I quite enjoyed the book, as at its heart it is about moral hazard and especially about unintended consequences, which regular readers of this blog will recognise is one of my favourite topics. However, Ip continually returns to financial crises, which nicely knits the book together into a coherent narrative. If you've already read books about the Global Financial Crisis, then I doubt you would gain much from reading this one, but Ip writes it in a very accessible way, and the links to moral hazard and unintended consequences mean that almost any student of economics will learn a lot, along with the general reader. The overall message is that because our economic institutions (like central banks) work hard to reduce risks to the economy, we end up taking more risks, so that when the system fails, it does so catastrophically.
Although the book has financial crises as an underlying theme, I generally enjoyed some of the other examples more (although I must admit, a lot of the stuff about the Volcker years in the U.S. was new to me). For example, this bit on floods:
Gilbert White, an obscure government geographer who had been pursuing graduate studies part-time at the University of Chicago, noticed that the frenzy of levee and dam building in the 1930s had not solved flooding; instead it had created a new problem: more homes, factories, and farms had sprung up on the floodplain, so more destruction ensued when floods overtopped the levees.And this bit on helmets in the National Hockey League (NHL):
Helmets became mandatory for new National Hockey League players in 1979. Thereafter the number of head fractures went down, while the number of spinal injuries went up. The conclusion of several specialists was that a more aggressive style of play, perhaps encouraged by the wearing of helmets and full face masks, was causing players to hit one another harder in ways that made spinal injuries more likely.The lessons from these other examples though, are targeted towards finance, such as this on the 1987 stockmarket crash:
Nonetheless, the crash taught an important lesson about insurance against financial catastrophes. It works when only a few people buy it; when everyone does, it not only makes the catastrophe more likely, it threatens the survival of the system...
Just as flood and earthquake insurance enable more people to live in flood- or earthquake-prone regions, insurance against market disruptions enables more investors to pile into those markets and perversely make the event more likely and more severe. Portfolio insurance had enabled this with stocks in 1987, and now CDSs [Credit Default Swaps] did the same with mortgages.Ip doesn't get everything right though, at least from my perspective. In one section, he does a poor job of explaining Prospect Theory, and consequently the book stumbles over the distinction between loss aversion and risk aversion. Similarly, most economists would disagree with Ip that risk aversion is characteristic of behavioural economics, and not traditional economics. However, the general reader will not notice these errors.
As you might expect of a book about financial crises, Ip does come up with solutions. He concludes that:
Our goal should be to eliminate big disasters, not small ones, to accept a bit more risk and instability today in return for more reward and stability in the long run.An analogy here (surprisingly not used in the book) is allowing children to take risks and hurt themselves a little, so that they can learn about their own limits and avoid catastrophe in the future. A few small boo-boos in the financial system should help us to reduce the chance of serious life-threatening events in the future. Overall, this is a good book for those interested in financial crises, but who don't want to do a deep dive into a book heavy on theory.
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