Andrew Lo reviews 21 books on the financial crisis

The paper and abstract are here:

The recent financial crisis has generated many distinct perspectives from various quarters. In this article, I review a diverse set of 21 books on the crisis, 11 written by academics, and 10 written by journalists and one former Treasury Secretary. No single narrative emerges from this broad and often contradictory collection of interpretations, but the sheer variety of conclusions is informative, and underscores the desperate need for the economics profession to establish a single set of facts from which more accurate inferences and narratives can be constructed.

It is an instructive look at how bad we are at discovering the truth and talking about it.  Here is part of his beginning:

To illustrate just how complicated it can get, consider the following “facts” that have become part of the folk wisdom of the crisis:

1. The devotion to the Efficient Markets Hypothesis led investors astray, causing them to ignore the possibility that securitized debt2 was mispriced and that the real-estate bubble could burst.

2. Wall Street compensation contracts were too focused on short-term trading profits rather than longer-term incentives. Also, there was excessive risk-taking because these CEOs were betting with other people’s money, not their own.

3. Investment banks greatly increased their leverage in the years leading up to the crisis, thanks to a rule change by the U.S. Securities and Exchange Commission (SEC).

While each of these claims seems perfectly plausible, especially in light of the events of 2007–2009, the empirical evidence isn’t as clear.

Starting on p.35, you can find a new take on the myth of the 2004 SEC change to Rule 15c3–1 (though see the first comment), relating to the supposed increase in leverage requirements from 12-1 to 33-1:

…it turns out that the 2004 SEC amendment to Rule 15c3–1 did nothing to change the leverage restrictions of these financial institutions. In a speech given by the SEC’s director of the Division of Markets and Trading on April 9, 2009 (Sirri, 2009), Dr. Erik Sirri stated clearly and unequivocally that “First, and most importantly, the Commission did not undo any leverage restrictions in 2004”. He cites several documented and verifiable facts to support this surprising conclusion, and this correction was reiterated in a letter from Michael Macchiaroli, Associate Director of the SEC’s Division of Markets and Trading to the General Accountability Office (GAO) on July 17, 2009, and reproduced in the GAO Report GAO–09–739 (2009, p. 117).

It is also shown that the higher leverage was common in the late 1990s.  There is more to the discussion, but it is time to reconsider this point.


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