24 November 2023
A Crash Course on Crises
Macroeconomic Concepts for Run‑ups, Collapses and Recoveries
Markus K. Brunnermeier and Ricardo Reis
2023, Princeton University Press, 136 pages,
Reviewer: Anjalika Badalai
Readers should not be deceived by the slenderness of this book. Although just over 100 pages, ‘A Crash Course on Crises’ packs a serious punch, covering a substantial amount of theoretical ground illustrated by real-world examples drawn from four continents and almost 100 years. The book succeeds handsomely in its stated aims: firstly, as a pedagogical tool, ‘to supplement existing textbooks when teaching classes in intermediate macroeconomics and in money and banking’, or, alternatively ‘to teach a term-length class in macro-finance’; and secondly, as a primer on macroeconomic and financial policy, aimed at ‘policymakers and members of the informed public’.
The authors’ combination of theoretical exposition, simplified models, and historical examples bringing the theory to life is a powerful device. The structure is also enhanced by the clarity of the writing. This is a book that will appeal strongly to those who believe that there is as much to be learned about core economic and financial concepts from descriptions of causal relationships illustrated by examples as there is from complex (or indeed even simple) equations.
That said, there have been some necessary trade-offs in covering 10 key economic and financial concepts, plus their illustrations, in a mere 100 pages, and some readers might find the balance between breadth and depth to have swung a bit too far towards the former. Some of the real-world examples are described in such brief and general terms as to feel almost Wikipedia-esque; the 1980s Japanese asset bubble, for example, is described in just two paragraphs, and the 1997-98 Asian financial crisis, which profoundly affected half a dozen east and South-east Asian economies, and had spillover effects in other countries in the region, is dealt with in just over three pages, with an additional paragraph nodding towards the 1998 Russian debt crisis and concluding: ‘On the other side of the world, Brazil saw large capital outflows, a depreciation of its exchange rate, and a dramatic spike in its interest rates…Similar events took place in Argentina, Chile, Colombia, Mexico and Venezuela.’
At other times, arguments or examples feel slightly shoehorned in to make a particular point. Describing a chart depicting net capital flows to emerging economies from 2005-2020, the text notes ‘…for almost every single quarter between 2005 and 2019, these flows were positive, with a brief and small exception in 2015 (a period that became known as the “taper tantrum”).’ However, a close reading of the chart shows that flows were negative for 20 out of the 60 quarters under consideration, excluding 2015. Moreover—reinforcing the idea that slightly more depth might have been preferable, even if it meant the loss of some geographic and temporal span—the book would have benefited from an explanation and discussion of the taper tantrum; its importance in global financial markets at the time means that its relegation to the briefest of parentheticals feels unwarranted. In another example, the increase in savings during 2020 is perhaps not strictly associated with a macro-financial crisis since the severe economic dislocations of that year were caused by public-health policies in the wake of the Covid-19 outbreak, not by any financial shock.
The strongest chapters are those at the centre of the book—the chapters on systemic risk, solvency and liquidity, the so-called doom loop, and the flight to safety which together comprise the section ‘Crashes: triggers and amplifiers’. The outer sections—on crisis run-ups and post-crisis recoveries—feel slightly more diffuse in comparison. At the same time, the discussion of unconventional monetary policy’s role in crisis mitigation feels incomplete without at least a mention of some of its (presumably) less desirable effects, such as asset-price inflation and de facto wealth re-distribution among population segments.
Overall, however, ‘A Crash Course on Crises’ excels as a succinct and well-structured explanation of the key drivers and dynamics of macro-financial crises.