Crisis Economics, By Nouriel Roubini with Stephen Mihm<br />Aftershock, By Philippe Legrain

Review,Stephen Foley
Friday 21 May 2010 00:00 BST

We are amidst the ruins of a city, after the quake. Measuring the damage is the easy part, and we can make out now the faultlines that caused our horrors. But how much harder it is to assess the risk of future shocks. The question is: do we rebuild and reinforce the city, or relocate somewhere else entirely?

This is the point we find ourselves at with regards to global finance. The earthquake that struck the financial order in 2007, and which unleashed the tsunami still battering parts of the world today, took a dreadful toll – and not just in terms of jobs and homes and livelihoods. It robbed us, too, of a sense that the global economy, however imperfect, was basically well-functioning. Now we know it was not. Incompetent financiers and incontinent borrowers had together erected a tower of debt so fiendishly complicated that no one spotted it was a catastrophe waiting to happen until it happened. The question, then, is what is to be done? Across the world, regulators are working to reshape finance and law-makers are debating more or less radical reforms to reduce risk in the economy, and in banks in particular.

It is into this debate that Nouriel Roubini of New York University and the journalist Philippe Legrain pitch their new books. Each is pitched as an urgent call to arms, a rebuke to the alleged timidity of national and international authorities.

Professor Roubini's "crash course in the future of finance", in collaboration with freelance writer Stephen Mihm, has been particularly keenly awaited. His was one of the few voices in the economics profession to have correctly predicted the contours of the crisis. Having identified the US housing market as but one of numerous asset bubbles across the West, he warned that all finance was in danger, that investment banks would be wiped out, and that the world faced a recession on a par with the Great Depression.

Many years ago, Roubini had earned the nickname Dr Doom; in 2007 his doomy forecasts came true in almost every particular. The predictions in Crisis Economics about the dangers to the eurozone – written months ago – appear to be coming true, just as the book appears.

The peculiarity of these books is that, for all the reputation of their authors as controversialists and big-picture thinkers, they seem to be planted largely within an emerging consensus, or at least well within the terms of the current debate. It turns out that policy-makers are not being that timid. Legislation to end "too big to fail" is in progress in the US Congress, while the Chinese are already gently pressing for the international reforms that might rebalance the global economy. Caution is not the same as timidity.

The Great Depression, to which our present financial crisis is persistently likened, changed the world forever. Out of it came the Keynesian intellectual revolution, an entirely new framework for governing the banking system, and cultural scars that damped speculation and borrowing for generations. It is now abundantly clear the Great Recession of 2007-2009 has produced no equivalent shift, at least not yet. Maybe not enough time has passed; maybe the success of governments' interventions mean there is actually no need. But if the banking crisis turns out to be just the appetiser, ahead of a full-blown sovereign debt crisis across the Western world, including in the US, then maybe the intellectual firecrackers will start going off.

It is no surprise that Roubini's contribution should be so broad, well-argued and easy-to-digest a précis of how we got to this point. He came to prominence in the Nineties as an economist of the Asian debt crises, and he puts the latest crash firmly in a historical tradition stretching back to the currency debasements of the 17th century. It was no "black swan" event, he insists, because bubbles and busts, and subsequent panics, are inherent to capitalism.

But only Alan Greenspan, former chair of the Federal Reserve, seems to be left arguing the credit crisis was a 100-year flood. Jamie Dimon, the louche chief executive of banking giant JPMorgan Chase, is more typical. "Not to be funny about it," he told a commission of inquiry this year, "but my daughter asked me when she came home from school 'what's the financial crisis?' and I said, it's something that happens every five to seven years."

Much of the first half of Roubini's book is given over to the now-familiar narrative of the credit crunch, but it is designed as a much bigger project, perhaps too big. Crisis Economics covers the range of challenges facing the global economy, in which Roubini uncharacteristically pulls his punches. There are some firm predictions – no return to the gold standard; no double-dip recession – but he is non-committal on the most interesting questions, such as whether the US can navigate its way to a new accord on currencies and trade with China and other emerging powers without sparking a new crisis.

He rattles through a menu of financial reform options, coming out at the most radical end of the spectrum with regard to breaking up the banks, and urging reforms of the International Monetary Fund that are already on the agenda. Sometimes the book feels that it's justa teaser for the professor's blog, where his arguments are more detailed, deeper and more persuasive.

Aftershock by Philippe Legrain, a long-time cheerleader for globalisation, similarly feels like a manifesto rather than an argument. Some policy options on this smorgasbord apparently contradict his central plea for open borders and open economies, such as his suggestion that emerging economies introduce capital controls to ban "hot money" from abroad which can risk inflating bubbles.

Legrain travels the world to paint a picture of global markets in action, from Westerners living the ex-pat life in Shanghai to Swedish manufacturers tapping the Chinese market, and from the South African suppliers to Tesco who celebrate the UK chain's interest in their well-being. These characters pass too fleetingly to tell the reader very much, and neither does Legrain find the sort of statistics that might persuade a crusty anti-globalisation protestor to undreadlock his hair.

Nonetheless, his optimistic view of global trade and travel is still right, amid the aftershocks of the credit crisis as it was before. His is still the view of policy-makers, who reaffirm their commitment to trade liberalisation at G20 meetings, even at the depths of the meltdown. The bogeyman set up by Aftershock is protectionism and reactionary local politics, but anecdotal evidence of these is no more plentiful now. The dynamic green economy envisioned here inches closer, not further away.

If these books are calls to arms, they are calls that are being largely heeded. We are rebuilding the city, not relocating. Isn't that always the human impulse after the natural disaster?

Stephen Foley is Assistant Business Editor of 'The Independent'

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