Economic Crisis A Crash Course - Book Report/Review Example

Economic Crisis: A Crash Course in the Future of Finance Introduction NourielRoubini also known as Dr. Boom for predicting that there would be a financial disaster in the year 2008, two year before it actually happened. In September 2006, he warned before the International Monetary Fund that “US housing bust” would trigger a recession in the whole of America sparking a “global hard landing.” During that period, he predicted that homeowners would fail on their mortgages, and trillion of dollars backed on mortgages securities would disentangle, financial firms would stumble, and all that would cause financial tsunami throughout the world. NourielRoubili, the author of the book is a professor and between 1998 and 2000 she worked as the advisor to the department of Treasury in United States. His book is mostly significant in the light of the current events especially in public debt in North America and Greek. The book has been divided into ten chapters, a section that focusses on global economic issues and a conclusion. Discussion The book undertakes a successful analysis of economic crises characteristics. The writer observes that the economic issues show similarity throughout the capitalism history, typically being composed of boom and bust rhythms. In his book he praises himself since no other economist in the world had foreseen the current crisis with as much clarity and specificity as he did. The analysis of the cataclysm and pacement of it with historical context eliminated any doubts that a reader could have. However, I wish Mr. Roubini clarified in details what he meant by saying that the current recovery is most likely to be “U-shaped” rather than a hazardous “W-shaped” double dip as he had suggested in the past. This book is an essential read for people interested in getting a crisp of an overview of how worldwide financial system seized in 2008 and what may take place in the coming years if reforms and applicable regulations are embraced. The writer did not impose a doctrinaire theory upon facts, instead he used an eclectic common sense approach to the historical financial incidences, taking a la carte from thinking of other economists such as John Keynes and Schumpeter Joseph. Mr. Roubini writes that the insights of the mentioned economists can be synthesized and used to solve the financial issues we are currently facing. “The successful purposes of the current crisis highly depend on a practical approach that take the best of both economic theories, noticing that while stimulus spending, monetary policy and bailouts may assist for a short while, however it is important to come up with a long term solution in order to attain to prosperity(Roubini and Mihm 62).” The writer takes the readers on a fast guided tour on several centuries of capitalism, pointing out how boom and bust patterns are predicted, from booming of asset bubbles to the collapse of other countries that share common types of excess. The author states that lack of transparency , underestimation of risk and being clueless about how newly established financial products will behave when subjected to stress are the main problems in many financial crises in the past and present. The author observes that financial calamities of 2008 were not as a result of bad subprime mortgages or simple housing bubbles but by deeper and more tectonic pressures that had been pilling/building for many years. The government had failed to keep flaps on exotic new financial products such as derivatives. The sweeping away of the banking regulations which had been established in the wake of Great Depression cased the development of a vast shadow in the banking system outside a regulatory oversight. The book highlights that the bonus system adopted during that time by many institutions caused the pursuit of profits in a short period resulting to excessive taking of risks, even as the easy money policies and low interest of the Fed under Greenspan Alan encouraged debt and leverage growth. Mr. Roubini writes that by the spring of 2006 the financial system having had adopted reliance on leverage and the blind faith that prices on asset would continue to go up were primed for a monumental proportions breakdown. The book also incorporates what other analysts such as Wall Street’s observers had argued that the collapse of Lehman Brothers in 2008 and the role of government in that issue was the inflection point which had caused to the fall of global dominoes. On the other hand, Mr. Roubini analyses that event as a less cause of the crisis and not as a symptom of its severity. He argues that much of what happened during that time could have been inevitable at some point (Roubini and Mihm 215). The author states that the government of United States along with other governments around the world, unleashed unprecedented “the shock and awe campaigns” as Mr. Roubini calls them, against the financial crisis. On the other hand, the Fed embraced its previously recognized role as a lender of last resort throwing life-lines of liquidity from one institution after the other, becoming an investor of “last resort” as wading into the government debt markets in order to inject more liquidity into the financial systems through quantitative easing. This way, the author explains, the government became a shareholder in many businesses, by buying shares and injecting capital in exchange for a stake of equity. This resulted to instituted bailouts of banks and homeowners by offering subsidized purchase of toxic assets hoping to restore faith in financial sector. The author observes that all fiscal and monetary measures fell in place between 2009 and 2010, awkwardly and imperfectly. “The response to the crisis was ready to retreat but finally the regulators worked,” states Mr. Roubini. He adds that capitalism did not fall apart especially to thehard-hit Iceland but unfortunately not for the whole world. This was good news but according to Mr. Roubini the stability was bought at a big price: bailouts, stimulus plans, guarantees and cost of managing crises doubling United States’ debt as well as the share of the nation’s GDP, causing a deficit of an estimated $9 trillion or even more in the coming decade. According to the writer he sees the American soaring deficit to be exacerbated by bailouts and cut in tax which were implemented during the presidency of George Bush, and borrowing of more money from abroad to be unsustainable and dangerous and could lead to a dollar decline and erosion of the American power on an international stage. The author declares that “too big to fall” firms such as Goldman Sachs and Citigroup should be broken up. He insists that the overlapping regulatory agencies which end up creating inefficiencies and gaps that are exploited by banks, should give way to a more centralized and consolidated systems of oversight. He adds that a “beefed up version” of Glass Steagall Act which separates investment banking and commercial banking to be adopted. The author also argues that the United States should and must put into use of the recent crisis as a chance to make meaningful and deep reforms in the financial systems (Roubini and Mihm 101). Conclusion The writer concludes that this century will experience persisting and recurring financial crisis meriting the specialized study of crisis economics. Market fundamentalism resulted to the 2008 world wide crisis but multibillion bond systems consisting of incentive brokers and shadow banks were major players to the crisis. Additionally, the leadership of Greenspan Allan in the United States resulted to an increased speculations through monetary expansion maintain a 1% annual rate for quite long time. However, in earlier times low interest called for credit leverage and irresponsible and unrestricted expansion without any government regulation resulting to laissez-faire. Due to this reason, the author advices that reinvention of regulatory bodies and international financial institutions such as International Monetary Fund. More room should be allocated to G-20s economies in making of decisions within the IMF. He insists on a wholesale reform in order to bring the financial system to a heel. He says that it is clear throughout his book that the crisis experienced was less a role of the subprime mortgages than of the subprime financial institutions. Due to the warped compensation structure and corrupt rating agencies, the worldwide financial system was affected from inside to outside. Given that the crisis was as a result of borrowing and excessive leveraging, it is difficult for any nation to recover without the help of the government. Work Cited Roubini, Nouriel and Stephen Mihm. Crisis Economics: A Crash Course in the Future of Finance. New York: The penguin Press, 2010. Print. Read More