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The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy
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About The Origin Of Financial Crises: Central
Product Description In a series of disarmingly simple arguments financial market analyst George Cooper challenges the core principles of today's economic orthodoxy and explains how we have created an economy that is inherently unstable and crisis prone. With great skill, he examines the very foundations of today's economic philosophy and adds a compelling analysis of the forces behind economic crisis. His goal is nothing less than preventing the seemingly endless procession of damaging boom-bust cycles, unsustainable economic bubbles, crippling credit crunches, and debilitating inflation. His direct, conscientious, and honest approach will captivate any reader and is an invaluable aid in understanding today's economy. Review “A must-read on the origins of the crisis.” — The Economist “A well written book. . . . Cooper's most novel doctrine is that investors do not have to be irrational to generate bubbles. . . . Mr. Cooper traces present difficulties to the rapid growth of credit encouraged by the Fed's ultra-cheap money policy of a few years ago.”— Financial Times About the Author Dr. George Cooper is a principal of Alignment Investors a division of BlueCrest Capital Management Ltd. He was born in Sunderland and studied at Durham University. Dr. Cooper has worked as a fund manager at Goldman Sachs and as strategist for Deutsche Bank and JPMorgan. He lives in London with his wife and two children. Excerpt. © Reprinted by permission. All rights reserved. 1.1 Lopsided PolicyThe first years of this millennium were marred with a corporate credit crisis; this being the hangover of a credit binge associated with the stock market boom of the late 1990s. Just as this crisis ebbed we found ourselves engulfed in a housing boom and, sure as night follows day, this boom has now morphed into its inevitable credit crunch. The proximity of these boom-bust cycles has fuelled the popular perception that financial crises are becoming larger and more frequent. The following chapters will explain why this popular perception is correct.Toward the end of the book I make some policy suggestions that, it is hoped, could begin to dampen the current chain of overlapping boombust cycles. The overall thrust of these suggestions is that avoiding the financial tsunamis comes at the price of permitting, even encouraging, a greater number of smaller credit cycles. And also at the price of requiring central banks to occasionally halt credit expansions. That is to say, the central banks must be required to prick asset price bubbles. Key to the success of any such policy will be a political climate that accepts the need for symmetric monetary policy; excessive credit expansion should be fought with the same vigour as is used to fight excessive credit contraction. As things stand neither politicians nor voters are ready for such tough love and central bankers have neither the stomach nor inclination to deliver it. In large part this is because economists have taught us that it is unwise and unnecessary to combat asset price bubbles and excessive credit creation. Even if we were unwise enough to wish to prick an asset price bubble, we are told it is impossible to see the bubble while it is in its inflationary phase.We are told, however, that by some unspecified means the bubble's camouflage is lifted immediately as it begins deflating, thereby providing a trigger for prompt fiscal and monetary stimulus.In recent years this lopsided approach to monetary and fiscal policy has been further refined into what has been described as a “risk management paradigm”, whereby policy makers attempt to get their retaliation in early by easing policy in anticipation of an economic slowdown, even before firm evidence of the slowdown has been accumulated. This strategy is perhaps best described as pre-emptive asymmetric monetary policy.To followers of orthodox economic theory, based on the presumption of efficient financial markets, this new flavour of monetary polic
