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15 of 15 people found the following review helpful
5.0 out of 5 stars An essential primer
Amid the plethora of books about the credit-crunch (which has become a boom industry in itself), this account stands out for providing the context in which these events occurred. While many others have dealt with the immediate causes of the crisis and its aftermath, Cassidy takes the time to provide a short history of the economic theories that inform these processes -...
Published on 3 May 2010 by Chuck E

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2 of 13 people found the following review helpful
1.0 out of 5 stars NOTHING RELATED TO MARKETS FAILING
Clearly, this book has fake reviewers as it would be inconceviable to give anything but the minimum stars.

This exercise in a waste of time has clearly been written by a journalist with no understanding of finance and economics. It does no even relate to the failing of markets, let alone how they fail.

As with most of these attempts by journalists it...
Published 23 months ago by THE TRUTH


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15 of 15 people found the following review helpful
5.0 out of 5 stars An essential primer, 3 May 2010
By 
Chuck E (UK) - See all my reviews
(VINE VOICE)   
Amid the plethora of books about the credit-crunch (which has become a boom industry in itself), this account stands out for providing the context in which these events occurred. While many others have dealt with the immediate causes of the crisis and its aftermath, Cassidy takes the time to provide a short history of the economic theories that inform these processes - without which any explanation is inadequate.

Running through 200 years of economic theory might not enliven the spirits, but it's a measure of Cassidy's achievement that he makes it both informative and entertaining. And it is only through understanding how beliefs about the free market and economic efficiency serve certain interests, and feed into an ideology that uses circular reasoning to justify its relevance, that the contradictions that have imploded so spectacularly can really be understood - and how a theory which emphasises transparency could result in a system that depends on the kind of asymmetries of information and off-balance-sheet accounting that ensures that markets are so opaque and impenetrable that even the bank's own managers don't understand them.

From myths such as the Efficient Market Hypothesis and the rational individual, to the Prisoner's Dilemma (which ensures that we are condemned to act against our own best interests), Cassidy provides a balanced and thought provoking overview of market behaviour, before rounding it off with an explanation of the current crisis.

An essential read for anyone wishing to grasp the fundamental processes at work.
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38 of 40 people found the following review helpful
5.0 out of 5 stars Grown up and enjoyable analysis of the credit crisis, 15 Feb 2010
There has been almost as much comment and media analysis of the credit crisis as there were panicked trades in the markets at its peak. Most comment has taken an aggressive or defensive position around the role of bankers. John Cassidy's outstanding book is a dispassionate but engaging look at the historical, economic, sociological and academic context of the sub-prime crash and its terrible aftermath.

Cassidy does have a message, eloquently argued: the vast majority of economists, bankers and policy makers of the last three decades have been blindly irresponsible in their wholehearted espousal of the unfettered free market. Indeed, he refers to the ideologies of the Chicago school as "Utopian Economics". His arguments are deep, broad and lucid. He shows, quite irrefutably, how the perfect market, enlightened self interest, full information and other such axioms of the Friedman revolution are disastrously simplistic. The evidence of huge areas of hidden information, beauty contest group psychology and the paradoxical force of game theory outcomes is undeniable. The underlying force of markets, "rational self interest" often or even usually works against the mathematics of supply, demand and perfect information. His analysis of the reality of how bubbles happen and how disturbing they are for traditional economic theories of the market is explosively enlightening.

"How Markets Fail" also looks at the agents behind the disaster of the last two years. Cassidy is especially unforgiving of the once God-like Alan Greenspan. The old Fed Chairman's explanation for his arrogant irresponsibility in allowing - indeed encouraging - two major speculative bubbles (dot-com and sub-prime) to explode unchecked was a pathetic "The problem is.. a critical pillar to market competition and free markets did break down...that shocked me. I still do not fully understand why it happened."

Cassidy also looks at the bankers, in particular, the brilliant mathematical minds behind all their risk calculations and the lethal Value at Risk (VAR) model so widely touted as the unsinkable ship for navigating the icebergs of the market. I was shocked to find that these models and, indeed, the bedrock Black-Scholes option pricing formula, are based on long outdated analyses of how markets work, namely the random walk of share prices and a normal distribution curve for market pricing in general. In other words, all that sophisticated, grotesquely overpaid risk analysis edifice was built on an infantile assumption that all trades are independent of each other and traders never follow the herd.

