- Hardcover: 384 pages
- Publisher: Crown Publishing Group, Division of Random House Inc; 1 edition (26 Jan. 2010)
- Language: English
- ISBN-10: 0307464229
- ISBN-13: 978-0307464224
- Product Dimensions: 16.5 x 3.6 x 24.1 cm
- Average Customer Review: Be the first to review this item
- Amazon Bestsellers Rank: 3,744,715 in Books (See Top 100 in Books)
The Road from Ruin: How to Revive Capitalism and Put America Back on Top Hardcover – 26 Jan 2010
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About the Author
MATTHEW BISHOP is the U.S. business editor of The Economist and a former faculty member of the London Business School.
MICHAEL GREEN is a London-based writer who previously taught economics at Warsaw University and was a senior official in the British government. He is coauthor (with Matthew Bishop) of Philanthrocapitalism.
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Most helpful customer reviews on Amazon.com
They illustrate their points with a very good historical overview of how international finance has worked for the last several hundred years. I finally learned some interesting stuff about the gold standard. For example, its downside: it limited the supply of money when more gold was hard to mine. This put a crimp on economic growth.
The second part of the book is devoted to the premise that the recent (2008) financial meltdown is another example and it requires that governments remake capitalism intelligently. It's a very good discussion of the pros and cons of regulation and free market theory.
As I write this (April 2010) I hope the people in charge of economic reform in the US and the EU will read this and takes it's lessons to heart.
Many of the positions restate mainstream economics viewpoints: free trade, free markets, better ag policy, modest fiscal/monetary responses to a weak economy, anti-protectionism, allow derivatives, allow short-sales, don't allow the financial system to collapse, pure free market or pure regulatory solutions are suspect, etc.
The authors provide a large number of important, relevant insights about the current economic situation: currency imbalances harm both countries; Keynes and Smith offered deep solutions; improved financial market information is valuable; extreme efficient market, rational expectations and rational man views are inadequate; liquidity and solvency both matter, but are tough to disentangle in practice; common bank risk models increased the risk to the whole system; innovation starts bubbles and they end when experimentation breaks limits; the role of moral hazard is central but must be de-emphasized in the midst of a crisis; capitalists find ways around regulations; the RTC bad bank model worked; the impact of financial crises varies widely based upon policy responses; purely efficient markets are undermined by agency problems; regulatory capture, limited information and irrational decision-making; alternatives to corporate structure in partnerships, private equity and rich/powerful CEO's exist; and the general international government response to this crisis was better than ever before.
The authors summarize their specific solutions in a concluding chapter: bank risk can be reduced by living wills and contingent capital reserve requirements; the federal reserve needs to act faster and with greater clarity, consistency and impact, including temporary nationalization as required, in spite of political pressures; banks require a greater capital reserve cushion with countercyclical components; greatly increased regulation is counterproductive, but regulators could add value by collecting and sharing information on systemic risks; regulation should be consolidated into one agency; international free trade should be expanded; and the IMF should be modified to be a truly effective lender of last resort with increased independence from politics, adequate reserves to handle liquidity crises and a global currency that is not limited by the interests of a single country.
The book also provides guidance on where a new and improved economics can be developed. Behavioral economics provides an improvement on homo economicus. Institutional analysis can provide insights into why firms and countries with billions and trillions at stake failed to identify or hedge against the obvious risks of an overheated global economy. Using incentives in place of detailed regulations is a preferred strategy. Automatic or countercyclical stabilizers have great potential. Simpler markets and institutional structures may provide the greatest capitalist value. The biological model or adaptive market hypothesis may provide a better framework.
Some of the writers' positions are less convincing: they claim that a split between retail and investment banking does not reduce systemic risks and would be overcome by depositors and banks; limits to bank size do not reduce risks; historic regulation of interest rates and the stock market destroyed value and could not be sustained in the global economy today; Keynesianism was proven a failure in the 1970's; most economics, policy and political groups migrated to the Chicago school's monetarist, rational expectations and anti-regulation views; nationalization of banks is the most effective response to crisis; regulatory staff are inherently inadequate to their tasks and regulation is always overcome; international capital controls are ineffective; and financial innovation would be stifled by requiring derivatives to be traded in exchanges.
The authors devote a good portion of the text to describing many widely decried problems with the incentives faced by economic actors, without providing better solutions: role of institutional investors with boards; generally ineffective corporate board governance; short-term bias and incentives everywhere; ineffectiveness of global institutions; various problems with regulators; executive compensation faults; financial illiteracy at all levels; role of legal versus principle based regulations; rating agency and executive pay consultant incentives.
Although the authors invest much time describing the counterproductive role of assigning blame, they fall into this trap by criticizing: politicians, journalists, the media, uninformed citizens, the IMF, Sarbanes-Oxley 404, mark to market accounting, rating agencies, institutional investors, George Soros, Nicholas Taleb, Milton Friedman, board members, auditors, lawyers and regulators.
The text may be overly ambitious, attempting to incorporate all related public policy issues, background and history. At times, the writing is repetitive or meandering.
The title, sub-title and chapter headings are overly ambitious in positioning this work as a guide to how and why American capitalism should be overhauled to avoid "ruin". One sentence captures this reach: In the future, American leadership will depend on its ability to remake capitalism in a way that is not only more productive but also sustainable, socially and environmentally.
Significant space is allotted to business as a profession, ethics, and corporate responsibility with a plea for business leaders to ignore Milton Friedman's advice and take broader responsibility for the capitalist system and society. The focus on "doing well by doing good" and enlightened long-term self-interest seems out of place in a work devoted to managing the structural incentives of an economic system.
Throughout the text, the authors appeal to actors to see the broader picture: long-run versus short-run; the general good; improved information; a commitment to innovative solutions; economic and social goals; a combined economic framework, international perspective and a mass movement of stockholders to manage corporations. They have identified the vital issues, but not the structural solutions to align incentives.
In spite of these quibbles, this is an outstanding work that provides a solid base for enlightened public policy debate.
B&G introduce their theme with what they call five wrong turns and what to do about them.
1. They cite Mackey's book for exaggerating bubbles. (The rest of the book doesn't support this idea.)
2. There is government aversion to risking taxpayer money. (Apparently they think more of this is needed.)
3. We address the fix without addressing causes. (They don't have the causes right.)
4. There's an error in thinking that the economy will naturally recover. (What on earth gives them the idea that government can effect an improvement?)
5. There is a rush to regulate.
I make it out one right and four wrong.
After the introduction the book turned into a surprisingly good history of economic thought, especially regarding debt and bubbles. Surprising, because it starts with the ridiculous assertion that capitalism has just seen off communism. The USSR,with it's mission of exporting communism has imploded but B&G are apparently blind to developing socialism in other places, especially the USA. The authors compound the error by advocating more government control in spite of many examples of failure. They tell us all the restrictions of the gold standard era and seem to think that government fiat money is an improvement.
B&G do a good job of paraphrasing works of both classical and modern economists
Smith, Keynes, Law, Stiglitz, Fisher, Friedman and quite a few more. They are somewhat pretentious in the social commentary, especially in the attempt to include ethical considerations. There are serious tries at analysis involving ethics. This doesn't quite qualify. There is no mention of greater good by Pareto efficiency nor economic analysis of care of the commons as, for example, by William Nordhaus.
If we discard the socio-political commentary in the introduction and conclusion, this is a very well written and entertaining economic history.