“Started on 8-2-2012. This book will examine the end of the Utopian era of economics in favor of a more realistic approach to economics.
“This book was quite fascinating. I now have a much better understanding of how and why the basic market system (which is based on self interest) will sometimes lead to bubbles or unserved markets. The problem is a combination of local optimization and the prisonerâs dilemma. People often make rational decisions (like selling a stock when itâs price is falling) which are actually quite irrational (the stockâs true value may be much higher, but public sentiment is declining). When crowd effects come into play, it seems that market bubbles are inevitable. John Cassidy seems to think the solution is good government regulation. His argument is sound, and his solution is necessary, but I donât think it will solve the underlying issue. I remember reading about the same dynamic in Paul Krugmanâs book âThe Return of Depression Economics and the Crisis of 2008â. Paul noted that whenever profitability falls in a regulated financial system, people move to unregulated systems where there are higher returns and higher risk. These unregulated systems inherently have the factors that lead to market failure. So people move from CDs to REITs. And they move from commercial paper to CDSs. Government can build regulations to reduce the chance of failure (like limiting bank leverage and limiting interaction between banking and investing activities) but people are creative and will find ways to go where no regulation is protecting them from themselves.”Jeff Hebert wrote this review 4 days ago. ( reply | permalink ) Was this review helpful? Yes | No
“For anyone with deep interest in the future of capitalism & market-based economics, this is an important contribution. In the introduction to this book, John Cassidy creates the driving tension of his book by retelling the famous encounter between Henry Waxman, the left-leaning chairman of the House Committee on Oversight and Government Reform, and Alan Greenspan, the former chairman of the Federal Reserve and inveterate champion of 'free enterprise', on October 23, 2008. The reason for the encounter was Alan Greenspan's appearance before Waxman's committee to testify why the subprime mortgage securities market collapsed (during the summer of 2007) and its precipitation of the financial ruin of major Wall Street institutions and the most severe economic downturn since the 1930's. In the hearings, Waxman challenged Greenspan to explain why this calamitous turn of events occurred and why it directly contradicted statements formerly made by Greenspan--which Waxman quoted: 'I do have an ideology. My judgment is that free, competitive markets are by far the unrivaled way to organize economies. We have tried regulations. None meaningfully worked.' Greenspan responded: 'To exist, you need an ideology. The question is whether it is accurate or not. What I am saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I have been very distressed by that fact....I found a flaw in the model that I perceived as the critical functioning structure that defines how the world works, so to speak.' Waxman then interjected: 'In other words, you found that your view of the world, your ideology, was not right. It was not working?' To which Greenspan concluded: 'Precisely. That's precisely the reason I was shocked. Because I had been going forty years, or more, with very considerable evidence that it was working exceptionally well.' From this rather dramatic beginning, Cassidy provides a very careful, historical examination of Greenspan's underlying ideology of laissez-faire economics and view of how the world should work. In the process, he ultimately reveals that this traditional economic worldview (shared by the majority of economists today) holds various optimistic assumptions--including the notions that competitive markets are 'highly efficient', are driven by 'rational expectations', and gravitate toward states of 'equilibrium'. Further, due to these inherent qualities, market regulation by governments should be minimized or even eliminated. Cassidy labels this prevailing ideology as 'utopian economics'--due to its inherent optimism. In contrast to this traditional view of economics, Cassidy presents considerable evidence and logic that indicate markets are not so routinely beneficial and, under certain conditions, lead to 'inefficient' outcomes, encourage irrational behavior ('rational irrationality'), and gravitate to panics & chaos (i.e., market failures). Therefore, market players need to be wary of the over-optimism of mainstream economics and be aware of potentially devastating scenarios arising from market failures. Finally, he argues a legitimate case can be made for an appropriate level of market regulation by the federal government--especially in the complex financial markets that fuel the global economy. Cassidy calls this more enlightened view of how the world actually works 'reality-based economics', and asserts it is being increasingly adopted by intelligent market observers and even formerly conservative ideologues.”Hayes Randolph wrote this review Tuesday, January 22, 2013. ( reply | permalink ) Was this review helpful? Yes | No
“...or rational irrationality. Almost two years on, are we already seeing the return of utopian economics? This book argues why we shouldn't accept it. But will we listen? No.”Peter Simpson wrote this review Tuesday, January 22, 2013. ( reply | permalink ) Was this review helpful? Yes | No
“A brilliant history of economic theory, although the second half of the book, about sub-prime mortgages, derivatives and greed, has by now become a bit overworked. ”henry curtis wrote this review Monday, January 21, 2013. ( reply | permalink ) Was this review helpful? Yes | No
“Started on 8-2-2012. This book will examine the end of the Utopian era of economics in favor of a more realistic approach to economics.
