13 Bankers
I read Simon Johnson and James Kwak's 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, which is a very good, albeit repetitive (in the sense that they repeat certain points over and over), overview of the 2008 economic crash, focusing on the problem of having a small number of financial institutions that are "too big to fail." It is not a fun read, particularly since the recently passed financial reform addresses the problem only at the margins. It is well-footnoted and also clearly written, with succinct definitions of very complicated topics (like synthetic collateralized debt obligations, which I am not sure I yet fully understand--in fact, another theme is that Wall Street viewed complexity as a virtue, so that if you are not an insider, you should accept everything at face value). It is highly critical of the way in which the crisis was handled--Johnson, a professor at MIT's Sloan School, takes particular aim at Democrats who talk about reform and then buckle under.
A core issue the book examines is the fact that in recent years large financial institutions have developed extremely complex products that are too often intended to obscure their dubious origin. The interests of the customer are ignored. This is not particularly new, but the sheer size and scope of these institutions is much greater than in the past. Thus, moral hazard is a severe problem, because these institutions feel emboldened by the idea that the government will bail them out. Indeed, the bailout (and likely the financial reform as well) has only made the problem worse: "we can see now that the largest, most powerful banks came out of the crisis even larger and more powerful." In 2009, an executive from Goldman Sachs argued that "The injunction of Jesus to love others as ourselves is a recognition of self-interest...We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all." In other words, being too big to fail was good for everyone.
But what to do? Their argument is to ensure that no institution becomes that big in the first place. Breaking them up and creating caps are the central policy prescriptions. Left intact, they will take on even more risk than in the past, create new products that elude regulations (and regulators who care little about enforcement anyway, sometimes refusing to do anything, or whose budgets rely on those same financial institutions--the current reform only asks regulators to make some new rules in the future) and thereby inevitably create a future crisis. You can close a barn door, or at least partially close it, but there are always new barn doors. It is, as the authors say, the "doom loop."
