Samuelson: A Readers' Guide to the Recession

For those of you who feel compelled to get to the bottom of every problem and who, just coincidentally, are determined to spoil your summer vacation, we have the perfect solution: read about the economic crisis. If that doesn't depress you, nothing will. It's beach reading for compulsive worriers. There's already a long list of books that, from one perspective or another, try to unravel what happened and why. The list that I've assembled is hardly comprehensive. It includes only books I've read, so just because something isn't on it doesn't mean it's not worth reading. It just means I haven't gotten to it yet.

Ironically, the book I'd recommend above all others doesn't deal with the present economic crisis. Elegantly written and exhaustively researched, the Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed, recounts how the world stumbled into the Great Depression. The lesson for today is obvious: what happens in the dark corners of finance profoundly affects politics, the social order, and global peace. The Depression led straight to World War II.

Ahamed tells his story from the perspective of the era's four dominant central bankers (Montagu Norman of the Bank of England, Benjamin Strong of the Federal Reserve, Emile Moreau of the Banque de France and Hjalmar Schacht of the Reichsbank). Their well-intentioned quest to restore the prewar gold standard led to the Depression. Ahamed's tale weaves together personal ambition, politics, and economic history.

If you want to dive directly into the present crisis, you could start with Charles R. Morris's The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash. Morris, who has written 10 books mostly on business and finance, was among the first to recognize that the mushrooming of dubious mortgages would trigger a broader economic crisis by inflicting huge losses on banks and other financial institutions. He is especially good at explaining some arcane securities (read: collateralized debt obligations, CDOs). But even he underestimated the debacle; the book's paperback edition has been retitled to The Two Trillion Dollar Meltdown.

A more detailed explanation of the housing collapse is Mark Zandi's Financial Shock: Global Panic and Government Bailouts. Zandi, the much-quoted chief economist of Moody's Economy.com, gushes information. Take the national obsession with homeownership. On page 52, we discover that Americans spend about a third of their incomes on homes; by contrast, the French spend only a fifth and the Japanese a seventh. Of the housing boom, Zandi says: "Many factors drove this home-buying binge, but the biggest was easy credit"—for which he mainly blames former Federal Reserve chairman Alan Greenspan. Zandi's writes clearly, if sometimes dryly.

One person who wholeheartedly agrees is John Taylor, an economist at Stanford University who held a high-level Treasury position under George W. Bush. In his Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis, Taylor argues that the Federal Reserve's low interest rates (the overnight Fed funds rate dropped to 1 percent in mid-2003) fueled the housing bubble. Taylor's short book (92 pages) is a bit technical for lay readers, though anyone who survived introductory college economics should have little trouble.

Thomas Sowell, another economist at Stanford's Hoover Institution, also blames government in The Housing Boom and Bust. By limiting housing supply, local zoning and building restrictions help explain why home prices rose sharply in California (where limits are common) and not in Texas (where they aren't), he says. Congress, he argues, encouraged lax lending practices through the Community Reinvestment Act of 1977, requiring banks to make loans in poorer neighborhoods, and through pressure on Fannie Mae and Freddie Mac, the government-created mortgage lenders, to increase "affordable" loans to moderate-income families. Although one-sided, Sowell's account qualifies the standard story that greedy investment bankers and mortgage brokers caused the whole crisis.

All these books are long on analysis, short on drama. If you want more excitement, try House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, by William D. Cohan, an ex-investment banker turned writer. I found his account of the collapse of the investment bank Bear Stearns a real page turner. Cohan had exceptional access to investment bankers, and he vividly captures Wall Street's petty rivalries, the locker-room language (sample: "It's a f--kin' bloodbath at the repo desk."), the scramble for short-term profits—and the genuine shock at the panic that doomed Bear Stearns. People's dreams and fortunes collapsed; surviving firms fought over the spoils. Though editing might have beneficially cut this 468-page book, it makes you live and feel the crisis as no other.

Gillian Tett's Fool's Gold: How the Bold Dream of a Small Tribe at J.P. Morgan Was Corrupted by Wall Street Greed and Unleashed a Catastrophe finds a nice middle ground between gripping narrative and detached analysis. Tett, a columnist for Financial Times who has provided first-rate commentary on the crisis, explains the creation of "credit default swaps"—a type of financial "derivative" that enables investors to bet on whether companies will default on loans and bonds. Conceived as a way of reducing risk (lenders could hedge), the proliferation of CDS's compounded the crisis by inflicting crushing losses on financial institutions—notably AIG—that couldn't bear them.

By and large, the economic crisis surprised economists. If Niall Ferguson's The Ascent of Money: A Financial History of the World had been written earlier—and economists had read it—that would have been less true. This is a terrific primer for the unschooled. Ferguson, a historian at Harvard, instructs us on the creation of bonds (by Italian city-states to pay for wars) and the stock market (by the Dutch in the early 17th century). Finance, he shows, has been a huge source for both progress, directing savings into productive investment, and instability. Beginning with the South Sea and Mississippi "bubbles" in England and France in the early 1700s, financial panics, bank runs, and market crashes have regularly disrupted economies.

Economists seem to have forgotten this. Or, rather, they assumed that they had solved the problem of "depressions," however caused. That was a shortsighted conceit, says Nobel Prize–winning economist and New York Times columnist Paul Krugman in his The Return of Depression Economics. Krugman provides a lucid overview of the economic crises of recent decades: Latin America's debt crisis in the 1980s; Japan's decade of stagnation in the 1990s; the Asian financial crisis of 1997–98; the stock and tech "bubbles" of the late 1990s; and the present crisis. But aside from plugging more government spending to cure slumps, Krugman has few novel insights into what he concedes is a far more complex world.

There are two final books worth mentioning. One is Dumb Money: How Our Greatest Financial Minds Bankrupted the Country by my NEWSWEEK colleague Dan Gross. As the list of books above suggests, theories of the present crisis crudely split into two camps. One blames the greedy bums on Wall Street; the other fingers inept feds and misguided politicians. Dan skewers almost everyone, including ordinary Americans who got caught up in the frenzy. Homeowners could borrow against rising real-estate values. Whoopee! "Incomes were stagnating, but consumption continued to rise," he writes. His brief narrative, about 100 pages, is breezy, informative, cynical and funny—and ties together many strands of this crazy story.

The last book that I like is The Great Inflation and Its Aftermath: the Past and Future of American Affluence. Alone among these books, it provides a cogent explanation of why money managers, government officials, investment bankers, and ordinary people made these self-destructive mistakes. Greed and myopia, after all, are constants. Why did they combine now in crisis? One answer is that decline of double-digit inflation (13 percent in 1980) and the parallel fall of high interest rates induced two decades of prosperity, characterized by rising stock prices, home values, and only two mild recessions. People took this stability for granted—risk had, it seemed, receded—and became careless and complacent. The consequences are now upon us. I am partial to this book; then again, I wrote it.

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