Most helpful critical review
4 of 7 people found the following review helpful
A mixed bag
on February 28, 2013
The book is interesting for two reasons. First, it gives a historical sketch of economic theory. Second, the author utilizes her knowledge of Wall Street to provide some worthwhile information and commentary on the activities of Wall Street firms. Regardless, the book is mainly to vent her criticisms of economists (except for Keynes), Wall Street firms, and models that Wall Street firms use, e.g. Value at Risk. Some of her criticisms are fine but others are fast and loose. For example, she blurs the distinction between partial equilibrium (for particular goods or services) and general equilibrium, and the distinction between neoclassical economics (which is microeconomics) and macroeconomics. Does she have a better economic theory or a better risk model? Of course not.
As another reviewer wrote, she sets up straw men and knocks them down. Her favorite straw man is a "free market", a term she always puts in quotes. That is appropriate, because her idea of what it is wanders far from others. For example, she says neoclassical economics assumes that people are strictly self-motivated. Wrong. If it were true, a parent buying diapers and formula for his/her infant(s) would count against neoclassical economics. It doesn't. Moreover, it wasn't merely a free market that brought about the recent financial crisis. There was a lot of government intervention that created the housing bubble and banking crisis. The cons were not merely by economists, but by politicians, too.
She accuses economists of behaving like drunks under the streetlight when looking to explain the financial crisis. She did, too. As another reviewer wrote, she finds no fault with the Community Reinvestment Act and its enforcers, e.g. Andrew Cuomo. She has lots of blame for credit default swaps, but none for Fannie Mae and Freddie Mac nor their political supporters such as Barney Frank. Yet Fannie Mae and Freddie Mac were, in essence, bigger sellers of credit default swaps than even AIG, and the biggest holders of securitized subprime mortgages. The author rants about banks getting bailouts, which is okay, but she does not rant about the bailouts of Fannie and Freddie, which were even bigger.
She says the distribution of stock price changes is fat-tailed, but models used in practice continue to use the normal distribution anyway. She says that is because the latter is mathematically tractable but fat-tailed distributions are not. This is true, but not using fat-tailed distributions is not nearly as faulty as she portrays it. For common stocks fat tails are prominent with *daily* price frequencies, but dissipate rapidly with less frequency -- weekly, monthly, quarterly, annually. As much as the S&P 500 fell the year ended March 9, 2009, it was about 3.3 standard deviations. The recent financial crisis -- with a big part of its root cause in house prices and mortgages and securitization -- was multi-year. The real "black swans" of the recent financial crisis were mortgage default rates and more so the size of the losses when they did default (due to the collapse in home prices).
The writing is pretty good with plenty of end notes. The book is worth reading, but be wary of the fast and loose criticisms.