Although there is a good deal of solid economic and financial analysis in this book it is imminently readable, sometimes un-put-down-able. His description of how the sub-prime market came into existence, grew and exploded reads like a thriller.

If, like me, you were once enthralled by the mathematical, organic beauty of the free market, the self correcting forces that would always take us back to a satisfying and essentially good equilibrium, this book is essential reading. John Cassidy's alternative prescription, a plea for "reality based economics" that takes into account how bankers, traders, business managers, house-owners and consumers" act in the real, non-utopian world is powerfully defended and should make us take stock and rethink. After all, what has happened is, fundamentally, a massive intellectual failure, a collapse of an ideology of hubristic wishful thinking. We've had enough of all that Master of the Universe stuff: what we need is rational, modest, realistic wisdom. "How Markets Fail" gives us exactly that.
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7 of 7 people found the following review helpful
5.0 out of 5 stars Market failures are endemic, 27 Nov 2010
By 
Luc REYNAERT (Beernem, Belgium) - See all my reviews
(TOP 1000 REVIEWER)    (REAL NAME)   
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John Cassidy explains brilliantly the rise and fall of the free market ideology. Its application ended in the most sweeping extension of State intervention in the economies all over the world since the 1930s. The recent financial panic could have brought down any number of financial firms worldwide, which meant the total collapse of capitalism.

The Free Market and its ideologues
The `free market' ideology (laissez-faire) is an all-compassing way of thinking about the world and about man (the perfect homo aeconomicus) with markets as divine efficient and self-regulating processes.
Its prominent ideologues were A. Smith (the invisible hand of self-interest), F. Hayek (a system of price signals), V. Pareto (an efficient economy), K. Arrow and G. Debreu (the combination of efficiency and social equity), M. Friedman (monetarism), E. Fama (efficient stock markets) and R. Lucas (governmental intervention in the economy is counter-productive).

Criticism (no market nirvana)
For its critics, a free market economy is utopian, based on illusions of stability (bubbles are not aberrations), of rational irrationalities (124 banking crises in the last 40 years) and of predictability (markets don't follow regular patterns).
The prominent critics were J.M. Keynes (governmental intervention is needed in recessions), A. Pigou (no spontaneous coordination of private and social interests), F. Bator (oligo (mono)-polies destroy free markets, no markets for public goods), G. Akerlof and J. Stiglitz (market prices don't reveal all information) and H. Minsky (free market capitalism is inherently unstable).

Current crisis
The actual housing and financial crisis was an outcome of deregulation (abolition of the Glass-Steagall Act), too long and too low interest rates, criminality at the top, greed (in the face of monumental risk), incentive-based compensation of officers, stupidity (NINJA loans, no income, no job, no assets), lax oversight of the banking system (SIVs off balance sheets), the incest between rating agencies and Wall Street firms, moral hazard (privatizing gains for a tiny oligarchy of extremely wealthy people, and socializing losses) and the mind-boggling amounts of money involved ($ 42.6 trillion CDSs).

Warning
But the `special interests' are back downplaying the massive (5 % of GDP) governmental bailout. The author gives a stiff warning: if those special interests can block meaningful reform, crony capitalism of the few will rule again at the cost of the many.

Milton Friedman's monumental blunder (the Fed is not a branch of government)
His comment about the Great Depression is as follows: `The Great Depression was produced by governmental mismanagement rather than by any inherent instability of the private economy. A governmentally established agency, the Federal Reserve System, exercised its responsibilities so ineptly...'
The comment should have been as follows: `The Great Depression was produced by private mismanagement. A private established agency, the FRS, exercised its responsibilities so ineptly ...'
The blunder destroys his whole theory.

