New York Stock Exchange traders watching the Dow plummet in September 2008, the month Lehman Brothers collapsed.  In a September 2006 talk before the International Monetary Fund, Nouriel Roubini presciently warned that a “U.S. housing bust” would spark a recession in America and a “global hard landing”: homeowners would default on mortgages, trillions of dollars of mortgage-backed securities would unravel, financial institutions would totter, and a fiscal tsunami would threaten the world.  Now, in his new book, “Crisis Economics” (written with the journalist and history professor Stephen Mihm, who has written for The New York Times Magazine), Mr. Roubini, a professor of economics at New York University’s Stern School of Business, uses his gifts as a teacher to give the lay reader a succinct, lucid and compelling account of the causes and consequences of the great meltdown of 2008.  Although his penchant for singing his own praises can be distracting (“Roubini’s prescience was as singular as it was remarkable: no other economist in the world foresaw the recent crisis with nearly the same level of clarity and specificity”), his analysis of the cataclysm and his deft placement of it within a historical context soon steamroller any doubts one might have. Readers may wish that Mr. Roubini elaborated more on certain points — like why he thinks the current recovery is likely to be “U-shaped” rather than a dangerous “W-shaped” double dip, as he’s suggested in the past. But “Crisis Economics” is nonetheless essential reading for anyone interested in getting a crisp, if opinionated, overview of how the global financial system seized up in the fall of 2008 and what may happen in the months and years to come if serious reforms and new regulations are not embraced.  Instead of imposing a doctrinaire theory upon the facts, Mr. Roubini employs an eclectic, common-sense approach to history, picking à la carte from the thinking of such disparate economists as John Maynard Keynes and Joseph Schumpeter. “The insights of both schools can be synthesized and brought to bear on the problems we face now,” he writes. “Indeed, the successful resolution of the recent crisis depends on a pragmatic approach that takes the best of both camps, recognizing that while stimulus spending, bailouts, lender-of-last-resort support, and monetary policy may help in the short term, a necessary reckoning must take place over the longer term in order to achieve a return to prosperity.”  Taking the reader on a fast guided tour of several centuries of capitalism, Mr. Roubini points out how the patterns of boom and bust are predictable, from the rise of asset bubbles to the spread of collapse to other countries that share similar types of excess. “Lack of transparency,” he writes, “underestimation of risk, and cluelessness about how new financial products might behave when subjected to significant stress are recurrent problems in many crises, past and present.”  As Mr. Roubini observes, the calamities of 2008 were not caused by a bunch of bad subprime mortgages or by a simple housing bubble but by deeper, more tectonic pressures that had been building for years. Not only had the government failed to keep tabs on exotic new financial products like derivatives, but the sweeping away of banking regulations established in the wake of the Great Depression (along with Wall Street’s ability to evade remaining rules) had resulted in the development of “a vast shadow banking system” outside regulatory oversight. Meanwhile the bonus system adopted by many financial firms spurred the pursuit of short-term profits and excessive risk taking, even as the low interest, easy money policies of the Fed under Alan Greenspan encouraged the growth of leverage and debt.  “By the spring of 2006,” Mr. Roubini writes, “the financial system, with its extraordinary reliance on leverage — and its blind faith that asset prices would only continue to rise — was primed for a breakdown of monumental proportions.” Whereas some Wall Street observers have argued that the collapse of Lehman Brothers in September 2008 — or the failure of the government to prevent its collapse — was the inflection point that led to the fall of global dominoes, Mr. Roubini sees that event as less of a cause of the crisis “than a symptom of its severity.” Much of what happened in the succeeding days and weeks, he argues, “was probably inevitable” by that point.  To keep things from spiraling out of control, the United States government (along with other governments around the world) unleashed what Mr. Roubini calls an unprecedented “shock-and-awe campaign against the crisis.” The Fed “embraced its historic role as a lender of last resort,” he writes, “throwing lifelines of liquidity to one kind of financial institution after another,” and eventually became an investor “of last resort” as well, “wading into government debt markets to inject still more liquidity into the system via quantitative easing.” In addition the government “became a shareholder in a host of businesses, buying shares and injecting capital in exchange for an equity stake”; instituted “outright bailouts of individual banks, homeowners, and others”; and “even offered to subsidize the purchase of toxic assets, hoping this might restore faith.”  All these monetary and fiscal measures fell into place — awkwardly and imperfectly — over the course of the next two years. “The response to the financial crisis had all the grace and beauty of a battlefield retreat,” Mr. Roubini observes, “but in the end it seemed to work: capitalism did not collapse; the fate of particularly hard-hit Iceland was not the fate of the world at large.”  That, of course, was the good news. The bad news, Mr. Roubini says, is that stability was purchased at an enormous price: “Thanks to all the bailouts, guarantees, stimulus plans, and other costs of managing the crisis, the public debt of the United States will effectively double as a share of the nation’s gross domestic product, as deficits in the coming decade are expected to hit $9 trillion or more.”  As Mr. Roubini sees it, America’s soaring deficits (exacerbated by the recent bailouts and the tax cuts implemented by the administration of George W. Bush) and its borrowing of more and more money from abroad are dangerous and unsustainable, and could lead to decline of the dollar and the further erosion of American power on the international stage.  Much as the economist Joseph E. Stiglitz did in his recent book “Freefall,” Mr. Roubini argues in these pages that the United States must use the recent crisis as an opportunity to make deep and meaningful reforms to its financial system.  He declares that Too Big to Fail firms like Citigroup and Goldman Sachs should be broken up; that the crazy quilt of overlapping regulatory agencies (which creates all sorts of gaps and inefficiencies that can be exploited by banks) should give way to a more consolidated and centralized system of oversight; and that a “beefed-up version” of the Glass-Steagall Act (which separated commercial banking and investment banking) should be adopted.  Wholesale reform, Mr. Roubini concludes, is necessary “to bring the financial system to heel.” Merely tinkering with existing rules, he goes on, is absurd, given the serious illness of the patient. “As we’ve made clear throughout this book,” he writes, “the crisis was less a function of subprime mortgages than of a subprime financial system. Thanks to everything from warped compensation structures to corrupt ratings agencies, the global financial system rotted from the inside out. The financial crisis merely ripped the sleek and shiny skin off what had become, over the years, a gangrenous mess.”
Nouriel Roubini, who predicted the financial meltdown, now explains it and offers solutions, with his co-author Stephen Mihm.