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How Markets Fail: The Logic of Economic Calamities Hardcover – November 10, 2009

4.2 out of 5 stars 87 customer reviews

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Editorial Reviews

From Publishers Weekly

Market disasters—and the cycle of delusions responsible—receive lively, engaging analysis by Cassidy (Dot.con), a journalist at the New Yorker. The author focuses primarily on the rise and fall of free market ideology and the mostly unrealistic ideal of a self-correcting marketplace. An excellent comprehensive history of the economic thought that led to this kind of utopian economics provides a refresher course in Adam Smith, Friedrich August von Hayek, Kenneth Arrow and Hyman Minsky. Both a narrative and a call to arms, the book provides an intellectual and historical context for the string of denial and bad decisions that led to the disastrous illusion of harmony, the lure of real estate and the Great Crunch of 2008. Using psychology and behavioral economics, Cassidy presents an excellent argument that the market is not in fact self-correcting, and that only a return to reality-based economics—and a reform-minded move to shove Wall Street in that direction—can pull us out of the mess in which we've found ourselves. (Nov.)
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From Booklist

Cassidy, economist and journalist, launches a theoretical attack on Milton Friedman and the Chicago school’s free market concepts, calling them Utopian Economics, which Cassidy explains in part one. The author describes his replacement theories in part two, which give market failure a central role, calling them Reality-Based Economics. Drawing on both approaches, in part three he explains in detail his analysis of the financial crisis of 2007–2009, indicating that the subprime boom was a failure of capitalism and the financial crisis was the consequence on decisions made by private firms under deregulation. He concludes with suggestions including banks that create and distribute mortgage securities should be forced to keep approximately one-fifth on their books and federal regulators should have oversight responsibility for mortgage bankers and lenders. Everyone will not agree with the author’s theories, and although he denies this is a textbook, it will stir controversy within and outside the classroom. However, the challenging material in this book will limit its appeal to many library patrons. --Mary Whaley

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Product Details

  • Hardcover: 400 pages
  • Publisher: Farrar, Straus and Giroux; 1 edition (November 10, 2009)
  • Language: English
  • ISBN-10: 0374173206
  • ISBN-13: 978-0374173203
  • Product Dimensions: 6.5 x 1.3 x 9.2 inches
  • Shipping Weight: 1.4 pounds
  • Average Customer Review: 4.2 out of 5 stars  See all reviews (87 customer reviews)
  • Amazon Best Sellers Rank: #560,196 in Books (See Top 100 in Books)

Customer Reviews

Top Customer Reviews

By Rajesh Gajra on December 21, 2009
Format: Hardcover
The 2007 and 2008 crisis in world economics and financial markets have spawned many books. This is one book that talks about the same crisis but perhaps in a much more insightful way than any other. Dwelling on the interplay between economic policies and financial markets this book is difficult to put down once you realise the enormous promise it holds when you read the 12 pages of the 'Introduction' chapter. That promise is not belied although John Cassidy, the author, could have been clearer and more elaborate in the solutions he offers.
Cassidy refers to the idea that a free market economy is sturdy and well grounded as an "illusion of stability". He calls this "Utopian economics". This forms the first of three parts of his book and includes eight fascinating chapters on the people and ideas that shaped it.
This section of the book first lays out in great detail how economic theories and economists came about to have a large sphere of influence in central banks' monetary policy matters and governments' economic policies. It describes how the "Chicago School" of economics, propagating free market economy with almost zero regulations, ended up enormously broadening their sphere of influence in the top echelons of the US Federal Reserve and the Treasury department of the US government. What follows is an excellent exposition of 10-12 most-influential economists including Adam Smith, John Keynes, Milton Friedman, Robert Lucas and Friedrich Von Hayek, as well as a couple of mathematicians such as Eugene Fama.
Taking the reader back and forth in time, Cassidy beautifully connects the conservative economists with the "neo" liberalists, mathematics with economics, and evangelist-led economic theories with existing practices in financial markets and governmental regulations.
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Format: Hardcover
Cassidy analyzes how orthodox economic theory (he calls Utopian economics) went astray. While Adam Smith advanced the merits of market competition and free trade in "Wealth of Nations" in 1776; He warned against unregulated credit creation and ensuing speculative excesses. But, economists focused solely on Smith's benefit of free markets. The field of economics became increasingly quantitative based on flawed assumptions including Cassidy's four basic Utopian illusions:
1) the illusion of harmony (free markets always generate good outcomes);
2) the illusion of stability (free market economy is sturdy);
3) the illusion of predictability (distribution of returns can be foreseen); and
4) the illusion of Homo Economicus (individuals are rational and act on perfect information).

This idealized framework allowed economists to develop overreaching math models increasingly disconnected from reality. This trend started with Friedrich Hayek, leading Austrian economics, who stated in late 1930s that prices communicate near perfect information that determined underlying demand and supply. This was a brilliant insight if not taken too far. In the 1970s, Eugene Fama builds upon Hayek's insight with the Efficient Market Hypothesis (EMH) that stated stock prices captured all available information. Thus, stock prices move randomly and both technical and fundamental analysis do not add value. The theory was popularized by Burton Malkiel in A Random Walk Down Wall Street: Completely Revised and Updated Edition. The EMH was a brilliant insight backed by data (the majority of mutual fund managers do not beat the index to this day).
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Format: Hardcover Verified Purchase
This book was great in places and painful in others.
On the one hand, I think he does do some wonderful things in the way of reviewing history and certain distortions that have lead to crisis. Part 2 of the book of is fairly accurate.

On the other hand, in his search to put everything on Alan Greenspans doorstep, he left out some very important details. Further he also just got parts of finance, particularly the parts that are important to this crisis, just plain wrong. I can't get too mad at him, because if I had a nickel for every journalist, let alone finance professional that has gotten it wrong, half right, somewhat confused, or otherwise, I'd have a lot more than 1$.

So let's go through it a bit.

1 - While it's nice to blame Greenspan, you really can't just do so, particularly when you're writing a book about market regulation. I mean, while the FRB did create the laws which cover Home Ownership and Equity protection as well as the Equity Credit Opportunity Act, it's actually the FTC that regulates the Mortgage brokers NOT the Fed. Further the FED does not solely regulate the Banking Trusts (Investment banks), the SEC, does that job. Nor does the Fed regulate the ratings agencies or the the insurance companies (AIG). Hence, to put it all on the fed, kind of misses the other parties that were a bit asleep at the wheel and also obsconds one of the major problems in the dependancies of the argument he sets forth in Chapter 1, i.e. "increasing regulation" or seeing the Greenspan as a period of "laissez faire". This is not to say that Cassidy makes the argument that Greenspan's world was without regulation.
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