Facts and fantasy about the financial crisis

I find it the most lucid summary (and criticism) of almost everything influential that has been published on the financial crisis so far. Some of the books are reviewed too briefly, and some newer ones are completely omitted, but nonetheless I think this is the most concise and useful general-purpose article written on the crisis as yet. Currently you can download Andrew Lo’s “Reading about the financial crisis: A 21-Book Review” from his website (PDF version dated Jan 9, 2012). It is prepared for the JEL– hence you should be able to find it also in one of the their next issues, perhaps in an updated version.

A special mention: the “Fact and Fantasy” section of the article covers the startling misinterpretations (some of them still awaiting to be corrected!), by several prominent academics, policy makers, and journalists, of the 2004 change in the SEC Rule 15c3-1 concerning leverage restrictions of certain financial institutions. It is beyond alarming how fast and easy some of these errors propagate even among what-ought-to-be-connaisseurs– and how long and hard it takes for them to be discovered and debunked thereafter. The following edifying quote from Lo’s article cannot be emphasized enough: 

[…] Only the most neurotic of academics would dig further to attempt to refute a “fact” that jibes with his or her intuition and preconceptions. This example should serve as a cautionary tale for all of us, and underscores the critical need to collect, check, and accumulate data from which more accurate inferences can then be drawn. Without the immutable hard platform of objective facts on which we can build an accurate narrative of the crisis that stands the test of time, there’s little hope for scientific progress as the waves of public opinion toss our perspective in one direction or another. This is one of the most compelling reasons to read more than one account of the financial crisis, and to seek out those books that may not agree with our preconceptions, just in case we’ve been inadvertently misled through faulty “facts”.

* update: the selected quote above is from the October 24, 2011 version of Lo’s article; it is slightly different in the Jan 9, 2012 PDF version linked above. I have a preference for the older version, hence I leave that one here.

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