Summary of How Markets Fail

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Adam Smith laid the intellectual foundation for free enterprise in his widely hailed 1776 book, The Wealth of Nations, but he also supported tight regulation of banks to suppress speculation and stabilize credit, a message most modern-day free market advocates have overlooked. Journalist John Cassidy’s thorough review of the events leading up to the 2008 financial crisis underscores how strict application of “utopian economics” can lead to disaster. He makes a strong argument for incorporating “reality economics” into the US’s supervision of the financial system. getAbstract recommends this weighty book to readers with a background in finance and to those interested in how free markets can coexist – and stabilize – with judicious government oversight.

About the Author

John Cassidy is a British-American journalist and author. He writes for The New Yorker and contributes to The New York Review of Books. He is the author of Dot.con: How America Lost Its Mind and Money in the Internet Era.

 

Summary

Theory and Reality in the Financial Industry

Few government regulators foresaw the financial crisis that peaked in 2008 when investment bank Lehman Brothers filed for bankruptcy. The Lehman insolvency panicked banks around the world, withered their willingness to lend and deepened an economic recession that was already underway. The financial crisis surprised even powerful central bankers: Neither former US Federal Reserve Board chairman Alan Greenspan nor Ben Bernanke, who succeeded Greenspan in 2006, predicted the collapse in home prices that led to the “Great Crunch” in credit availability.

By 2008, a sharp increase in mortgage loan defaults had popped a massive bubble of inflated US home prices, undoing widespread faith that the value of residential real estate could only rise. Lehman and many other financial institutions got into trouble because they had purchased too many securities bundled with subprime mortgages that were in default. Overnight lending between banks plunged because financial executives were uncertain about other institutions’ exposure to the mortgage mess. These financiers lacked a clear idea of the worth of their own subprime mortgage securities...


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