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Central Banks, Credit Bubbles, and the Efficient Market Fallacy

The Origin of Financial Crises

The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns" -- not with inflation, as Cooper sees it, however the least inadvisable. Fed encroachment on Congress's fiscal duties will thus proceed quietly, especially as inflation increases.

The public excuse will be, with the help of Republicans, that the government is spending too much and cannot be trusted to be fiscally responsible. Hussman continues that "In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.

But if preferable, will we get them? As Rahm Emanuel said, however, "You never want a serious crisis to go to waste. Dec 04, Philski rated it did not like it.

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E for Effort, but ultimately this book was a huge disappointment. The first few chapters are fine background material. However to him it's binary, either 'the market' is stable and requires no intervention, or it's unstable and needs a central bank. He doesn't acknowlege it could have multiple stability points and bounce back and forth between them. An E for Effort, but ultimately this book was a huge disappointment.

And how can you mention Keynes almost every other page without mentioning Hayek? There were a few references to Milton Friedman but Hayek and Keynes sparred over ideas during their career and it would have been good to incorporate both sides of history. But where he really fails is in his over simplified examples of why the financial market is not like the physical trade market. He offers the simplified analogy of a bread and a potato salesman and how their changing prices will lead to response in the consumers which will bring prices back into check.

So far so good. He then has a separate simplified finance market where somoene buys stock in the one stock that exists, raises the price of the stock, loans get adjusted mark-to-market, boom things explode. His model is too simple And with only one stock he removes the principle of arbitrage that is selling one stock and buying another, or an index, as a paired trade which brings prices back in line. By making his examples too simple he eliminates feedback functions that exist and work. He provides the example of a bridge which vibrates resonates with foot traffic, and dampers are installed after the fact to make it stable, and that central banking can offer the same damping function and stability.

He cites Mandelbrot's work on finance criticizing the efficient market hypothesis without citing Mandelbrot on the idea of the sandpile and criticality in systems - that is, you take away one mode of failure, and others crop up. He also fails to acknowledge that, while there are have been booms and busts prior to central banking Tulip bulbs, South Sea company we haven't had system wide booms and busts Great Depression, Internet bubble, Housing bubble since central banking appeared.

In the end he is correct about individual arguments, for example how having a generous central bank encourages risky loans, but when he puts all the arguments together it falls apart due to oversimplification. He uses Mandelbrot's ideas where convenient and throws them away when they aren't. He quotes Keynes left and right without Hayek, his counterpart and intellectual sparring partner.

Avoid unless you can read it critically. Mar 29, Jeff Brown rated it it was amazing Shelves: I don't have too much to add that you won't see in the other 4 or 5 star reviews. Chapter 3, on the evolution of money is about as clear and concise of a summary you are likely to find on how we got from stone age bartering to modern age fiat currency and central banks in 50 pages. In addition, the author attempts to take on the clear hand-waving and hindsight-as-wisdom that is the current financial world.

I am not sure if you could find a I don't have too much to add that you won't see in the other 4 or 5 star reviews. I am not sure if you could find a better indicator that the current conventional wisdom on economics is broken than the almost universally unpredicted economic crisis. When circumstances such as these come along where the theory becomes more and more clearly detached from reality see string theory, global warming, earth-centric universe , I always appreciate the people who realize that band-aiding the old theory is hopeless and only helping further entrench bad ideas. What is needed is new ideas, not putting lipstick on the pig.

I don't pretend to be informed enough about economics to give a valid opinion on whether or not he is correct.

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But I like that he bases his views on real world systems we know work, and not the entrenched dogma of folks who have probably read Atlas Shrugged one too many times. Instead he looks to James Clerk Maxwell's theories of regulating systems. I would say that a strictly factual and mathematical look at regulating systems by one of the most brilliant scientists in history would seem to be a better starting point than the opinions of economics professors who couldn't see 4Q coming even at the end of 3Q As the old joke goes, "If you take all of the economists in the world and line them up in a row, they will all be pointing in different directions".

If they follow Maxwell's ideas on governors, maybe they'll start following some of his other laws and line up a little better Aug 09, Syed Ashrafulla rated it really liked it Shelves: This is a good book explaining a possible feedback mechanism that causes financial crises. Essentially expedience forces market participants to overlever during good periods and try to retract money during bad periods. This exacerbates the natural economic cycle so that peaks go higher when borrowing money to invest and troughs go lower when pulling money out.

