What An Economist Learned From Reading 21 Books About The Crisis

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A while back, the MIT economist Andrew Lo set out to review a couple books about the financial crisis. Those books led to a couple more books, which led — you see where this is going — to 17 more books.

Now, Lo is about to publish "Reading About The Financial Crisis: A 21-Book Review" (PDF).

Reading 21 books about the financial crisis does not sound, on its face, like a fun experience. After you talk to Lo, it sounds even worse.

"After each book, I felt like I knew less," he told me. "For an academic, that's a pretty frustrating feeling."

Lo read widely. Idea books by economists, newsy books by journalists. An 800-year history of financial crises. (The full list is on pp. 4-5 of the review.)

He knew going in that there was still disagreement over the finer points of the crisis. But reading all those books showed him that the debate runs much deeper than he thought.

"If you got five economists in a room and you asked them what caused the crisis, you'd probably get eight different opinions," he says.

For Lo, this is a problem. His dream is for economists to look at the crisis the way climatologists look at climate change.

You have ... hundreds of scientists who have a number of varying perspectives. They're fiercely independent. They've got huge egos. And yet they all seem to be able to come together around the data about climate change. At this point, I don't think there's any dispute in the academic world about whether or not global warming is a fact.

Lo knows that there aren't "laws of physics that will govern all economic behavior." Still, he says, economists ought to be able to agree on a basic set of facts about what caused the crisis.

And for all of his worry over the debate, Lo does offer his own, broad account of what went wrong in the crisis. On the surface, he says, it looks a lot like most crises. It starts with an economic boom.

In that kind of a climate of prosperity, people begin to lose fear. They begin to become much more relaxed in much the same way that somebody who has a little bit too much to drink becomes a lot more relaxed ... After a while we get lulled into false sense of safety, security and prosperity. And we begin to start cutting corners. ... we start building up the kind of risks that end in financial crises.

The difference this time, Lo says, is that the combination of technology and new financial products allowed a larger buildup of risk around the world.

"If you're drunk and you're playing around with a [hand] saw, there's not a whole lot of damage you can do," he says. "But if you're drunk and you're playing around with a chainsaw, that's another matter."