If you’ve ever wanted a clear explanation of what went wrong in the lead up to the financial crisis you need look no further than Freefall by Joseph Stiglitz and Inside Job by Charles Ferguson. They are both excellent accounts that make extremely complex financial transactions like credit default swaps understandable, and make compelling cases of what we need to do to stop it happening again.
The documentary Inside Job released in 2010 was the first time I had properly understood what sub prime mortgages were and their part in bringing down the global financial system. An excellent diagram in the film, expertly narrated by Matt Damon, explained how extremely risky products were packaged and repackaged until they granted low risk AAA ratings.Â
The film led me to the book which covers the same ground but brings the analysis up to date – it’s depressing to see how little progress there has been in bringing the culprits to justice through criminal prosecutions in the two years since. It also highlights the role the ratings agencies played in the crisis and the bizarre way they still determine a country’s fate. There is also an excellent discussion of the gap between banking and the ‘real economy’, where the best talent has been sucked into banking over the last decade or so, and the effect that has had on innovation in the rest of the economy.
Freefall, as you would expect from nobel prize winning Economist Joseph Stiglitz, is an excellent read. It covers all the ground of what went wrong in the lead up to the crisis, from deregulation, the coupling of retail banks and investment banks, banks becoming too big to fail, to the misaligning of incentives. The explanation of the mortgage market where everyone had incentives to borrow more than they could afford is particularly powerful. As is also highlighted in Inside Job, the depressing lack of action under the Obama administration, where more of the same is the order of the day, is covered in detail. It’s unsurprising that the system hasn’t changed and the banks have been let off the hook when those at the heart of the old system remain at the heart of decision-making.
The Prime Minister casually failing to deny in an interview a couple of weeks ago that we are in a lost decade would have been unthinkable at the start of the crisis. I can’t help thinking in the aftermath of all of this that we have become desensitised boiling frogs.