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As a result the drawdown is far wider than the normal economic cycle. The author does a very good job of describing this mechanism as This is a good book explaining a possible feedback mechanism that causes financial crises. The author does a very good job of describing this mechanism as well as why it happens. He avoids for the most part the use of behavioral economics on purpose. The reason is to avoid people making the assumption that Shiller and Kahneman are required for this cycle-to-crisis transformation. You can use rational efficient market theory, an adherence to the flawed efficient market hypothesis and shorter-term political pressure to generate the cycle.

I was a little bit disappointed in the author's proposed solution to the credit expansion of market participants. It amounted to telling everyone they are wrong rather than forcing them. If you believe the right answer is to force investors to have enough capital to take the bets they are taking, then it is not enough to remind them.

You have to use an expanded law to force constant monitoring of credit. If you are free market, then what you want is for overleveraged firms to fail during the downturn so that those consequences are priced into the market. The notion of using words over actions seems academic more than influential. Still, I recommend the book as a good way to learn how to describe the effect of credit policy on financial cycles.

Apr 23, John rated it liked it. Minsky was regarded as a maverick and a lone voice arguing against the ''Efficent Market Hypothesis'' that mainstream economists and policy makers had adopted in the last 30 years. He argued that Finanacial markets do not operate in the same way as markets in goods and services. I thought the author George Cooper puts the argument simply as follows: In the goods market, higher prices trigger lower demand.

In the asset market higher prices trigger higher demand. One market is a stable equilibrium-seeking system and the other habitually prone to boom-bust cycles, with no equilibrium state'' Where I disagree with the author is when he argues that credit should be controlled more effectively by central banks but concedes that the boom years where fueled by a credit boom, but he doesn't acknowledge that this period saw wages as a percentage of GDP fall in comparison to an increase in profits. So it could be argued that the only way workers can buy the goods and services produced was to increase the level of credit in the economy.

I think the author misses the point, if you increase the percentage of income going to workers creating a more equal society this would automatically decrease the need for credit fueled growth. This was an excellent read, but disheartening. It clearly lays out how, while Adam Smith's invisible hand applies to the market for goods, it does not apply to the asset markets, in which there is no equilibrium the best we can hope for is to lightly apply governors to dampen the fundamental instability.

The majority of the book is dedicated to the myriad flaws in the Efficient Market Hypothesis EMH , currently the dominant macroeconomic theory, and that's where it gets disheartening: In short, we is not learning. EMH ignores the scientific method and twists facts to fit theories. Cooper's writing style is engaging and very readable. He has a number of excellent turns of phrase, such as "In the goods market Adam Smith's invisible hand is the benign force guiding the markets to the best of possible states. In the asset markets the invisible hand is playing racquetball, driving the market into repeated boom-bust cycles.

Sep 06, Ryan Mcconville rated it liked it. George Cooper's "Origin of Financial Crisis" is a quick read which basically says that our current economic theories do not explain how the economy actually works. Specifically, he argues that markets are not efficient, do not naturally approach equilibrium, and cannot be measured and predicted using models based on normal distribution functions. Markets especially capital ones are not random, but rather, self-reinforcing as if having memory when both expanding and contracting; for this reas George Cooper's "Origin of Financial Crisis" is a quick read which basically says that our current economic theories do not explain how the economy actually works.

Markets especially capital ones are not random, but rather, self-reinforcing as if having memory when both expanding and contracting; for this reason financial risk models don't work, i. The central banking system, according the Cooper, makes things worse by seeking to "maximize economic activity" by using credit expansion the fastest way to stimulate spending and thus growth , which inevitably leads to increased debt stock and ultimately further financial instability.

This book incisively attacks the entrenched, seemingly unmovable Efficient Market Hypothesis EFH , which is, like other Neoclassical theory, preposterously premised on a number of untenable assumptions perfect information, rational expectations, etc. In lieu of this theory Cooper suggests an unoriginal proposition, recommending a disentanglement of the Efficient Market Hypothesis, on one hand, and a greater embrace of Hyman Minsky's Financial Instability Hypothesis on the other.

The latter v This book incisively attacks the entrenched, seemingly unmovable Efficient Market Hypothesis EFH , which is, like other Neoclassical theory, preposterously premised on a number of untenable assumptions perfect information, rational expectations, etc. The latter views economic crisis as being generated as a result of expansionary credit creation, which is undergirded by a ballooning foundation of indebtedness - causative components endogenous to the financial system, a postulate not held by the EFH.