After completing the book, my conclusion about free market advocates and efficient market hypothesis advocates is Ayn Rand is full of it! Continuing in this vein will only perpetuate the need for even larger government bailouts following even more exaggerated swings of boom-bust cycles. The reason history repeats itself is because no one listens the first time.
"Today, of course, the division of labor is much more global and intricate than it was in (Adam) Smith's day. Apple's iPod, of which more than 175 million have been sold, was conceived in Silicon Valley; most of the software it operates on was written in Hyderabad, India; and it is manufactured in China, where Apple has outsourced production to a number of Taiwanese companies. The music player contains 451 parts, including a hard drive made by Japan's Toshiba, two microchips produced by American companies, Broadcom and PortalPlayer; and a memory chip made by Samsung, a Korean firm. Each of these components, in turn, has a complicated global supply chain. The iPod is rightly seen as a triumph of American innovation and marketing. It is also a pocket-size emblem of the division of labor."
For the best explanation of Pareto efficiency: " Imagine that I have six apples and you have six oranges. We both eat fruit, but you like apples twice as much as oranges, whereas I like them equally. A moment's thought suggests that you should trade some of your oranges for some of my apples, but how many? Since I'm indifferent to the merits of the two fruits, you could offer to exchange all six of your oranges for all six of my apples, in which case I would remain equally well off, but your welfare would double. Alternatively, I could offer you three of my apples for all six of your oranges. Your welfare would stay the same, three apples are as good as six oranges to you - but I would end up with six oranges plus three apples, so I'd be 50 percent better off. Both of these trades would clearly be Pareto improvements, but how can we be sure either one will take place? If you off me the first deal, which doesn't do me any good, I might refuse it. If I offer you the second deal, which doesn't leave you any better off, you might turn it down.
Now let's imagine that a farmer's market opens nearby, where both of us can buy and sell fruit: in the market, apples cost $1.50 and oranges cost $1.00. How does this alter things? Well, at these prices you can sell your six oranges for $6.00 and use the proceeds to buy four apples. But since you like apples twice as much as oranges, which cost $1.00, those four apples will be worth $2.00 each to you
[Tobin's perfect price discrimination], giving you a total value of $8.00 for your $6.00 outlay. Similarly, I can sell four of my apples for $6.00 and buy six oranges. Then I'll have two apples and six oranges which together I value at $8.00. Now look at what has happened. We each started out with fruit - my six apples and your six oranges - that we valued at $6,00. By trading at market prices that differ from our private values, we have both gained the equivalent of $2.00."
"The list of commercial products that originated in research financed by the Pentagon or NASA includes satellite television, titanium golf clubs, GPS navigation systems, water filters, cordless power tools, smoke detectors, ear thermometers, and scratch-resistant spectacles."
Of course, he left out Tang and duct tape, but those were originated in the 1960s or before.
