses how the world's central banks have dealt with the crisis. In short, they have pumped a huge amount of liquidity, many times in a very haphazard way, into the banking system to prevent it from collapsing. This, he points out, has not only dramatically increased debt (thus creating a serious inflation risk in the future) but has also caused serious moral and principle agent problems in that financial institutions may, as a result, take more risks in the future than prudent due to expectations of being bailed out the next time around.
Roubini, toward the conclusion of the book, provides steps to mitigate against the current and future crisis. A few (but by no means all) include the need for tighter links in the financial sector between risk and reward (so that risk and return can be better matched as opposed to just passing risk on to third parties or to the future); reduction in rating agency conflict-of-interest by preventing agencies from issuing ratings to issuers of financial instruments (this could, more logically, be done by purchasers); separation of banking functions from investment banking; and more transparency (and standardization of transparency) to make it easier for third parties to better judge the true value of collateralized debt obligations. It would a serious loss to not mount this reforms now, in Roubini's opinion, as they will be almost impossible to enact into law in a non-crisis environment. Even then, although Roubini does not come out and explicitly state it, he seems to imply that he is not optimistic that much of what needs to be done here will implemented.
For financial professions, PhD level Economists and those actively engaged and closely following the markets (i.e., reading Financial Times, Euromoney, Economist on a regular basis) what is mentioned above is not exactly a revelation. Hence the book would be of limited value to such persons albeit Roubini still have many interesting insights that may intrigue this group whether or not they may agree with them (i.e., his belief that gold is currently [as of December 2009, when book was completed] more an overpriced commodity, in a speculative bubble, than an anti-inflationary hedge). For the layman, however, the book is a five star.
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