Understanding financial crises is essential for making sense of the present financial system and identifying ways to improve it in the future. Financial turmoil in global banking has raised concerns about another economic crisis, and looking to the past can help to prevent this.
One of the best books to read is Too Big To Fail by Andrew Ross Sorkin, which offers a compelling account of how Wall Street and Washington fought to save the financial system and themselves during the global financial crisis of 2008. For those who find this book too big to read, HBO’s film version is a faithful retelling.
Another essential read is The Fed and Lehman Brothers by Lawrence Ball, which offers a forensic analysis of the history and economics of Lehman’s failure, making a compelling case that emergency loans to Lehman were possible but were rejected for political reasons. This book provides a vivid worked example of Walter Bagehot’s principles on whether--and how--failing banks should be saved.
Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze offers an account of the post-2008 era and identifies four big themes that emerged: the immediate response, in which the banks were rescued and monetary and fiscal taps were loosened; the euro-zone crisis; the later shift in the developed world to fiscal austerity; and the rise of populist politics.
Carmen Reinhart and Kenneth Rogoff's This Time Is Different: Eight Centuries of Financial Folly points out that eight centuries of financial calamities have not persuaded investors to treat booms with the requisite caution. One reason is that regulators, like everyone else, are too eager to conclude that this time is different.
The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig may be a bit technical for some readers, but it's worth the effort. This book challenges the conventional wisdom on banking, arguing that banks need much higher levels of capital than they currently have in order to be safe and to provide the necessary credit for a healthy economy.
Overall, studying past financial crises can provide valuable lessons for the present and the future. Understanding the causes and consequences of financial crises can help identify ways to prevent them from happening again, and it can also help us build a stronger and more resilient financial system that can weather future storms.
