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Book Reviews: Politics in The Face of Financial Crisis
Where have all the relevant political economists gone? While political scientists in general have enjoyed a great deal of attention during this election season and in regard to the tumult around the Middle East, it seems hard to find a fellow political scientist in the public spotlight who can speak about perhaps the most important issue of all, the continuing economic crisis in the West since 2008. The best-known voice on this issue, New York Times columnist and Nobel-winning economist Paul Krugman, is known for pointing out the insufficiencies of the stimulus program. In this book, economists Carmen Reinhart and Kenneth Rogoff take a much-needed longer view, placing the current crisis, with a focus on the U.S. housing bubble, into historical perspective. The main theme of their book, as revealed by the title, is that there is a common tendency in the midst of asset and/or financial bubbles to miss obvious (in hindsight, anyway) indicators of overvaluation.
It is risky to try to find fault with a book that is lauded by other well-known economists and financial analysts as "a masterpiece." However, from a political science perspective, the book reveals a genuine missed opportunity for us to make a contribution to this debate, namely in better understanding the policies behind, and in reaction to, the crisis. Reinhart and Rogoff's most important contribution is the development of an historical database of all financial crises that goes back to the nineteenth century. This painstaking effort allows them to examine patterns across crises, documenting observations that are not particularly novel in some cases but important for realizing their them as reflected in the title. En route, they examine crises from a number of angles, from sovereign debt crises to domestic debt defaults to banking and currency crashes. They end with an analysis of the U.S. subprime crisis and some general lessons.
Each section contains an interesting analysis based on the original data set. However, beyond the overall theme, it is hard at times to follow a train of logic from one section to another. The different sections seem to reveal...