Crisis Economics Part 14

That process may be especially violent if the dollar starts to appreciate quickly. Any number of things could cause it to do so: increased investors' risk aversion or military confrontations and other geopolitical tensions could suddenly send investors fleeing for safer havens. Whatever the reason, if the dollar appreciates suddenly-just as the yen did when the carry trade in that currency unraveled-a stampede will ensue. Investors who went long on risky global a.s.sets and short on the dollar will suddenly reverse course. The bubble will then burst.

This unraveling may not occur immediately. The wall of liquidity and the Fed's suppression of volatility can keep the game going a bit longer. But that means the a.s.set bubble will only get bigger and bigger, setting the stage for a serious meltdown.

Defaulting on Debt.

Until very recently, the idea that an advanced economy might default on its sovereign debt would have seemed outlandish. Emerging markets were the ones that defaulted. In the past decade alone, Russia, Argentina, and Ecuador defaulted on their public debt, while Pakistan, Ukraine, and Uruguay came close. This same pattern has held through the centuries: emerging economies occasionally default on their debt, then eventually "graduate" to a more respectable, reliable place in the global economy.

We seem to have come full circle. In recent years, with a few exceptions in central and eastern Europe, emerging-market economies have put their fiscal houses in order. The threat of default now looms over advanced economies. In 2009 rating agencies downgraded the debt of several advanced countries, and debt auctions in the United Kingdom, Greece, Ireland, and Spain found far fewer buyers than antic.i.p.ated. It was a less-than-friendly reminder that unless advanced economies start to put their fiscal houses in order, the rating agencies-and in particular, the dreaded "bond vigilantes"-will bring them to heel.

That prospect puts many advanced economies in a bind. The recent crisis and the ensuing recession have led to a serious erosion in their fiscal position. Stimulus spending programs and lower tax revenues have hit hard. So has the decision to socialize the losses in the financial sector, effectively s.h.i.+fting them onto taxpayers' backs. In the coming years, an underwhelming recovery and an aging population may worsen the debt burden of the United States, the United Kingdom, j.a.pan, and a handful of countries in the Eurozone.

Some countries have already taken measures to consolidate their fiscal position, including Iceland, Ireland, and the United Kingdom, as well as Spain, Portugal, and, to a lesser extent, Greece. These measures will hurt in the short term, but they will be the only thing that can prevent a loss of credibility and the inevitable spike in borrowing costs. Unfortunately, while putting one's fiscal house in order may play well with foreign investors, it could also sabotage a fledgling recovery. On the whole, however, these countries are better off taking the pain now rather than running the risk of defaulting on their debt.

Though the United States and j.a.pan will likely avoid the bond market vigilantes for some time to come, they too may one day incur their wrath. The United States continues to run unsustainable current account deficits and has an aging population and plenty of unfunded ent.i.tlement spending on Social Security and health care. j.a.pan has an even bigger aging population and has already racked up significant debts. Both countries may soon face growing scrutiny of their fiscal position, a prospect that poses particular dangers for the United States, which until now has been able to borrow in its own currency.

Unfortunately, it has another, less honest option. The United States (as well as the United Kingdom and j.a.pan) issues its public debt in its own currency. That means it need not formally default on its debt if it proves unable to raise taxes or cut government spending. Instead, central banks can print new currency-or its digital equivalent-and monetize the debt. This time-honored method would send inflation soaring, wiping out the real value of the debt and transferring wealth from creditors to the government. While the so-called inflation tax avoids an outright default, it achieves the same end.

Proponents of the inflation solution argue that it kills two birds with one stone. First and most obviously, a moderate rate of inflation helps erode the real value of public debt, reducing the burden. At the same time, it resolves the problem of debt deflation, reducing the real value of private liabilities-fixed-rate mortgages, for example-while increasing the nominal value of homes and other a.s.sets. This is a win-win: the public and private sectors both get to wriggle free of their debts.

It sounds smart, but it's not. If inflation rose from near-zero levels to the low single digits-let alone double digits-central banks could lose control of inflation expectations. Once the inflation genie gets out of the bottle, it's hard to control. In the process, central banks would destroy their hard-won credibility. While Paul Volcker's success in fighting inflation in the early 1980s confirms that this credibility can be regained, doing so comes at the considerable cost of a severe recession.

