Sunday, November 11, 2012

How Markets Fail

This is another analysis of the general factors that caused the economic collapse of the late 90s. It provides a general history and critique of "Utopian" economics and shows other case studies where markets failed to provide the correct outcomes. Sometimes, an entrenched player has network effects that prevent a market from working properly. Markets are also controlled by an indirection, where a herd mentality prevails. If you bet contrarion and lose, you are fired. If you go with the herd and lose, then nothing happens. Similarly market gains can be had by predicting what people will do, not necessarily what the underlying businesses will perform.
The book provides critiques for numerous other aspects of the efficient markets hypothesis.

Alan Greenspan gets a lot of criticism for his policies. The monetary policies during the housing boom were set excessively low for the current financial conditions. This, along with government policies to encourage homeownership (especially among minorities) helped to further fuel the bubble. On top of this came the moral hazard of those giving the loans not being responsible for their long term health and you have a huge bubble. (I recall a friend who went in to mortgage brokerage work during the bubble. He didn't like dealing with people with "real money". He got much better commissions for exotic loans to people that should not be able to afford what they were getting.) Instead of letting the market work things out, the FED was creating some of the moral hazard itself. The book presents thoughtful analysis, even acknowleging that it is much easier to see the problems in hindsight.

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