Recession Books and Theories - The Best of What's Around

by: Eric Falkenstein

This recession hasn't been all bad. Housing is now more affordable, and now we have Kentucky Grilled Chicken, Pasta Hut, Domino's Subs, and $5 burgers at Morton's. Necessity is the mother of fast food invention. On the other hand, we are awash in books reflecting the proverbial blind men describing an elephant.

Two new books are out of the financial crises. One's a recap of Nassim Taleb's arguments in Lecturing Birds to Fly by Pablo Triana, the other a journalist's expose of greed and hubris in Fool's Gold. As this crisis was peaking in October, I imagine many editors got contracts to pen their dramatic explanation of what the heck is going on, so like making babies, we will see a bevy of of such books for the remainder of the year. Right now, I put them into the following themes for laying the blame:

The Fed: Getting Off Track (John Taylor), Two Trillion Dollar Meltdown (Charles Moris), Too Big to Fail (Stern and Feldman)

Too much government: Meltdown (Thomas Woods), Bailout Nation (Barry Ritholtz).

Bubbles: The Subprime Solution (Robert Shiller)

Greed/Hubris: Fool's Gold (Gillian Tett), Meltdown (Paul Mason), Chain of Blame (Muolo and Padilla), Looting of America (Les Leopold), Meltdown (Katrina vanden Heuvel)

Models/Quants/Math: Lecturing Birds (Pablo Triana)

Everything: Panic (edited by Michael Lewis), Financial Shock (Mark Zandi)

That's three 'Meltdown' books on the same subject by different authors. Mark Zandi is the chief economist at Moody's, and he supposedly saw this all coming, highlighting my earlier claim about Simon Johnson, that no one listens to their Chief Economist. That is very useful in hindsight recollections because no one would ever think a Chief Economist was a driving force behind anything an institution actually did (of course, there's a reason no one listens to them).

Bloggers and Journalists are more on the models/quant side (eg, Taleb, Felix Salmon), but some emphasize regulatory arbitrage via derivatives (Arnold Kling).

Clearly, each view has some valid points. There was, and is, greed and hubris. Models are not infallible maps of reality. People--investors, homebuyers--chase trends. The Fed had low interest rates in the early naughts, regulators and legislators were encouraging lower mortgage standards, derivatives were increasing in complexity, and with hindsight housing followed a classic bubble trajectory. The key is to focus on the primary drivers, the theory, because the facts themselves are rather ambiguous. Thus, descriptive books on the Bear Stearns collapse or Dan Gross's Dumb money are somewhat useful, but really are just like reading newspaper stories about what happened. History without a good theory is very barren, and it's easy to focus on irrelevancies, especially because it's tempting to focus on personalities (hubris anecdotes or emphasis on pot-smoking CEOs) or diagnoses that would be really clever and interesting if they were true (obscure math errors).

For me, the best explanation comes from two parts. Stan Liebowitz's account on how we slowly eroded mortgage standards with the best intentions, led by academia, regulators, legislators, and investment banks. And then the accelerator mechanism outlined by Gary Gorton. Neither are books.