First bank of the living dead.

• Author: Drezner, Daniel W.
• Position: Books about economics - Book review

Sebastian Mallaby, More Money Than God: Hedge Funds and the Making of a New Elite (New York: Penguin Press, 2010), 496 pp., $29.95.

John Quiggin, Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton, NJ: Princeton University Press, 2010), 216 pp., $24.95.

Robert B. Reich, Aftershock: The Next Economy and America's Future (New York: Alfred A. Knopf, 2010), 192 pp., $25.00.

Nouriel Roubini and Stephen Mihm, Crisis Economics: A Crash Course in the Future of Finance (New York: Penguin Press, 2010), 368 pp., $27.95.

Earlier this year, Goldman Sachs CEO Lloyd Blankfein attempted to justify his professional existence, proclaiming, "We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth.... We have a social purpose." This all sounds good enough, except that finance went from being responsible for 2.5 percent of GDP in 1947 to 7.7 percent in 2005. And at the peak of the housing bubble, the financial sector comprised 40 percent of all the earnings in the Standard & Poor's 500. The incomes of the country's top-twenty-five hedge-fund managers exceeded the total income of all the CEOS in that index. And by 2007, just about half of all Harvard graduates headed into finance jobs. If capital markets merely serve as conduits from savers to entrepreneurs, then why does such a large slice of them get siphoned off to compensate people like Lloyd Blankfein? To put it more broadly, what is the role of finance in a good and just society?

These are not merely theoretical questions. They come at the end of an era when Big Finance played an outsize role in the American political economy. Furthermore, the political system is now responding to these perceived ills. I write this sentence on the day that President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, completing the most sweeping overhaul of financial regulation since the 1933 Glass-Steagall Act (which segmented commercial from investment banks in a sweeping reformation). Now the G-20, IMF, Financial Stability Board and the Basel Committee on Banking Supervision are hashing out new financial standards that are ostensibly supposed to prevent a sequel to the Great Recession. Meanwhile, concerns over mounting sovereign-debt loads in the developed world are causing ripples in capital markets and potentially triggering a double-dip recession. The quicker that finance's role in the world economy is well defined, the better for everyone.

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The trouble is that finance now permeates not only the economic but also the political and social fabric of our world. No one can talk about Big Finance without talking about the power of capital in politics. At the same time, Goldman Sachs now possesses all the cultural cachet of a tobacco company. And no matter how Washington attempts to curb the excesses of an industry whose core purpose is the making and reallocation of money, the future of global financial regulation remains unclear.

Even economists are still unsettled about banking's place in the economy. Paul Volcker, chairman of the President's Economic Recovery Advisory Board, argues that the value-added of financial innovation is limited to the ATM. Yet, when New York Times columnist Paul Krugman argues that the big banks shouldn't be broken up, perhaps it means that the world is a bit more complicated than Volcker's blunt assessment.

Socially, the rise of hedge funds and investment houses has triggered nostalgia for the days when America built things, as if goods are somehow magically different from services. Still, it is not necessarily the best of all worlds when finance drains the brains of physicists, mathematicians and economists from other pursuits. There is a nugget of truth in Blankfein's plea for the utility of finance--but it's a much smaller nugget than he realizes.

The whys and wherefores of economic calamities as yet unsolved, four new books attempt to tackle Big Finance from different angles. Robert Reich, Bill Clinton's first secretary of labor and now a public policy professor at the University of California, Berkeley, focuses on the rise in political and economic inequality over the past few decades, and how that inequality abetted the recent crisis. John Quiggin, an economist at the University of Queensland in Australia, performs a clinical autopsy on the cluster of market-friendly ideas that emerged from the ashes of Keynesianism, asserting that the Great Recession should have exposed market fundamentalism (faith in the power of markets to correct themselves) as a fraud. Quiggin argues that still these ideas continue to lurch around like the undead, moaning "maaaaaaarkets" rather than "braaaaaiiins" because we are intellectually unable to adapt to these changing times. Washington Post columnist Sebastian Mallaby addresses the problem from a different angle entirely by drafting the first history of the hedge-fund industry. New York University economist Nouriel Roubini--who deserves pride of place for warning about the financial meltdown before it happened--has coauthored a book with University of Georgia historian Stephen Mihm that looks at the crisis, the policy response and what to do now.

Some of these books address some of the big questions some of the time. Most of the authors, however, focus on the retrospective at the expense of the prospective. With the partial exception of Roubini and Mihm's Crisis Economics, these authors seem more concerned with looking back at the halcyon days of the postwar era than looking forward to the twenty-first century. Unfortunately, none of these books recognizes two important facts of life. First, at present, no economic model perfectly captures the interrelationship between the...