The Financial Crisis and the Free Market Solution.

• Author: Selgin, George
• Position: Book review

* The Financial Crisis and the Free Market Solution

By John A. Allison

New York: McGraw Hill, 2013.

Pp. vii, 278. $28 hardcover.

A busy reader wanting to understand the subprime crisis now has dozens of books to choose from, even counting only the ones by authors who know what they're talking about. So when I say that you absolutely must not skip John Allison's The Financial Crisis and the Free Market Solution, I had better give you some good reasons for saying so.

My main reason has to do with John Allison himself. Allison's perspective on the crisis is both unique and exceptionally revealing, for, unlike the authors of other books on the subject, he is neither an economist nor a financial journalist. He's a banker--a darned good one. Under his leadership, BB&T not only survived the crisis but came through it with flying colors. Allison's long tenure as BB&T's CEO helped: unlike other bank CEOs, he remembered the losses that banks incurred during the real estate cycle of the 1990s and so knew better than to believe the generous mortgage-backed security ratings that were being handed out by Moody's, Fitch, and S&P. His extensive reading in economics apparently helped as well, making him more aware than most bankers (and indeed most professional economists) of the Federal Reserve's capacity to promote an unsustainable credit boom and then deny its existence.

In fact, Allison is excellent on many topics. He explains, as only a prudent and economically literate banker can, how Federal Deposit Insurance Corporation (FDIC) insurance allowed his less responsible counterparts to "poison the market" by underpricing the risks they were taking and how the Basel capital standards encouraged financial firms to load up on both subprime and sovereign debt. He also gives good accounts of how the WorldCom and Enron scandals led to the fateful involvement of Fannie Mac and Freddie Mac in subprime (including Alt-A) lending, of why the AIG bailout made little sense except as an indirect means for bailing out Goldman Sachs, of the way in which "fair-value" accounting rules added to the severity of the bust, and of how restrictions on foreclosures have helped to stymie the postcrisis recovery.

Although much of what Allison has to say about the subprime crisis reinforces and clarifies other expert testimony, his book also contains observations that, if not exclusively his own, are at least not commonly encountered elsewhere. To give one important example...