Upon completion, this book serves as a reaffirmation of the tenuousness and how out-of-touch with reality the current conventional economic theory is, and that systemic -paradigmatic change is required; no tweakings or minor modifications, but an entire usurpation being supplanted by a new far-reaching theory. Jul 30, Anil Swarup rated it really liked it. An interesting analyses of the financial crisis that shook the US and then the entire world. The author provides a plausible explanation for what happened and how it could have possibly been avoided. In doing so he take on the mighty Greenspan, who talked about the "irrational exuberance" but did precious little to control the consequences of this irrational exuberance.

To Cooper "the laissez-faire philosophy of competition can be invoked to explain progress when it happens, but cannot explain a An interesting analyses of the financial crisis that shook the US and then the entire world.


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To Cooper "the laissez-faire philosophy of competition can be invoked to explain progress when it happens, but cannot explain a lack of progress when it fails to materialise". According to him there are no perfect solutions but the Central Bank could and should have played a pro-active role in preventing the financial crisis that shook the world. May 05, Peter rated it really liked it. It's amazing what this book's author accomplishes in less than pages: His writing style and arguments are both disarmingly simple, making it a quick and relatively easy read given the subject matter.

If you want a quick prim It's amazing what this book's author accomplishes in less than pages: If you want a quick primer on what happens in crises from the Great Depression to the current one, I highly recommend this book. Aug 06, Paul Loong rated it it was amazing. I am not an economist, so I cannot tell whether the Free Market approach or the approach discussed in this book is better or not.

I do think both has its merits and limitations. However, I do find that the best part of this book is the discussion on the history of money and bank. If you want to know why money and bank is invented and their evolution, and the gold standard has been abandoned and money was printed as much as a country wishes, and the effect of it to inflation, this book provides a I am not an economist, so I cannot tell whether the Free Market approach or the approach discussed in this book is better or not.

If you want to know why money and bank is invented and their evolution, and the gold standard has been abandoned and money was printed as much as a country wishes, and the effect of it to inflation, this book provides an explanation which is both good and easy to understand. I give 4 stars just because of this part. Dec 25, Steven rated it liked it Shelves: I found this book to be informative, and almost as importantly, concise.

It was a good basic foundation of monetary policy and finance for a novice. The language is easy to follow and the arguments are both well-reasoned and mostly politically neutral. The only area where this book falls short is in the policy recommendations area, though in all fairness this might be because there are really a very limited number of available policy options that are palatable. The author acknowledges that eve I found this book to be informative, and almost as importantly, concise.

The author acknowledges that even he has to hold is nose at some of his suggestions, because the situation is simply so muddled and yet so important that the rules of pragmatism often lead to less than desirable ways forward. Oct 06, Brian Mathieu rated it it was amazing Shelves: I enjoyed the hell out of this book. The first half plodded on for a bit, but once I got into the second half, everything "clicked", and the author's main thesis became intuitively obvious.

I was so excited that I proceeded to go back and re-read the first half again to make sure I hadn't missed anything. In a nutshell, the self-correcting nature of prices that lead to market stability for most goods actually works in reverse for securities, and leads to overcorrections in securities markets, wh I enjoyed the hell out of this book.

In a nutshell, the self-correcting nature of prices that lead to market stability for most goods actually works in reverse for securities, and leads to overcorrections in securities markets, which bring about bubbles and crashes. If you're still an advocate of Efficient Market Theory after reading this book, then you probably didn't understand what you read.

Lecture: Housing Bubbles and Financial Crises

Mar 14, Jbryon rated it it was amazing. This is a very accessible economics book and I would recommend it to other non-economists trying to understand the current turbulence in markets and how governments are trying to correct for them. Since reading The Origin of Financial Crisis, I can't stop thinking about the circumstances that detached currency from gold reserves. No worries, I won't spoil any of the plot in this review but guarantee that this fascinating tidbit of information will make you extremely popular at your next depressi This is a very accessible economics book and I would recommend it to other non-economists trying to understand the current turbulence in markets and how governments are trying to correct for them.

No worries, I won't spoil any of the plot in this review but guarantee that this fascinating tidbit of information will make you extremely popular at your next depression-era cocktail party. Sep 02, James Carmichael rated it really liked it Shelves: A very lucid and clear argument against some of the core tenets of the Efficient Market Hypothesis. Cooper does an excellent job articulating both where he thinks the theory goes wrong and what this means in practice with respect to monetary policy and how he thinks the Hypothesis, joined with politics, has often led to bad policy ; whether or not you're convinced, it's very helpful to understand why he sees things as he does.