Moreover, while inflation can reduce the real value of nominal debt at fixed interest rates, much of the debt in the United States and other advanced economies consists of short-term obligations with variable interest rates. These include bank deposits, variable-rate mortgages, short-term government debt, and other short-term liabilities of households, corporations, and financial inst.i.tutions. Expectations of rising inflation would mean that these liabilities would be rolled over at higher interest rates. The rates would effectively keep pace with inflation. In the case of short-term and variable-rate debt, the inflation solution would be ineffective: you can't fool all of the people all of the time.

Needless to say, trying to use inflation to erode the real value of private and public debt would carry other risks. Foreign creditors of the United States would not sit back and accept a sharp reduction in the real value of their dollar-denominated a.s.sets. The resulting rush toward the exits-as investors dumped dollars-could lead to the collapse of the currency, a spike in long-term interest rates, and a severe double-dip recession. The United States would not have the sway that it did the last time inflation started to rage, in the 1970s. Back then the country was still running current account surpluses.

That's no longer the case: the United States has become the world's biggest debtor, owing a whopping $3 trillion to the rest of the world. Its current account deficits-$400 billion a year-have become the stuff of legend. As its creditors become increasingly leery of holding long-term debt, it will have to resort to borrowing on a shorter time frame to finance its various deficits. That makes it increasingly vulnerable to the kind of crises that hit emerging markets in the 1990s, with the sudden collapse of the dollar more likely.

The Chinese and other U.S. creditors-Russia, j.a.pan, Brazil, and the oil exporters in the Gulf-would not accept such a loss on their dollar a.s.sets. Convincing China to accept such a financial levy would require some rather unpleasant negotiations. China might ask the United States for some other form of compensation, such as giving up on its defense of Taiwan. Such trade-offs would be likely in a world where the great powers on both sides of large financial imbalances vie for geopolitical leaders.h.i.+p.

This "balance of financial terror" would seem to rule out the possibility that China would simply stop financing the U.S. fiscal and current account deficits. For China to halt its interventions in the foreign exchange markets, much less dump its stock of dollar a.s.sets, would severely damage the compet.i.tiveness of its exports. But should political tensions rise, and the United States begin actively to debase its own currency, China may well walk away from the table, even if its interests suffer in the short term. This outcome may be as unlikely as a nuclear exchange at the height of the Cold War, but it is not inconceivable.

Given these risks, U.S. authorities will likely not resort to the printing press to deal with the country's debt, even if the temptation to use inflation-just a little bit-to depreciate the debt will remain strong. But prudent policy makers should know that the costs and the collateral damage of such a solution would be significant, if not catastrophic.

All That Glitters.

Through 2009 the price of gold rose sharply, reflecting fears that the United States might purposely debase and devalue its currency in order to resolve its debt problems. In 2009 gold prices breached the $1,000 barrier and rose to $1,200 by the end of the year, before falling once more. Some goldbugs forecast that in the next couple of years gold prices could reach a level above $2,000. Is that possible? Is the recent rise of gold prices justified by fundamentals, or is it evidence of a bubble?

Typically, gold prices rise sharply in one of two situations: one, when inflation starts to rage out of control, at which point gold becomes a hedge against inflation; two, when a near depression seems increasingly likely and investors become concerned that even their bank deposits may not be safe. The history of the last two years fits both situations.

First, gold prices started to rise sharply in the first six months of 2008 as emerging markets began to overheat, commodity prices skyrocketed, and fears of inflation in these markets increased. Oil prices. .h.i.t record highs. Then the bubble burst, commodity prices fell, and gold prices fell too.

The second spike in gold prices occurred at the time of the Lehman collapse in 2008. Then the rush to gold was not driven by concerns about inflation; indeed, deflation had become a problem around the world. Rather, once the Lehman collapse triggered a global financial cardiac arrest, investors became sufficiently scared about the security of their financial a.s.sets-including bank deposits-that some preferred the safety of gold.

The G-7 contained that depression scare by widely insuring deposits and bailing out and backstopping the financial system. The price of gold then drifted downward, as the near depression gripping the global economy undercut commercial and industrial demand for gold, as well as the consumer demand for it as a luxury object.

