Advancing a Free Society

The Roots of the 2008 Economic Collapse

Thursday, June 2, 2011

Jeffrey Friedman, editor. What Caused the Financial Crisis? University of Pennsylvania Press. 360 pages. $29.95

This book’s title is appropriate. In it, various economists and financial experts address the question: What caused the financial crisis? Not surprisingly, they disagree in their answers. Why, then, read the thing? Because it narrows the range of disagreement and supplies vital information that can help one judge which alleged causes are most likely, and which less so. As an economist I have followed this issue closely over the past two and a half years, and yet I still found this book illuminating. The bottom line for me: The case is fairly strong that government regulation was one of the major sources of the financial crisis.

The most important chapter is the first. This 66-page segment is editor Jeff Friedman’s overview of subsequent chapters, along with his own contributions to the debate. It is by far the densest part of the book, not in the sense of being hard to understand, but in the sense that if you miss even one paragraph, you may miss a lot. Friedman carefully sifts through the other authors’ arguments and evidence. His work would be impressive if done by a Ph.D. economist with twenty years of experience in the profession. What makes it more impressive is that Jeffrey Friedman is not an economist at all but a political scientist (he is a visiting scholar in the Department of Government at the University of Texas at Austin).

One point that almost all informed observers agree on is that the financial crisis started in the housing market and that the crash in housing prices caused a more-general banking and financial crisis. Therefore, to understand the cause of the financial crisis, one needs to understand two things: First, why the housing crisis happened and, second, how the housing crisis caused the larger financial crisis.

Continue reading David Henderson’s review…