John Cassidy wrote a formidable overview of essential economic theories and practises. His book is a must read for all those who want to understand the world we live in.
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11 of 12 people found the following review helpful
5.0 out of 5 stars Great book - best explanation of the credit crunch, 29 Dec 2009
By 
Christian J. Kennedy "Fresno Bob" (Merseyside) - See all my reviews
(REAL NAME)   
This is a great book for understanding the credit crunch but rather than a chronological account of financial deregulation, banking greed and the phenomenal scale of the credit bubble he looks first at the evolution of the economic ideas which supported the boom. He explains why the free market became seen as an economic panacea and how many of the financial tools, which were supposed to manage risk, were actually based, in part, on these ideas. He then looks at newer ideas in economics such as behevioural economics and game theory which, when linked with Keynsian macro-economics, explain much better how the current crisis came about. It is only in the last 3rd of the book that he explains how this relates to the credit crunch. This is not a dry explanation of theory and ideas but a fascinating insight into why individuals at all levels convinced themselves the good times would never end.
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2 of 2 people found the following review helpful
5.0 out of 5 stars Fantastic insights, 5 Sep 2010
By 
The Flying Dutchman (The Hague, The Netherlands) - See all my reviews
I bought - and read - a number of books related to the recent financial crisis, including Fox's 'The Myth of the Rational Market', Johnson & Kwak's '13 Bankers', Lenchester's 'Whoops', Sorkin's 'Too Big To Fail' and, of course, Cassidy's 'How Markets Fail'.

I found John Cassidy's book very comprehensive, balanced and informative. Like most of the others, he provides a good background of free-market ideology and a clear, lucid description of the events and interconnections that led to the financial crisis.
Cassidy's key message is that market failures are intrinsic features of economic and societal processes and systems. With that understanding, the ideology of the market's invisible hand and its subsequent developments - from Adam Smith to Milton Friedman - are essentially theoretical simplifications that may be useful for a few practical and special cases, for example in the markets for many material goods and commodities goods where information asymmetries, adverse selections and externalities do not play a significant role. Reality however is much more complex: in particular for labour, financial and information systems, market failures actually dominate and the free-market approach fails miserably in its basic task of allocating resources efficiently.

In keeping with the basic premise of the book, Cassidy does not come with a new ideology to replace the old, rather he provides a useful set of insights and practical policy recommendations that may give us a better chance to avoid such catastrophic (or worse still) failures in the future. In that, the message is also clear that there is no free lunch, and to avert future disasters we need to reassess very carefully and honestly our basic premises as to what future sustainable growth should we really aim to.

Strongly recommended reading.
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1 of 1 people found the following review helpful
5.0 out of 5 stars Not only How but Why Markets Fail, 27 April 2012
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How Markets Fail by John Cassidy provides a detailed review of economic theories relating to the operations of markets and illustrates the power of ideas; sometimes - bad ideas.
Cassidy provides the reader with a highly relevant historical journey that weaves the development of economic theories (particularly in finance and macroeconomics) with their practice in the real world leading up to the breaking of the financial crash of 2008-2009 centred on the US housing bubble. Key characters include economists from both sides of the spectrum together with pivotal policy makers.
This is definitely one of the better books I have read on the financial crisis since Cassidy illustrates how we came to be in this dreadful place through a combination of factors. Grounded in a fair representation of the conflicting theories of finance and macroeconomic policy this books avoids the kind of ranting witnessed in certain other publications on the subject.
Perhaps most valuable in this book is the way in which Cassidy traces the thinking of theoreticians about how markets operate from the classical to the contemporary period and illustrates how these various theories were adopted by politicans and financiers in the real world. Sometimes with disastrous results.
Hence whilst the book goes to some lenghts to explain the relevant theoretical constructs of the economics community, it is complemented by an equal consideration of the psychology and political economics at play amongst some of the key players.
As recorded in other publications on the financial crisis the book reinforces the sense that the demise of millions of people results from the games played by a relatively small number of players at the top of the power pyramid.
Sadly, although the conclusion of the book offers up some suggestions on how the crisis might be turned into an opportunity for significant reform in banking (particularly investment banking), the intervening three years since the book was published witness very little has been changed. A seriously missed opportunity.
At its heart this is a book that revisits the intellectual struggle by top economists from Adam Smith to Friedrich Hayek and Milton Friedman, from the ideas of Karl Marx to the insights of John Maynard Keynes. But it also includes some less well known figures whose contributions have greatly enriched our understanding of how people behave in market situations, in particular Daniel Kahneman and Amos Tversky in their contributions from psychology and Hyman Minsky's grasp of reality of how markets really work.
It reminds us that as students of political economics, there are two sides to consider; namely, the political (in particular the use of power) and the economic. The same can be said of financial economics, where there are the increasingly mathematically based models to consider, but there are also the psychological and political elements of the players. At its heart, this book reads as a review of the ideological battle between those (both theorists and practitioners) who believe in the efficiencies of the market and the need to minimise government intervention, versus those who take a more pragmatic approach that acknowledges the realities of market failure and the need to insulate society from its excesses. It is of course a conflict that continues to this day.
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1 of 1 people found the following review helpful
5.0 out of 5 stars If you read Economics, then READ this!, 16 Feb 2011
Having read a lot of books picking over the bones of the financial crisis I was a little sceptical and a tad jaded by the topic. This was an excellent book, however and well worth a read.