But gold bounced back, spiking above $1,000 in the early spring of 2009 as concerns about the solvency of the financial system in the United States and Europe peaked once again. Fears grew that governments could not bail out the entire financial system-that something once considered "too big to fail" was now "too big to save." At that point growing concerns about an economic and financial Armageddon triggered another spike in gold prices. That's hardly surprising: when you begin to worry that your government cannot credibly guarantee bank deposits, it's time to buy a gun, ammo, canned food, and gold bars, and hunker down in a remote log cabin in hopes of surviving a global meltdown. But once again that panic subsided-and gold prices drifted downward again later that spring, as additional policy measures and the gradual bottoming-out of the global economy helped dispel fears.

The pattern is clear: gold prices spike in response to concerns about either inflation or depression. In both cases, gold makes a good hedge against risk, particularly extreme events that signal a total systemic collapse. When those threats ease, gold prices generally drift downward.

How might gold fare going forward? Any number of forces may propel gold prices higher, though it's unlikely to hit $2,000 per ounce. For example, growing concerns that governments might try to monetize their deficits could stoke fears of inflation, sending prices higher. Likewise, ma.s.sive amounts of liquidity slos.h.i.+ng around the financial system could send any number of a.s.set prices higher, including gold. In addition, carry trades funded by dollars have pushed the value of the dollar sharply downward. There's an inverse relations.h.i.+p between the relative value of the dollar and the dollar price of commodities: as the dollar goes lower, prices of a range of commodities, including gold, increase.

Other factors may fuel demand for gold. Central banks in India, China, and other countries have increased their holdings of gold. Private investors who have lingering fears of low-probability events-high inflation or a crippling double-dip global recession-may also fuel demand. Given the inelastic supply of gold, central banks and private investors need make only a small s.h.i.+ft toward gold in their portfolios to increase its price significantly. A single event-a sovereign debt default, for example-can serve as a catalyst for gold prices to move upward into bubble territory. So-called herd behavior and momentum trading would only inflate the bubble still further.

Nonetheless, a downward correction in gold prices carries significant risks. The dollar carry trade will likely unravel at some point, and central banks will eventually exit quant.i.tative easing and abandon near-zero policy rates. Both these developments will put downward pressure on commodity prices, including gold.

More generally, anyone who has blind faith in gold as a hedge against risk should understand that crises don't always drive people toward gold. The prospect of sovereign debt defaults in smaller countries may drive investors toward dollars, not gold. The same goes for any kind of crisis. So long as the dollar itself is not the focus of a crisis, gold prices do not automatically spiral higher simply because bad things are afoot.

For the sake of argument, let's a.s.sume that the global economy plunges into a near depression, and investors steer clear of dollars. Should they therefore put all their money into gold? Not necessarily. Unlike other commodities, gold has little intrinsic value. You can't eat it, heat your house with it, or put it to good use. It is what Keynes called a "barbaric relic." While you could exchange gold for something more useful, it might make more sense to stock up on commodity futures or, if you can stomach it, cans of Spam.

Investors should remain wary of gold. The recent swings in its price-up 10 percent one month, down 10 percent the next-underscore the fact that its price movements are often a function of irrational beliefs and bubbles. Holding some gold as a hedge against inflation may make some sense, particularly if governments start to monetize their debt. But holding lots of gold makes no sense, particularly given the likelihood that inflation will remain in check.

Inflation or Deflation?

At the height of the recent crisis, concerns about deflation drove many governments to take drastic measures to prevent prices from falling. Zero interest rates and quant.i.tative easing would normally trigger a round of inflation, but that did not happen in 2009. Deflation crept into the United States, the Eurozone, j.a.pan, and even some emerging-market economies. The reason was simple: banks held most of their excess liquidity in the form of reserves rather than loaning it out.

Deflationary pressures will persist in the short term in most advanced economies and even some emerging-market economies. In most places, demand for goods and labor remains slack, putting downward pressure on prices and wages. Inventories of unsold goods get liquidated at low prices, and workers facing record unemployment rates have little bargaining power, even accepting cuts in wages in exchange for job security.

Inflation has shown some signs of reappearing in emerging economies, which have enjoyed a swifter recovery from the financial crisis. At the end of 2009 oil, food, and real estate prices were rising in China and India. For these economies, which may soon overheat, inflation could become a problem, far more so than in advanced economies.

