Engineering the Financial Crisis

Jeffrey Friedman is a visiting scholar in the Department of Government at the University of Texas, Austin. He is the editor of What Caused the Financial Crisis, also available from the University of Pennsylvania Press, and editor of the journal Critical Review. Wladimir Kraus is a doctoral candidate in economics at Universite Paul Cezanne Aix-Marseille and associate editor of Critical Review. Together, Friedman and Kraus maintain Causes of the Crisis, a blog that publishes updated information about the financial crisis.

• List of Figures and TablesGlossary of Abbreviations and AcronymsIntroduction1 Bonuses, Irrationality, and Too-Bigness: The Conventional Wisdom About the Financial Crisis and Its Theoretical Implications2 Capital Adequacy Regulations and the Financial Crisis: Bankers' and Regulators' Errors3 The Interaction of Regulations and the Great Recession: Fetishizing Market Prices4 Capitalism and Regulation: Ignorance, Heterogeneity, and Systemic RiskConclusionAppendix I. Scholarship About the Corporate-Compensation HypothesisAppendix II. The Basel Rules off the Balance SheetNotesReferencesIndexAcknowledgments

"This book argues that the incentive distortions of bank capital-adequacy regulations were the proximate cause of the 2007 financial crisis. The systemic instability that followed was fueled by blind-sided experts who perpetuated the myths of too-big-to-fail and overcompensated corporate managers. A serious read for those struggling to make sense of the worst crisis since the Depression." (Vernon Smith, 2002 Nobel Laureate in Economics) "An excellent conceptual book on the financial crisis, full of deep research and intellectual honesty." (Tyler Cowen, Marginal Revolution) "For anyone wanting to read only a single book about the crisis and its origins, this is the book to read." (Choice) "Jeffrey Friedman and Wladimir Kraus distinguish themselves by presenting the most systematic and rigorously argued empirical analysis of the crash to date." (Perspectives on Politics) "While this is the single best book on the financial crisis, it also offers an outstanding analysis of decision making in modern regulatory states." (Samuel DeCanio, Yale University) "If you thought you understood the causes of the financial crisis, think again. This thought-provoking exploration of the financial crisis provides a convincing argument that much of what we thought we knew about the crisis is, at best, misleading. In thinking about the cause, much more focus needs to be given to ignorance on everyone's part, and models that don't include ignorance will be, at best, incomplete. Ignorance of the importance of ignorance is a sign of ignorance." (David Colander, Middlebury College)