The Great Shock of 2008, by Ross Garnaut with David Llewellyn-Smith

Ross Garnaut and co-author David Llewellyn-Smith explain the financial crisis of 2008 in a lucid prose that is shot through with a lot of dry humour. The Great Crash of 2008 manages to instruct and also entertain, while at the same time avoiding the moralising tone so common to other books on this subject.

Ross Garnaut is currently best known to Australian audiences for his work on economic policy to combat climate change. The Great Crash of 2008, written with the assistance of David Llewellyn-Smith, was suggested to Garnaut by Louise Adler at Melbourne University Press. It features a bit of recent history (most notably the Asian financial crash of the late nineties), but for the most part concentrates on what caused the financial crisis that occurred in the Anglosphere countries. Garnaut uses the metaphor of an elephant when explaining the financial crisis – global finance being a gigantic organism with many differing body parts, all of which may have contributed to the crash of 2008.

Garnaut sites as major components of the financial system ‘elephant’:

1.) Global Imbalances. Asian countries had a surplus of savings, which they used to buy debt from Anglosphere countries. A notable example is the huge amount of US bonds that China bought, helping America to keep up its spending. (UK historian Niall Ferguson jokingly called the phenomenon ‘Chimerica’.)

2.) Clever Money. Through clever financial innovations, risk was pushed further and further off financial ledgers, until many had fooled themselves that it no longer existed. As the world saw, eventually the whole shonky system would collapse in a heap.

3.) Greed. CEO remuneration packages have reached ridiculous proportions, and it seems the high money paid does not really deliver results.

4.) Boom and Bust Cycles. This is just the regular pattern of free markets; they race from being too optimistic to overly pessimistic.

While The Great Crash of 2008 covers mostly global finance, for Australian readers there is much of especial interest. The analysis of the Australian housing bubble shows that easy finance, coupled with a generation of baby boomers wanting to park their investment money somewhere, created skyrocketing prices. Despite industry experts and journalists constantly asserting that Australia does not have enough houses, hence the high prices, Lllewellyn-Smith and Garnaut demonstrate that Australia may in fact have too many dwellings.

Australians also spent very big during the boom, and what allowed this large spending was borrowing money from overseas. (Here is another example of the imbalances argument, with Australians borrowing from countries with high savings rates.)

Ross Garnaut writes in a simple, open manner that aims to communicate to a wider audience, yet without dumbing the subject matter down. There’s also quite a bit of very dry humour in The Great Crash of 2008, which makes the book a bit of a chucklefest here and there. Some parts of the book get quite complex in the details, but generally the explanations are reader-friendly, making difficult sections within grasp.

Many books have been written on the global financial crisis, but Garnaut and Llewellyn-Smith give their book more gravity by concentrating on analysis and avoiding polemics, ensuring that their work here can be read more for instruction than shock value.

The Great Crash of 2008, by Ross Garnaut and David Llewellyn-Smith. Published by Melbourne University Press. ISBN: 978-0-522-85702-3