Still, advanced economies may see a return of inflation starting in 2012. It could happen for one of three reasons. One, if governments opt to monetize their deficits, expectations that inflation will soar, prompting a vicious cycle of falling currencies and rising prices and wages. Two, the glut of easy money unleashed in response to the crisis may end up fueling an a.s.set bubble in commodities, prompting a return of inflation. Three, if the dollar continues to weaken, the price of commodities in the United States might go up: as we've seen, there's a negative relations.h.i.+p between the value of the dollar and the dollar price of commodities. Oil producers, for example, will raise the dollar price of a barrel of oil if the dollar weakens. Otherwise, they will see a decline in the purchasing power of the dollar they receive in revenue.

In all likelihood, neither deflation nor inflation is likely to be p.r.o.nounced in the next year or so. Absent a severe double-dip recession, deflation will likely remain in check, but inflation might start to gain momentum under certain circ.u.mstances.

Globalization and Its Discontents.

In the last few decades the world has become increasingly "globalized." Trade in goods and services has become increasingly international in scope, as has the migration of workers and the diffusion of information. Globalization has gone hand in hand with technological innovation, each reinforcing the other. For example, financial capital now moves around the world at a much faster pace thanks to the widespread adoption of information technology.

As a result, countries can now provide services to other countries on the other side of the world: think of India's call centers, for example, and the outsourcing of U.S. white-collar jobs. Likewise, China has been able to join complicated supply chains that stretch around the globe. Increasingly, countries on the economic periphery are connected to advanced economies and vice versa.

Globalization has brought a sharp increase in the standard of living in emerging economies. Hundreds of millions of Chinese, Indians, Russians, Brazilians, and other citizens of emerging-market economies have been lifted out of poverty. They have obtained higher-paying blue-collar jobs, or even middle-cla.s.s salaries, gaining far greater access to necessities and luxuries alike. In turn, citizens of advanced economies have seen the prices of goods and services become ever more affordable.

But globalization and innovation are not without risks. Take, for example, the daunting challenge of adding billions of people to the global labor supply. China and India contain nearly 2.5 billion people, and other emerging economies have another 2 billion. Botching this integration could cause a backlash against globalization and free trade in advanced economies. Unfortunately, this sort of transition will not likely be smooth. Many stress points in the global economy-current account imbalances, for example, and the growing prevalence of financial crises-are in no small part a function of the complex integration of emerging markets in the global economy.

Globalization has also been a.s.sociated with growing inequalities of income and wealth in advanced economies and emerging-market economies alike. Debate simmers over why this has happened. Some economists point out that technological progress has left some workers out of growing global prosperity (for example, if you don't know how to use a computer, you can't improve your situation). Others point to the rising comparativer, advantage of China and other emerging markets in the manufacture of labor-intensive goods.

Whatever its causes, this increased inequality has caused a growing malaise and concerns about globalization and free trade. It began with blue-collar workers, for understandable reasons, but has spread to white-collar workers, as outsourcing enables firms to s.h.i.+ft service jobs from advanced economies like the United States to emerging economies like India. In time, entire industries may s.h.i.+ft from one part of the globe to another, causing serious disruption. This kind of "creative destruction" may be inevitable, but it will cause considerable strife unless properly managed.

Finally, globalization may well usher in far more frequent and virulent crises. The speed with which financial capital and hot money can move in and out of specific markets and economies has increased the volatility of a.s.set prices and the virulence of financial crises. Unfortunately, while finance has gone global, its regulation remains a national affair. All of this increases the likelihood of future crises that could a.s.sume global proportions.

The recent crisis has made it clear that the "Great Instability" may be a better description of the coming era than the "Great Moderation." a.s.set bubbles and busts may occur more frequently, and crises once thought to occur only once or twice a century may hammer the global economy far more often. Black swans may become white swans.

That would be unfortunate: as financial crises grow in frequency and severity, they will inflict social and political instability and ultimately breed a backlash against globalization. The backlash could take many forms: protectionist trade policies; financial protectionism, with restrictions on foreign direct investment; capital controls; and a broader rejection of any policies that promote free markets.