The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy

If you're interested in the Crisis, its causes, and the where-do-we- A very lucid and clear argument against some of the core tenets of the Efficient Market Hypothesis. If you're interested in the Crisis, its causes, and the where-do-we-go-from-here thing, Cooper's book is a valuable read. Oct 25, Jeff Irwin rated it really liked it. Although some of this was above me it was worth reading just for chapter 3 which is a finacial history of the world. The historical development of the banking system was particularly fun. The central thesis is that markets left to themselves are unstable and always lead to periods of boom followed by those of economic decline.

He makes a good case that the federal reserve is needed in this process but has of late messed up big time. Mostly becuase they have like everyone else bought into the eff Although some of this was above me it was worth reading just for chapter 3 which is a finacial history of the world. Mostly becuase they have like everyone else bought into the efficent market fallacy.

A pretty good but not great book about the recent ish history of money, finance, and financial crises and what we should do about them. The author never delves very deeply into the details of macroeconomics and that lack of rigor shows towards the end, particular when it comes to his prescriptions about what is to be done.

They sounds nice enough, but one wants a bit more detail in their justification. Cooper argues that the Efficient Market Hypothesis is deeply flawed when applied to financial markets, so much so that it should be scrapped and replaced with a hypothesis that more closely models the behavior of the participants who assign values to them.

The Origin of Financial Crises by George Cooper | cagiluzygy.tk

The Efficient Market Hypothesis states that assets are always priced accurately because the prices reflect the current economic conditions as well as the best estimates of future conditions that participants in the markets can conceive. It is based on the assumption that prices always move toward a point of equilibrium that balances supply and demand and optimizes the benefit to all participants in a market.

Because the participants drive the price and quantity toward equilibrium, the market offers no productive role to a government regulator. But Cooper argues that the behavior of participants in a market for financial assets causes prices to frequently depart from an equilibrium price. Unlike markets for common goods and services, in which a rise in price solicits a decline in demand, with markets for investments an increase in price solicits an increase in demand. For example, when prices of equities or real estate increase, investors often grow concerned about missing future increases in prices and accelerate their purchases of these investments.

Does the price rise toward a new equilibrium or away from the real equilibrium? Cooper argues that prices in financial markets move away from equilibrium and that a government regulator should play a role in managing the changes in these prices.

The use of credit to finance purchases of financial instruments merely magnifies the deviation between price and equilibrium because the buyer does not necessarily need cash-on-hand to purchase the investment but can use the investment itself as collateral for the loan. The second theme that the group discussed was the role of the central bank in the financial markets. During the last twenty years, governments that have chosen to liberalize their banking and financial systems have followed the U. In this model, four specific goals define the policies of the central bank: During that period, the secular decline in interest rates and the availability of credit provided households with little incentive to increase savings, but encouraged them to increase consumption by borrowing money.

Cooper argues that two of these goals are at odds. The goal of underwriting the credit markets to ensure financial health is not consistent with the goal of managing aggregate demand to encourage economic growth. The former goal suggests restraining the growth of credit while the latter suggests expanding the growth of credit. Historically, the process of politics has resolved this contradiction by favoring economic growth over the health and solvency of the financial system.

Cooper argues that the financial system is too complex to be explained by a unified theory from which regulatory framework can be designed. Instead, he recommends borrowing ideas from a variety of academic fields, such as physics and mathematics as well as economics, to redesign the regulatory function. First, he recommends using the Financial Instability Hypothesis crafted by Hyman Minsky to model the behavior of capital markets. The Financial Instability Hypothesis argues that economic expansions and contractions are self-reinforcing, creating large waves of rising and falling prices of financial assets.

Control System Theory was first introduced by James Clerk Maxwell in in a paper discussing the approach toward automatically regulating mechanical devices that were difficult to control and operate. Cooper suggests that central banks create a regulatory system that automatically slows or expands credit creation in a counter-cyclical manner in order to narrow the amplitude of the waves of credit expansion and contractions.

Finally, he recommends that central banks establish a new system of information to monitor the stages of credit creation and expansion, displacing the existing system that falsely assumes that participants in the financial markets are fully informed and rational. Cooper offered several insights that the group found interesting.

One such insight is that politicians commonly promote the macroeconomic policy suggestions of John Maynard Keynes, who is credited with recommending that governments use deficit spending as a stabilizer during periods of recession. While invoking the name of Keynes, the George W. Bush administration used deficit spending as a tool of fiscal policy during an expansion cycle in the economy, leaving the U.