In an effort to explain speculative fever the author quotes a study: "The sight test was easy. The lines had been drawn so that it was immediately clear which line on the second card matched the line on the first card. But in each of the groups, just one of the students was a genuine volunteer. Unbeknownst to this person, Asch had recruited all the others and told them how to answer the questions. In six of the eighteen trials, they selected the line on the second card that was the same length as the line on the first card. But in the other twelve trials, Asch's stooges all gave the same wrong answer, picking a line that clearly wasn't of the same length. This setup placed the genuine subject in an awkward spot: 'Upon him we have brought to bear two opposed forces: the evidence of his senses and the unanimous opinion of a group of his peers,' Asch noted. 'Also, he must declare his judgments in public, before a majority which has also stated its position publicly.' "
"Often echoing the insights of Keynes and other economists of earlier generations, the best papers in behavioral economics start with a seemingly minor psychological quirk and examine how, in a competitive setting, it can scale up into a significant market failure. For example, Richard Roll, an economist at UCLA, addressed the growing popularity of corporate takeovers. Many empirical studies have shown that these arranged marriages rarely deliver the financial benefits that bidders hope to reap, but that hasn't prevented ambitious CEOs from going ahead with them. In a paper entitled 'The Hubris Hypothesis of Corporate Takeovers,' Roll suggested that overconfidence on the part of top executives was the driving force of many mergers; despite all the evidence to the contrary, CEOs kid themselves they are getting a bargain '[T]he average individual bidder/manager has the opportunity to make only a few takeover offers during his career,' Roll wrote. 'He may convince himself that the valuation is right and that the market does not reflect the full economic value of the combined firm' "
"No credit boom lasts forever. At some point, lenders get nervous about all the dubious credit they have already extended. This prompts them to call in some existing loans and restrict the issuance of new ones. Where money was flowing freely, it is suddenly much harder to obtain, even for financially sound creditors. This is a 'Minsky moment' of the type that Paul McCulley and other Wall Street economists identified in August 2007. Struggling to meet their financial commitments, some shaky borrowers are forced to sell of whatever assets they can liquidate. 'This,' Minsky noted drily, 'is likely to lead to a collapse of asset values,' which, in turn, can lead to 'a spiral of declining investment, declining profits, and declining asset prices.' Unless the financial authorities intervene, lending public money freely to whoever needs it, the ultimate result could well be 'a traumatic debt deflation and deep depression.' "
"Although Minsky didn't state it as such, the financial instability hypothesis is a theory of rational irrationality, with the individually rational actions of banks and other financial firms serving to destabilize the entire syste. 'In a world with capitalist finance it is simply not true that the pursuit by each unit of its own interest will lead an economy to equilibrium,' Minsky wrote. 'The self-interest of bankers, levered investors, and investment producers can lead the economy to inflationary expansions and unemployment-creating contractions. Supply and demand analysis - in which market processes lead to an equilibrium - does not explain the behavior of a capitalist economy, for capitalist financial processes mean that the economy has endogenous destabilizing forces.' "
"Of the overall rise in indebtedness between 2002 and 2006, households were responsible for about a third - some $4.4 trillion - and that figure includes all types of household debt, no just mortgages and home equity loans. Another $2 trillion, or thereabouts, came in the form of increased borrowing on the part of federal,state, and local governments. The balance of the $13.5 trillion increase was debt taken out businesses. Some of the borrowers were in the nonfinancial sector, which includes big industrial corporations such as Caterpillar and 3M and privately owned businesses of all kinds. But by far the biggest rise in borrowing came in the financial sector. As interest rates tumbled, banks, investment banks, mortgage finance companies, real estate investment trusts, private equity companies, hedge funds, and financial companies of other types leveraged up their balance sheets in a manner that would have stunned even Minsky. In four years, the financial sector's indebtedness jumped by $4.2 trillion.”
“Author was interviewed on the PBS Frontline program aired May 1, 2012, "Money, Power and Wall Street," 4 part series on the implosion of Wall Street. Highly recommend this program if you plan to read this book.”RT wrote this review Wednesday, May 2, 2012. ( reply | permalink ) Was this review helpful? Yes | No
“By far THE best macro economic explanation of the Great Recession and financial service's impact to overall economy. Markets do fail and government-intervention is essential for capitalism (and financial services more specifically) to NOT take the whole country off the cliff. Capitalism work fine, except that aggregation of individual's rational decision (e.g. maximize bonus) may not be rational for the society as a whole (e.g. 30:1 leverage, CDO, sub-prime...). Econ 101 for the adults. ”David K wrote this review Thursday, February 9, 2012. ( reply | permalink ) Was this review helpful? Yes | No
“Top shelf: I recommend this book highly. It is chock full of many arguments and counter-arguments around markets and gives many reason why markets fail. Orthodox economics is based on the premise that markets are perfect. When that was disproved, the fall back was to argue that markets are "good enough," and when that was disproven, the arguments ceased, rather they turned to "I can't hear you: la-la-la" (fingers in ears). If you don't feel that your senses don't jive with the economic tripe being thrust upon you, this is an excellent book.
The level of writing is not too high, and the author provides definitions to and explanations of words that might otherwise be unfamiliar to the lay reader. If you are a student of economics, this is yet another book with fodder with which you might use to confront your instructor.”
“A great book putting the financial crisis of 2008 into a long term economic perspective.”Liothe wrote this review Tuesday, October 19, 2010. ( reply | permalink ) Was this review helpful? Yes | No