How to prevent such a backlash? First, it's essential for governments to adopt policies that reduce the frequency and virulence of a.s.set booms and busts. This will entail reforming the financial system and monetary system along the lines described earlier in this book. But it will also require the construction of a much broader government safety net. If workers have to be flexible enough to switch jobs and careers frequently, they will need more government support to navigate the increasingly uncertain employment terrain. This approach-dubbed "flexicurity"-will mean greater investments in education, job skills, and retraining; a safety net of unemployment benefits; and portable health care plans and pension benefits. In the United States, it will also mean a more progressive tax system in order to pay for these benefits.

Paradoxically, making free markets function better, and enabling workers to be more flexible and mobile in a global economy where "creative destruction" will be the norm, requires more, not less, government. Government can use monetary policy and increased regulation to keep booms and busts from occurring. It can provide a broad social safety net to help make workers more productive and flexible. It can implement tax systems that will reduce inequalities of wealth and income. Finally, government will need to take a bigger role in more closely coordinating their economic policies so as not to create the kind of imbalances that produce crises in the first place. Crises may be here to stay, but governments can limit their incidence and severity.

In the shadow of the worst financial meltdown since the Great Depression, many policy makers and pundits have observed that "a crisis is a terrible thing to waste." This is true. We will plant the seeds of an even more destructive crisis if we squander the opportunity this crisis has presented us to implement necessary reforms. That opportunity would be a terrible-indeed, a tragic-thing to waste.

ACKNOWLEDGMENTS.

Speaking as one, we want to thank Eamon Dolan, our editor at The Penguin Press. Eamon's unerring editorial instincts have proven invaluable in getting two professors to write for an audience beyond the confines of academia. Unflappable and whip smart, he has been instrumental in shepherding this book every step of the way. Many thanks as well to the rest of the staff at Penguin: Janet Biehl, Bruce Giffords, Nicole Hughes, and last but not least, Ann G.o.doff. We also want to extend our appreciation to those who read the ma.n.u.script with an eye toward clarification, especially Jane Cavolina, Dan Kaufman, and Richard Sylla. A special thanks goes to Wes Neff of the Leigh Bureau, who first proposed this project and brought us together with Eamon, Ann, and The Penguin Press.

Personal Acknowledgments.

I would like to thank my collaborators at Roubini Global Economics-Christian Menegatti, Arnab Das, Elisa Parisi-Capone, Rachel Ziemba, Bertrand Delgado, Sandra Navidi, and many others-who have been my daily intellectual colleagues for the last few years. Parul Walia was helpful with a chronology of the crisis. Brad Setser, a former colleague in many different venues and the coauthor of my previous book on financial crises in emerging market economies, was always a great sounding board for ideas.

My colleagues at the Stern School of Business at New York University-starting with Richard Sylla, David Backus, Tom Cooley, Paul Wachtel, Matt Richardson, Viral Acharya, and others-provided me with intellectual rigor and opportunities for discussion and debate. Academic colleagues who have influenced my thoughts on international macroeconomics and financial crises include-among many others-Jeff Sachs, Paul Krugman, Ken Rogoff, Carmen Reinhart, Na.s.sim Taleb, Raghu Rajan, Jeffrey Frankel, Richard Portes, Joe Stiglitz, Niall Ferguson, Robert s.h.i.+ller, Hyun s.h.i.+n, Barry Eichengreen, Willem Buiter, Simon Johnson, Bob Mundell, Joseph Mason, members of the International Finance and Macroeconomics Program at the National Bureau of Economic Research, and members of the International Macroeconomics group at the Centre for Economic and Policy Research. Giancarlo Corsetti, Paolo Pesenti, Bernardo Guimares, Paolo Mana.s.se, Vittorio Grilli, and Fabrizio Perri have been among my coauthors of academic research on international macroeconomics and financial crises; I have learned much from them.

Market pract.i.tioners, a.n.a.lysts, and other thinkers with whom I've had a productive dialogue include Martin Wolf, Steve Roach, David Rosenberg, Mark Zandi, Jim O'Neill, Luis Oganes, Joyce Chang, Lewis Alexander, Don Hanna, Stephen King, Manu k.u.mar, Jens Nystedt, Robert Kahn, Chris Whalen, Joshua Rosner, Barry Ritholtz, Yves Smith, Wolfgang Munchau, Gillian Tett, Ian Bremmer, Michael Pettis, Steve Drobny, Satyajit Das, Katerina Alexandraki, Daniel Alpert, Charles Morris, Richard Bookstaber, Edward Chancellor, and Walter Molano. Former policy makers and other policy think-tank scholars with whom I've interacted include Alex Pollock, Desmond Lachman, Ted Truman, Fred Bergsten, Morris Goldstein, Adam Posen, and Benn Steil. Marc Uzan has been a dynamo in organizing policy conferences via his Reinventing Bretton Woods Committee.

