Crisis Economics

Roubini, who had publicly forecast a severe crisis before 2008, wrote this with the historian Stephen Mihm as both an explanation of the crisis and an argument that such events are normal rather than exceptional.

The organising claim is in the framing. Roubini argues that crises are not black swans, meaning unpredictable and unprecedented events, but what he calls white swans: recurring events with identifiable causes that the economics profession chose to treat as impossible because its models excluded them. He supports this with the history of financial crises and with the intellectual history, covering Mill, Bagehot, Fisher, Keynes, Minsky and Kindleberger, whose accounts of credit-driven boom and bust were displaced by models assuming rational expectations and efficient markets.

The explanatory chapters cover the mechanisms: the securitisation chain and the separation of originator from holder, the compensation structures rewarding volume, the rating agencies' conflicts, shadow banking's growth outside the regulatory perimeter, leverage across the system, and the global imbalances that supplied the capital.

The prescriptive chapters are more specific than most crisis books. Roubini argues for breaking up institutions too large to fail rather than regulating them more heavily, for compensation deferred and clawed back on outcomes, for central clearing of derivatives, for capital requirements that rise in booms, for regulating shadow banks by function rather than by legal form, and for resolution mechanisms that permit failure.

Roubini's forecasting record was correct on this occasion and has been substantially wrong on others, including repeated predictions of subsequent crises that did not occur, which readers should hold in mind. The book was written in 2010 and its assessment of the reforms then being negotiated is provisional.