The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy | 
| Author: George Cooper
Publisher: Harriman House
Category: Book
List Price: $28.00
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Avg. Customer Rating:  9 reviews
Sales Rank: 26145
Format: Import
Media: Hardcover
Number Of Items: 1
Pages: 208
Shipping Weight (lbs): 1
Dimensions (in): 9.2 x 6.1 x 0.8
ISBN: 1905641850
Dewey Decimal Number: 332
EAN: 9781905641857
Publication Date: September 1, 2008
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Product Description
The Origin of Financial Crises provides a compelling analysis of the forces behind today's economic crisis. In a series of disarmingly simple arguments George Cooper challenges the core principles of today's economic orthodoxy, explaining why financial markets do not obey the efficient market principles described in today's economic textbooks but are instead inherently unstable and habitually crisis prone.
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| Customer Reviews: Read 4 more reviews...
 Well-written critique, but affirmative points less convincing December 2, 2008
There's a lot to like in this book. George Cooper (GC) provides one of the most lucid and concise descriptions of the role of central banking you're ever likely to encounter. He carefully distinguishes among the philosophies of different central bankers, such as between the Federal Reserve and the European Central Bank. His critique of the Efficient Market Hypothesis (or "fallacy", as he prefers to call it) is trenchant and clear, as is his analysis of why the "fundamentals" of a stock aren't fundamental. He rightly praises the heterodox theories of Mandelbrot and Minsky, which have long been ignored by economists despite being closer to the truth than the orthodox theories. And he writes with a wry sense of humor, including a nice one-liner about boom-bust cycles that I'm surprised other reviewers haven't mentioned: "The invisible hand is playing racquetball" (@105).
That said, this book won't give you the whole story in understanding the current financial crisis. For one thing, GC never mentions credit default swaps or other derivatives, which in the aggregate dwarf the "real" economy. Even when GC describes why balance sheets are misleading, he doesn't mention derivatives or any other off-balance sheet instruments.
For another, GC tends to be overly accepting of microeconomics, and even of the diligence of lenders. For example, he says, in a kind of defense of bond ratings analysts, "When ratings analysts are assessing the quality of a loan, ... or the mortgage broker is assessing the safety of a mortgage, they evaluate each loan against the prevailing market prices for the loan's corresponding assets. In this procedure the tacit assumption is that the asset in question can be sold to repay the loan. At the micro level this is always a reasonable assumption" (@115). GC's point is that there is a "fallacy of composition" in reasoning from the micro scale to the macro -- the macro-level reality is not simply the sum all the micro transactions. OK. But why is the assumption he mentions *always* reasonable at the micro level? And why doesn't GC mention that in the current financial crisis, ratings agencies, mortgage brokers et al. did NOT follow the careful procedures he describes? (The recent books by George Soros, Charles Morris and especially the fantastic "Structured Finance and Collateralized Debt Obligations" (2nd. ed. 2008) by Janet Tavakoli will tell you much more about this aspect of the story.)
GC rightly points out that many economists' arguments operate on the principle of "proof by assertion" (@6), but he doesn't entirely avoid this trap himself. For example, GC's simplified descriptions of the history of finance are based on "toy model" analogies, such as bakers and farmers selling their wares in a town square (Chapter 3). This picture isn't entirely historically accurate; e.g., when he asserts that central banking was necessary for the development of venture capital "in the truest sense of the word," whatever that means (@55), he overlooks the venture investments of the Medici during the medieval period, as well as many forms of Islamic financial transactions, none of which relied on central banks. This gave me the feeling that other aspects of his explanation might be a bit too pat, as well.
More problematic is his ingenious analogy (Chapter 6) to 19th-Century physicist James Clerk Maxwell's mathematical theory of mechanical "governors" (gizmos that kept machines from spinning out of control; Maxwell's original paper is reproduced as an appendix). Most of neoclassical economic theory is based on ingenious analogies to physics. Some of those analogies, such as to "equilibrium" in price of and demand for consumer goods, sound at first blush as plausible as GC's analogy to Maxwell: just ask any mainstream economist. But that plausibility doesn't mean that any of the theories are right -- and indeed, in the neoclassical case, the theory is wrong. GC doesn't use any empirical data stronger than anecdotal evidence to show that his Maxwell analogy is apt in any serious way. Nor does he provide evidence that the policy recommendations he deduces from that analogy are feasible.