A number of former and current policy makers-some of them colleagues of mine while I worked at the Council of Economic Advisers and at the U.S. Treasury during 1998-2000-have shaped my views over the years. Without implicating any of them in any way or form with my views, I want to thank Larry Summers, Tim Geithner, Stan Fischer, David Lipton, Mary Goodman, Anna Gelpern, Dan Tarullo, Janet Yellen, John Lipsky, Bill White, Olivier Blanchard, Federico Sturzenegger, Andres Velasco, Felipe Larrain, and Hans-Helmut Kotz. I also have learned a great deal about financial crises from many colleagues at the International Monetary Fund, where I have had many stints as a visiting scholar over the years.

George Soros kindly hosted me in his summer home while I wrote parts of this book and has always been for me a model of a "Renaissance man." I also benefited from discussions with other investors interested in macroeconomics and economics policy issues, such as John Paulson, Louis Bacon, Bill Janeway, Ron Perelman, Steve Eisman, Daniel Loeb, Avi Tiomkin, Harry Lefrak, Stylianos Zavvos, Charles Krusen, and Jim Coleman. My friend Shai Baitel also supported my intellectual ventures. I thank Klaus Schwab and many folks at the World Economic Forum for a great venue to present and discuss my views.

Numerous bloggers-some top-notch academic economists and many accomplished veterans of Wall Street-provided me with real-time insights about the financial crisis. These include Yves Smith of "Naked Capitalism"; "Calculated Risk," home to Bill McBride and the much-missed Doris Dungey; the anonymous bloggers at Zero Hedge; Brad DeLong at "Grasping Reality with Both Hands"; Barry Ritholtz at "The Big Picture"; Mark Thoma at "Economist's View"; Jim Hamilton at "Econbrowser"; Paul Krugman at "The Conscience of a Liberal"; Mike Shedlock at "Mish's Global Economic Trend a.n.a.lysis"; Tyler Cowen and Alex Tabarrok at "Marginal Revolution"; The Wall Street Journal's "Real Time Economics"; Dave Altig and the other economists at the Atlanta Fed who contribute to "macroblog"; Dean Baker at "Beat the Press"; Greg Mankiw on his blog; and many, many others who have played such an instrumental role in covering the financial crisis.

Finally, I want to thank my agent, Wesley Neff, for first suggesting the idea of a book and helping me develop this project.

-Nouriel Roubini.

I first met Nouriel Roubini while profiling him for a feature in The New York Times Magazine, and many of the ideas behind this book first surfaced in the course of that a.s.signment. I want to thank my editor there, Jamie Ryerson, as well as Alex Star, Gerald Marzorati, Adam Moss, and Jack Rosenthal, all of whom have played key roles in fostering my work at the Times. Thanks as well to Steve Heuser at The Boston Globe for letting me air some of the ideas that ultimately shaped this book. I also owe a special debt of grat.i.tude to Henry Grunwald and Sarah Lewis, each of whom played an early but indispensable role in encouraging my forays into writing for a wider audience.

My colleagues at the University of Georgia deserve special acknowledgment too, beginning with the members of the Workshop in the Cultural History of Capitalism; Allan Kulikoff has been especially helpful in so many ways. I'm also grateful to Paul Sutter, Robert Pratt, and Garnett Stokes, who provided a course release so that I would have more time to work on this book. Other colleagues at the University of Georgia have provided moral support, constructive criticism, or simply a much-needed respite from work: Stephen Berry, Kathleen Clark, Jim Cobb, Rachel Gabara, Shane Hamilton, John Inscoe, Michael Kwa.s.s, Chana Kai Lee, Laura Mason, Bethany Moreton, Bob Pratt, Reinaldo Roman, Susan Rosenbaum, Julie Rothschild, Claudio Saunt, George Selgin, Steve Soper, Paul Sutter, Pamela Voekel, and Chloe Wigston Smith. Thanks as well to those friends who put me up in New York City while I worked on this book, especially Michael Lacombe, as well as David Sampliner and Rachel Shuman.

