Doug's Reviews > The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy

The Origin of Financial Crises by George    Cooper
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's review
Nov 15, 10

Read in November, 2010

This book as an establishment apology for central banking and elite quantitative risk management. It is also a very good primer on modern financial architecture, so I enjoyed both learning quite a bit about credit creation and the Financial Instability Hypothesis, and arguing with the author's inconsistencies and primrose naivete about the politics of money.

One of his prescriptions is that fiscal policy should be turned over to the central planners; we see what monetary policy in the hands of the central-planning Fed has done: precious little for the saving class (in fact the aim is to ruin savings by debasing the dollar so that spending/consumption ensues) and a heck of a lot for the financiers who pay no penalty for their moral hazard. This prescription should come as no surprise when one follows the trend of ever-greater centralization of power and contempt for the individual making his/her own decisions, starting from the body outward. (It has been well argued, e.g. by Hoppe, that private property starts with self-ownership, inviolably owning one's own physical body). But I digress.

Risk management is necessary, certainly, but the chips need to fall where they may, not where they are mandated to be carried by someone else. The author, while clearly knowledgeable, also tends to forget or ignore conclusions that derive from his own arguments, namely that on the upswing, housing is seen as belonging to the market for goods and services, whereas on the downswing, it becomes an asset whose market must be managed differently.

But to quote John Hussman, who notes, "Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear? The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns" -- not with inflation, as Cooper sees it, however the least inadvisable. Fed encroachment on Congress's fiscal duties will thus proceed quietly, especially as inflation increases. (The public excuse will be, with the help of Republicans, that the government is spending too much and cannot be trusted to be fiscally responsible).

Hussman continues that "In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable." The overally thrust of Cooper's book is that debt creates instability (agreed) and that therefore, using the analogy of Maxwell's control system theory, finer and more sensitive governors are needed. But if preferable, will we get them? As Rahm Emanuel said, however, "You never want a serious crisis to go to waste."


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