Apropos of those recommendations, the derivatives issue is pertinent here too. One of GC's main constructive ideas is that central bankers should "prick" asset price bubbles as soon as they can identify that they've begun. (BTW, GC uses the word "asset" not as you might have learned if you took a class in accounting, but in the finance pro's way of referring to stocks, bonds and other financial instruments.) If this sends the economy into small cycles of good times and tougher times, so be it; that's better than the long ride up and crashing ride down we've experienced so often under Greenspan and his successor, in GC's view. However, GC says *the* key macroeconomic variable for identifying bubbles is the rate of credit creation (@125). Many derivatives contracts, like the ones that made trouble for A.I.G. in autumn 2008, are a form of credit creation -- basically, they're like bets placed at Las Vegas. But derivatives are notoriously non-transparent: it's hard to know how many of these contracts are out there at any time. In that case, the visible data (mainly loans, bonds, etc.) might understate the amount of credit out there and also understate the rate of credit creation. So how's a central banker supposed to know the right time to prick? Since GC doesn't show how this approach has worked in the past, it's a matter of faith as to whether it might in the future.
This is a clear, witty book from which you can learn a lot. But ultimately, it's stronger when it's criticizing than when it's proposing constructive policy.
 A sit-up-and-take-notice book on the economy December 2, 2008
The recent financial crisis has produced a rash of books that all claim to provide some insight to our current dilemma. Cooper's book The Origin of Financial Crises first appeared in April 2008 and reprinted in October as the extent of our current crisis became more apparent and more widely publicized.
The book provides a brief outline of the history of money and the banking system. This introduction shows readers how the various pieces of our modern economic system came into being, and the reasons that precipitated their creation. One conclusion is that moving away from the gold standard and having a central bank are essential for our economic system to function. Next, the book simply and easily dismantles the Efficient Market Hypothesis (EMH). The arguments expose the theoretical flaws of EMH and the empirical evidence that suggests that financial markets do not behave as EMH would predict them to behave.
The book introduces the theories of Keynes and Minsky as alternatives to EMH and shows how these theories better fit the empirical evidence. The authors claim that nfortunately most contemporary institutions charged with stabilizing the economy adhere to EMH. This means that they hold conflicting views, and hence advocate inconsistent economic policies.
If the book's goal is to promote refined versions of Keynes' theories, then it does an excellent job. If its goal is to provide an alternative explanation to neoclassical economics, then other "heterodox" theorist need to be considered as well (such as those proposed by Mises or Hayek). To the book's credit, it does cite Ron Paul, and gives credit to Mandelbrot and Fischer. Despite these shortcomings, this book offers the most coherent and down-to-earth skewering of both academic orthodoxy and central bank policy of the books discussing the current financial crisis.
The writing style is crisp, the arguments are cogent and well-reasoned, and the examples are clearly and thoughtfully presented for readers with no formal economic background. Despite my criticisms, it is superior to most books about the current financial crisis on the market today.
Armchair Interviews says: Important read for people in business or who just want to better understand the economy.
Excellent and very detailed November 30, 2008
I am not an economics major. Cooper explains the core concept of finance , central banking in such a way that even a layman can understand. His arguments are very convincing . A must read for everybody wondering what is going on with our economy
Excellent! A must read. November 19, 2008
2 out of 5 found this review helpful
This is an emminently readable review of the 'dismal science'.
The prose is clear frank and honest.
If the new administration really wants to try and repair our financial system, they should consult George Cooper.
 This is amateur hour November 16, 2008
1 out of 20 found this review helpful
If I could make it a zero star rating I would. After 30 pages I am throwing it in the recycling bin. This book is a joke; recycled ideas, jacked up only by emotional statements and thoroughly uninsightful. A total waste. I am tempted to end my subscription to the Economist for its apparent endorsement of this waste.
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