Slapped by the Invisible Hand: Laying Bare the Root Cause of the Crisis

by: David Merkel, CFA

In one sense, but not in every sense, this is the best book on the crisis. I give Yves Smith credit for diving deep on economics and finance, and laying bare the intellectual bankruptcy there. Simon Johnson and James Kwak did an excellent survey of regulatory difficulties in banking and more. Barry Ritholtz probably wrote the best book, because he has a knack of combining informative and entertaining.

But what makes this book a winner is that he lays bare the root cause of the crisis: We need safe short-term liabilities in order to transact. Banks provide the short term medium of commerce, so that no one has to consider whether their dollars are changing in value month after month.

But when there are alternatives to banks that seem cheaper in the short run in creating stable securities, the banking system gets hollowed out. That can be as simple as money market funds, or as complex as AAA structured securities that finance complex obligations.

At such a point, being a bank is not so valuable, and banks mimic the innovations in order to compete.

Though not an innovation, repo funding was a star of this crisis. Repo funding is a short-term means of gaining liquidity through borrowing while offering high quality liquid assets as collateral. It is very stable most of the time, but when liquidity gets scarce, the system as a whole can unwind.

The book focuses on “safe” liabilities: bank deposits, both before and after deposit insurance, repo funding, and AAA short securities from securitizations. People want to keep their purchasing power safe. But when the safety of any safe security comes under question, the system falls apart.

That is the nature of a systemic crisis. What is previously regarded as safe is not safe.

I have one main policy recommendation as a result of this book — regulate the repo markets. They were a main factor for contagion in this crisis.

I liked this book a lot, and recommend it. I also like the title a lot, because the invisible hand does deliver negative consequences to those who act foolishly. Punishment is needed for a capitalist system to survive.


Though it is a book, it is really five essays that have been sewn together with some extra copy in order to make it into a book. Also, you don’t have to be bright to benefit from the book, but you can’t be dumb.

Who would benefit from this book

Anyone looking to understand the fundamental reasons behind the crisis will benefit.

If you want to buy it, you can find it here.

Full disclosure: the author e-mailed me on a day where one of my favorite bloggers praised the book as the best book on the crisis. So I said I would review the book, and his publisher sent me a copy for free.