It grounds the current crisis firmly in the development of conventional economic thought, preoccupied by complex mathematical models and ignoring the real world risks exogenous to the models. The book traces the development of economic though back to Adam Smith et al up to the present day, including the rise of Behavioural Finance.

Very accessible to non-economists and a succinct refresher of all the models you've forgotten about if you have studied it (Kaldor-Hicks, Lorenz curves and all your favourites!)
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1 of 1 people found the following review helpful
5.0 out of 5 stars Fine study of the free market's bankruptcy, 27 Jan 2011
By 
William Podmore (London United Kingdom) - See all my reviews
(REAL NAME)   
In this brilliant book, financial journalist John Cassidy traces the rise and fall of free market ideology. Part 1 traces the story of utopian economics from Adam Smith to Alan Greenspan; Part 2 looks at reality-based economics and Part 3 at the crisis.

He pops the illusions that capitalist economies are harmonious, stable and predictable. He observes, "Markets encourage power companies to despoil the environment and cause global warming; health insurers to exclude sick people from coverage; computer makers to force customers to buy software programs they don't need; and CEOs to stuff their own pockets at the expense of their stockholders." As he notes, "the American health care system is chronically inefficient." The USA spends twice as much per person as Britain, yet its life expectancy is far lower.

Life has proved the free-market theorists wrong: Nobel Prize winner Robert Lucas said in 2003 that the `central problem of depression-prevention has been solved'. Federal Reserve Chairman Alan Greenspan said in 2005 that falls in house prices, `were they to occur, likely would not have substantial macroeconomic implications'.

But there are always uncertainties, imperfect information, monopolies and spillovers. Probabilistic risk is not the same as inherent uncertainty; actuarial tables of mortality are accurate, but the future is still unknowable.

The new financial instruments, far from spreading and thus diluting the risks of subprime, focused them into the centre of finance capital, the giant global banks, unleashing the crash. World industrial production fell 15 per cent between April 2008 and March 2009. In the USA alone, more than 5 million jobs went between September 2008 and June 2009.

Pursuing individual (or corporate) self-interest can be rational, yet bring irrational effects, can be individually optimal but socially sub-optimal. In the financial markets it causes positive feedback and disaster. In the real world, it leads to pollution, congestion, overfishing, desertification and deforestation. As Cassidy warns, "blind reliance on self-interest and the market is a recipe for further environmental catastrophes."

He writes, `the biggest lesson we have learned ... Wall Street needs taming'. Otherwise, it's back to crony capitalism. But the regulatory changes proposed so far aren't enough. As he notes, "no thought has been given to splitting up the essential utility aspects of the financial system - customer deposits, check clearing, and other payments systems - and the casino aspects, such as investment banking and proprietary trading."

Cassidy concludes, "Imposing restrictions on the biggest hedge funds and private equity firms could well lead to a drastic shrinkage in these industries, which would be no great loss. Much of the activity that such firms engage in amounts to a zero-sum game, which doesn't yield any economic gains for society at large."
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1 of 1 people found the following review helpful
5.0 out of 5 stars thoroughly good, 13 Sep 2010
good read, thorough and precise. a must for those who want to recap on theo economics as well as recent credit market failures
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7 of 9 people found the following review helpful
4.0 out of 5 stars Excellent book on history of economics, 15 Dec 2009
By 
Glyn D. Manton (uk) - See all my reviews
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For those with a keen interest in economics book takes an unbiased look at various theorists centred around market failure. You would need a good understanding of basic micro and macro economics but will help you understand economics and markets further
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