SHANNON STAPLETON / REUTERS Game over: leaving Bear Stearns’ headquarters in New York, March 2008. 

What Caused the Crash?

The Political Roots of the Financial Crisis

In This Review

The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—From the Financial Crisis
By Martin Wolf
Penguin Press, 2014
465 pp. $35.00
Purchase

Crises are an inevitable outgrowth of the modern capitalist economy. So argues Martin Wolf, chief economics commentator for the Financial Times, in his authoritative account of the 2008 financial crisis. Instability reveals itself in the form of shocks; even a seemingly small deviation from the norm can set off a major crisis. Consider the decline in U.S. housing prices, which began in 2006 and hit its nadir in 2012. In isolation, the trend appeared manageable. After a period of exceptionally high housing prices, U.S. policymakers initially welcomed the drop, which they saw as a much-needed correction to the market, a gradual unwinding of excess. They did not expect a crisis of the magnitude that eventually arrived; nearly no one did.

With characteristic thoroughness and clarity, Wolf identifies a number of culprits for this failure. At the broadest level, it was a failure of imagination. Bankers, regulators, and policymakers assumed that a long period of macroeconomic stability had made the economy invulnerable to shocks. In the United States and the United Kingdom, it had been many decades since the last major busts. Unfamiliarity, Wolf writes, bred complacency. “Why did the world’s leading economies fall into such a mess?” Wolf asks. “The answer, in part, is that the people in charge did not believe that they could fall into it.”

Wolf walks through developments in the United States, Europe, and the developing world, identifying key events and policies that collectively made the crisis the biggest, baddest, and costliest in a century. He pinpoints a host of troubling trends, including the global savings glut, an unsustainable credit boom, and an increase in the level of fraud. In the final chapters of the book, Wolf sketches a road map for the future, offering his vision for a more stable financial system.

Wolf’s book contains a wealth of illuminating details and sharp analysis. Two subjects, in particular, stand out: his critique of the mainstream economic ideas that held sway prior to the crisis and his

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