Crisis Economics: A Crash Course in the Future of Finance.

• Author: Marshall, Jeffrey
• Position: Book review

Crisis Economics: A Crash Course in the Future of Finance. By Nouriel Roubini and Stephen Mihm. The Penguin Press, 363 pages. $27.95.

When Nouriel Roubini speaks, people listen--at least, they do now. The Mew York University economics professor has garnered a reputation as the oracle of the great recession. He shocked the financial world with a series of astounding predictions in September 2006: That the U.S. economy would suffer a "once-in-a-lifetime" housing bust, sharply falling consumer confidence, a severe oil price shock and ultimately, a terrible downturn. His sky-is-falling outlook earned him the sobriquet of "Dr. Doom," and most mainstream economists shrugged off his forecasts as outlandish headline-hunting.

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Obviously, Roubini was vindicated, and brings a wealth of credibility to a confidently argued new book, written with Stephen Mihm, a professor of economic history, that details his overall thinking about how markets work and how crises evolve. A key precept: Crises emerge in predictable ways, and always start with a financial "bubble." They batter an economy like a hurricane, then often wane before striking even harder--something the U.S. clearly witnessed in 2008-09.

Roubini and Mihm also argue that massive financial shocks are not "black swans"--oddities that defy prediction, like freak storms that flare up, seemingly from nowhere. Instead, crises are "hard-wired into the capitalist genome," the authors write. "The very things that give capitalism its vitality--its power of innovation and its tolerance for risk--can also set the stage for asset and credit bubbles and eventually catastrophic meltdowns whose ill effects reverberate long afterward."

The authors devote much of the first part of the book to examining the sources of the recession, placing it in context...