Why the Great Recession happened, and why it’s going to happen again
A decade after the onset of the Great Recession, economists, financiers, historians, and politicians still debate its causes. It’s widely agreed that the recession was triggered by the massive Wall Street crash of 2008 and that it constituted the greatest threat to the stability of the world economy since the 1930s. However, a number of factors are advanced as responsible, including the widespread use of subprime mortgages, derivatives trading, deregulation of the financial sector — and simple greed. It probably makes the most sense to conclude that all these factors were part of the picture.
In the seven books listed below, some of the nation’s most distinguished financial journalists sort through the rubble, examining the origins of the Great Recession and its consequences. They don’t all directly address that question. But every one of these books casts light on the reasons for Wall Street’s instability in its own way. The books are listed in alphabetical order by the authors’ last names. Each is linked to my review.
Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud by David Dayen — Understanding Wall Street’s great foreclosure fraud
In Chain of Title, David Dayen exposes the criminal conduct that ran rampant during the fallout from what is so delicately referred to as the “housing bubble.” (The phrase sounds frivolous, doesn’t it?) With a focus on a handful of activists, most of them based in the state of Florida — among the states hardest hit by the foreclosure crisis — Dayen uncovers the truth about the role of law enforcement officials and the Wall Street banks in forcing an estimated six million people out of their homes. It’s a grim and deeply unsettling story.
A First-Class Catastrophe: The Road to Black Monday, the Worst Day in Wall Street History by Diana B. Henriques — A lucid and thoroughly researched account of what’s wrong on Wall Street
Pulitzer Prize-winning New York Times reporter Diana Henriques illuminates the decades-long history of deregulation, bureaucratic turf wars, over-the-top risk-taking, and fraud brought to light on Black Monday in 1987. On that single day, the Dow-Jones Industrial Average, the most widely-watched financial indicator in the world, dropped a staggering 22.6%. And the loss for the week was even greater. It was “the worst one-week decline in Wall Street history.” Panic spread around the world, with other closely-followed stock market indices down even more sharply. Sadly, the problems Henriques highlights went largely unchecked three decades later — and they continue to threaten the stability of the global economy to this very day.
Flash Boys: A Wall Street Revolt by Michael Lewis — “The stock market is rigged!”
Flash Boys tells the tale of the arcane and long-secret phenomenon known as high-frequency trading (HFT). As Lewis explains, HFT is one of the ways that Wall Street cheats investors — and not just small-time investors like you and me, but also the elite folks who manage multi-billion-dollar pension funds and mutual funds (and thus, indirectly, us as well). Initially, the practice was limited to a handful of traders working in small, independent shops, many of them Russian immigrants with advanced degrees in math or science. However, in the course of Lewis’ exploration of this complex and clever technique to game the system, he learned that many of the big Wall Street banks bought into the process as well and gained enormous profits as a result. All together, Lewis asserts, HFT has robbed the investing public of billions of dollars. (HFT originated in the 1980s and was one of the factors responsible for Black Monday.)
The Big Short by Michael Lewis — The clever investors who made fortunes from the Great Recession
Marginal players populate the pages of Michael Lewis’ masterful study of the decline and fall of Wall Street a decade ago, not their much better-known counterparts who played such leading roles in making the mess. This delightfully entertaining book explains how a handful of marginal actors in the financial markets anticipated the collapse of the subprime mortgage market and its dire consequences — and walked away with tens of millions of dollars each while the rest of us were counting our losses. In the process, Lewis explains in approachable language how Wall Street unraveled.
All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera — Who’s to blame for the financial crisis?
All the Devils Are Here explores the decades-long accumulation of errors and misconceptions that lay at the heart of the crash that caused the Great Recession. Many of the principal causative factors were set in motion in the Clinton White House: the marriage between the federal government and Wall Street, continuing financial deregulation, and the repeal of Glass-Steagall, among other factors. McLean and Nocera’s treatment of the crisis from a long-term perspective, with its roots in the evolution of housing policy as well as greed and excess on Wall Street, put the whole question into perspective. If you’re looking for the best way to begin understanding the financial meltdown of 2007–8 that came close to tanking the global economy, start with All the Devils Are Here.
The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public by Lynn Stout — If you own stock, invest in companies, or are starting a new business, read this book!
The well-entrenched view that shareholders’ interests must be paramount is widely regarded as the cornerstone of contemporary business law — and it’s flatly untrue. In The Shareholder Value Myth, business law professor Lynn Stout proves this point, citing chapter and verse in court decisions going back more than a century. “So long as a board can claim its members honestly believe that what they’re doing is best for ‘the corporation in the long run,’ courts will not interfere with a disinterested board’s decisions — even decisions that reduce share price today.” Having laid the legal groundwork, Stout then proceeds to explain how this mistaken view of shareholder primacy is bad for business.
The Devil’s Casino: Friendship, Betrayal, and the High Stakes Games Played Inside Lehman Brothers by Vicky Ward — Greed, jealousy, and betrayal at the heart of Wall Street’s collapse
The Devil’s Casino is an intimate, inside look at the people of Lehman Brothers, the venerable Wall Street investment bank whose record-setting bankruptcy is widely credited with triggering the meltdown of 2008. Like the close-up portraits of the rich and famous that often appear in the pages of Vanity Fair, the magazine for which author Vicky Ward writes, this book is nothing more, and nothing less, than a character study of homo sapiens wallstreetianus. To paraphrase one insider confiding to Ward, all in all this was a sorry bunch of rotten, greedy scoundrels at the helm of one of the world’s most important financial institutions. There were exceptions, a (very) few of them notable for their restraint and honesty. By and large, however, this was a company — and an industry — that by its very nature tended to attract people interested in little but money, fame, and power.
You’ll find a longer list of books on related topics at 37 good books about business history.