Andrew Lo has written a useful review of 21 books about the 2008 financial crisis. Subscribers to the Journal of Economic Literature can find it here. Otherwise, an earlier but basically identical draft version can be found here.

It is a pity he did not include what I regard as one of the best books about the crisis: Senseless Panic, written in 2010 by William M. Isaac, Chairman of the US Federal Deposit Insurance Corporation from 1981 to 1985.

In September 2008, in the midst of the crisis, Isaac had written this piece on the Wall Street Journal and this piece on the Washington Post. I quote from the WSJ article:

I am astounded and deeply saddened to witness the senseless destruction in the U.S. financial system, which has been the envy of the world. We have always gone through periods of correction, but today’s problems are so much worse than they needed to be.

The Securities and Exchange Commission and bank regulators must act immediately to suspend the Fair Value Accounting rules, clamp down on abuses by short sellers, and withdraw the Basel II capital rules. These three actions will go a long way toward arresting the carnage in our financial system.

During the 1980s, our underlying economic problems were far more serious than the economic problems we’re facing this time around. The prime rate exceeded 21%. The savings bank industry was more than $100 billion insolvent (if we had valued it on a market basis), the S&L industry was in even worse shape, the economy plunged into a deep recession, and the agricultural sector was in a depression. These economic problems led to massive credit problems in the banking and thrift industries. Some 3,000 banks and thrifts ultimately failed, and many others were merged out of existence. Continental Illinois failed, many of the regional banks tanked, hundreds of farm banks went down, and thousands of thrifts failed or were taken over. It could have been much worse. The country’s 10-largest banks were loaded up with Third World debt that was valued in the markets at cents on the dollar. If we had marked those loans to market prices, virtually every one of them would have been insolvent. Indeed, we developed contingency plans to nationalize them. At the outset of the current crisis in the credit markets, we had no serious economic problems. Inflation was under control, GDP growth was good, unemployment was low, and there were no major credit problems in the banking system. The dark cloud on the horizon was about$1.2 trillion of subprime mortgage-backed securities, about $200 billion to$300 billion of which was estimated to be held by FDIC-insured banks and thrifts. The rest were spread among investors throughout the world.

The likely losses on these assets were estimated by regulators to be roughly 20%. Losses of this magnitude would have caused pain for institutions that held these assets, but would have been quite manageable.

How did we let this serious but manageable situation get so far out of hand — to the point where several of our most respected American financial companies are being put out of business, sometimes involving massive government bailouts?

The book expands on these articles. I find it spot on. Isaac is a great example of a competent, unassuming, level-headed professional, whose advice is so much more valuable than the superficial, narcissistic and sometimes downright irresponsible vacuities of many revered “experts”. Nothing proves this point better than the following video. It is 24 February 2009. PSB interviews Isaac alongside Paul Krugman. The question is: Should banks be nationalised?

Isaac vs. Krugman

Very funny, and instructive. For more on Isaac, check his website.

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