In his 2003 presidential address to the American Economic Association, the economist Robert Lucas, Jr., famously observed that the “central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.” The global financial crisis of 2008–10 and the European debt crisis from 2009 to the mid-2010s exposed Lucas’s conclusion as premature. Two recent books parse the dynamics of financial crises. Brunnermeier and Reis provide a compact, accessible introduction to efforts to understand and prevent economic crises, the task Lucas referred to as “depression prevention.” Ten short chapters explain concepts used to analyze economic and financial crises, such as bubbles, leverage, and contagion. The authors then put these concepts to work, showing how they shed light not just on the 2008–10 and 2010–13 episodes but also on the German banking crisis of 1931, the East Asian financial crisis of 1997–98, and the Argentine crisis of 2001, among others.
Gorton and Ordoñez’s more technical approach focuses on the roles of credit and information in financial turbulence. In contrast to Brunnermeier and Reis, they reject the emphasis on psychological factors in certain interpretations of crises, arguing that credit booms and busts are intrinsic to the operation of market economies. Disagreements aside, together these two books show that economists have made considerable headway in the last 20 years in understanding financial crises, if not necessarily in preventing them.
