Volume 43, Number 168,
January-March 2012

Crisis Economics. A Crash Course in the Future of Finance, Nouriel Roubini and Stephen Mihm, Penguin Press, N.Y., 2010.

Nouriel Roubini is known in the academic sphere for having warned of the 2008 economic collapse in the United States, long before it happened. She is a professor at the Stern School of Business at the University of New York and from 1998 to 2000 worked as advisor to the U.S treasury department and at the White House. Her book Crisis Economics. A Crash Course in the Future of Finance is significant in the light of recent events, particularly the Greek crisis and public debt in North America. The book is divided into ten chapters, conclusions and a section focusing on global economic perspectives.

Nouriel Roubini undertakes an excellent analysis of the characteristics of economic crises, observing that they show a strange similarity throughout the history of capitalism, typically being made up of boom and bust cycles. However, the speculative bubble is surrounded by such mystique that those involved tend to forget the past and think that things will be different on the present occasion and somehow unusual or remarkable. Nassim Nicholas Taleb, for example, published a book called The Black Swan in the middle of the crisis, in which he indicated that the recent financial collapse was such a strange occurrence, that it would have been impossible to predict it, given that such phenomena rarely occur in history. Roubini responded by saying that crises are as common as white swans, given that in the nineteenth century alone there were various crises, such as those of 1819, 1829, 1837 and 1893, among others.

The euphoria that feeds speculative bubbles is astonishing. It even seeks support in scientific principles, as was the case, for example, at the beginning of the twentieth century with Louis Bachelier's speculation theory. The French mathematician assured than no asset was overvalued or undervalued; that the market was guided by laws that auto-regulated. Market participants were intelligent enough to keep the price of assets stable. So if the value of an asset changed radically, it was simply because participants were in possession of new information that made them change their minds. This theory was strengthened during the post-war period at the University of Chicago by Professor Eugene Fama, who gave substance to the laissez-faire approach, the rationality and efficiency of the markets before mathematical models, which gave rise to the School of Chicago.

On the other hand, the 1929 recession opened up serious criticism of the market's ability to regulate itself. John Maynard Keynes defines the crisis as insufficient demand, which should be offset by public spending, that is by the visible hand of the State. In this way, State intervention and the regularization of financial markets were the legacy of Keynesian theory after the Second World War until the 1970s. Stagflation in this decade has brought the Keynesian theory into disrepute, giving way to financial liberalization, sanctioned by the repeal of the Glass Stealgall Act in 1999. This law was adopted in 1933 in reaction to the causes of the great depression and strictly prohibited the involvement of commercial banks in investment banking in the United States. Subsequently, a process of mergers and acquisitions took place that facilitated highly leveraged and risky financial operations, which also served as a platform for speculative bubbles throughout the 1990s and the first decade of this century. Roubini explains that as a result a shadow banking system was established, that is to say, financial institutions that appear to be banks, behave like banks, grant loans and get into debt like banks, but are not subject to current banking regulation. Getting into debt in the short term and investing long term made these institutions increasingly more vulnerable. The speculative bubble, spurred on by the boom in the mortgage market, facilitated the securitization of growing debt until in 2007 what Roubini refers to as a Minsky moment occurred and the market folded. The co-responsibility of the so-called regulators in this global economic disaster is significant here. Roubini accuses the regulators of corruption, similar to a teacher selling his students an exam to ensure they pass. The regulators assessed various financial institutions awarding them a triple 'A' grade in exchange for lucrative gains. Similarly, Roubini dedicates an important part of the analysis to the so-called moral hazard, that is the consequences of rescuing financial institutions considered too big to fail, too big to be allowed to go bankrupt or disappear. Rescuing them with public money was a clear socialization of losses in favor of those who caused financial misfortune with their voracious greed.

Roubini concludes that this century will be permeated with persisting, recurring economic crises, which merits the specialized study of crisis economics. She insists that market fundamentalism led to the 2008 world crisis, but both the shadow banks and the multimillion bond system of incentives for brokers played a leading role. In addition, the United States Federal Reserve under the leadership of Allan Greenspan increased speculation via monetary expansion after September 11, maintaining the 1% annual rate for too long. Historically low interest rates brought about credit leverage and unrestricted and irresponsible expansion, without the intervention of regulatory authorities who subscribed to the dynamics of laissez-faire. Greed fed the speculative bubble to the end and attracted many fraudsters and charlatans who silenced the voices of those, like Roubini, who warned of the impending storm. For this reason, the author proposes greater regulation and the reinvention of regulatory authorities and international financial organisms, particularly the International Monetary Fund (imf). In this vein, the author emphasizes that more room should be given to g-20s economies in decision making within the organism. It was thought this would be taken into account when Dominique Strauss Kahn resigned early in 2011 and an external candidate (Agustín Carstens) was considered. However, hope was lost when Christine Lagarde of France was nominated as the new director of the imf.

In the last section, Roubini states that the U.S economy will follow a 'U' course, that is lasting economic lethargy before any real recovery. We now know that this is more of a 'W' or what Anglo-Saxon economists refer to as a double dip recession. Given that the crisis was caused by debt and excessive leveraging, it will be difficult for demand to recover in the short term without government help. But continuing public spending at the expense of greater public debt would only lead to a dead end. With the western hemisphere's now excessive public debt in mind, Roubini predicts the collapse of the dollar and the euro as a result of the structural problems these economies are facing. The question on the horizon then is this: when will these countries start issuing banknotes to overcome their debts with inflation, and how will creditors react to this, in particular China?

Gerardo Reyes
Ibero-American University, Puebla
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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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