Several economists, policy makers, and individuals with hands-on experience in the financial markets have fielded endless queries from me. David Dean, David Forquer, Michael Laskawy, Benjamin Schneider, Patricia Schneider, and Robert Wright have all provided insights on various esoteric financial matters. Finally, I owe a particular debt to Richard Sylla of New York University. I have known d.i.c.k since graduate school, and he has been an unfailing source of insight on the convergence of economics and history.

Particular thanks go to my agent, Tina Bennett, who has been an indispensable guide throughout this process from start to finish. She and the staff at Janklow & Nesbit-including Svetlana Katz-deserve special thanks for representing me throughout this process. A special thanks as well to Joyce Seltzer of Harvard University Press, who kindly gave me leave from another project so that I could complete this book.

I have great grat.i.tude for those who have helped out on the home front. Richard and John Mihm contributed significantly toward child care; Kathy Mihm effectively shouldered the burden of taking care of the kids during one particularly stressful weekend; so too did my niece Alisa Dunning and my in-laws, Kathleen and Jamie Reason. Likewise, Sheridan Smith has done a heroic job of coralling my children while I work-no easy task. Jing Cui and Mary Elizabeth Nuttall have also lent a hand at critical junctures. So too did Martha Clinkscales and her family, helping out at a particularly critical time.

Last, but certainly not least, I want to thank my family. My wife, Akela Reason, has been a source of unwavering support throughout the process of writing the book: her patience, advice, and love have kept me going throughout the past year. A special thanks goes to my three sons: Silas, Asher, and Linus. They have provided comic relief as well as a constant reminder that however much the collapse of the global financial system demands my attention, it cannot compete with the more mundane-but more readily remedied-crises of dirty diapers, empty baby bottles, and bad dreams.

-Stephen Mihm.

NOTES.

Introduction.

1 "n.o.body anywhere was smart enough . . .": d.i.c.k Cheney, interview by Deb Riechmann, a.s.sociated Press, January 8, 2009.

1 the most famous prediction: Nouriel Roubini, lecture and discussion, International Monetary Fund, Was.h.i.+ngton, D.C., September 7, 2006, transcript.

2 elaborated on his pessimistic vision: Nouriel Roubini, "The Rising Risk of a Systemic Financial Meltdown: The Twelve Steps to Financial Disaster," February 5, 2008, online at http://www.roubini.com/a.n.a.lysis/44763.php; Stephen Mihm, "Dr. Doom," New York Times Magazine, August 15, 2008.

3 Robert s.h.i.+ller: Robert s.h.i.+ller, Irrational Exuberance (Princeton, N.J.: Princeton University Press, 2000); Karl E. Case and Robert J. s.h.i.+ller, "Is There a Bubble in the Housing Market?" Brookings Papers on Economic Activity 2 (2003), 299-362.

3 Raghuram Rajan: Raghuram G. Rajan, "Has Financial Development Made the World Riskier?" speech delivered at Federal Reserve Bank of Kansas City symposium, "The Greenspan Era: Lessons for the Future," Jackson Hole, Wyo., August 27, 2005.

3 "the greatest of all credit bubbles": Justin Lahart, "NASDAQ: Five Years after the Peak," Wall Street Journal, March 7, 2005.

3 William White: Beat Balzli and Michaela Schiessl, "The Man n.o.body Wanted to Hear," Der Spiegel, July 8, 2009.

3 Maurice Obstfeld and Kenneth Rogoff: Maurice Obstfeld and Kenneth Rogoff, "The Unsustainable US Current Account Position Revisited," National Bureau of Economic Research Working Paper no. 10869, November 2004.

3 Stephen Roach: Brett Arends, "Economic 'Armageddon' Predicted," Boston Herald, November 23, 2004.

5 "animal spirits": John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt, Brace, and World, 1936), 161.

5 "the ideas of economists . . .": Ibid., 383.

11 "The decadent international . . .": John Maynard Keynes, "National Self-Sufficiency," Yale Review 22 (1933): 760-61.