The Cost of Capitalism : Understanding Market Mayhem and Stabilizing our Economic Future

A Street economist's strategy for managing market madness“A punchy and relevant book on our present distress that has, at its core, one very big and useful idea.“ Portfolio “Heeding the lessons of the last few years, as documented in this book, may help both financiers and government policy makers find ways to reduce some future costs of capitalism without sacrificing all the potential rewards.” The New York Times “[Barbera] challenges the blind faith in free markets.” The Economist “Barbera ... [is] one of the few commentators actually saying something interesting and innovative about the crisis.” Asia Times "The Cost of Capitalism is a must-read and a thoroughly enjoyable one—for those who want to understand the Crisis of 2008 and hammer out a new framework for decision making." Jared L. Cohon, President, Carnegie Mellon University "Readers who absorb the lessons of this book will be armed with more than mere technique; they will acquire an attitude that will make them better investors for the rest of their lives." Paul DeRosa, Principal, Mt. Lucas Management Corp. "The Cost of Capitalism translates the economic diagnoses and theories of my father, Hyman Minsky. It captures the vivacity of a post dinner conversation not coincidentally my father's favorite forum for elaborating, educating, and entertaining." Diana Minsky, Art Historian, Bard College "Lucid, intriguing, brilliant! Barbera combines the uncertainty and speculation of Keynes with Schumpeter's "Creative Destruction" and Hy Minsky's "Deflationary Destruction" into a tasty stew." James R. Schlesinger, former Director, Central Intelligence Agency "Long ago, Bob taught me that if you don't know Minsky, you don't know nothing. This work shows the path out of nothingness." Paul A. McCulley, Chief Investment Officer, Pacific Investment Management Company "Barbera's recommendations are profound in their simplicity. Let us hope Wall Street, Main Street, Washington, and academia embrace them." Jack Rivkin, former Chief Investment Officer, Neuberger Berman "This is truly an extraordinary book that should be of great interest to an extremely wide audience from Wall Street practitioners to economics and finance scholars." Louis Maccini, Professor of Economics, Johns Hopkins University From the panic of 1987 to the tech-bubble burst of 2000, the past two decades have witnessed a series of financial crises, each more disruptive than the last. Unfortunately, they all seem like dress rehearsal for today's debacle. In hindsight, the precipitating factors responsible for each crisis seem clear, yet, in every case, mainstream economists and policy makers were caught off guard. Why didn't they see it coming? What should they have known but didn't? And, most critically, how must they adjust their thinking going forward? In the Cost of Capitalism, Robert Barbera provides compelling answers to all these questions. In the process, he offers the most cogent analysis yet of today's crisis and explains how to manage the ever present potential for mayhem intrinsic to free market economies without stunting innovation and growth. At the core of Barbera's thinking are three assumptions: first, boom and bust cycles have been stoked since 1985 by finance, not inflation; second, Main Street stability paradoxically invites excessive risk taking on Wall Street; and last, these things set the stage for small setbacks to deliver cataclysmic consequences. Barbera applauds current efforts to unabashedly infuse public money into the global economy. It's the only way, he says, to prevent another Great Depression. And, looking beyond the crisis of the moment, Barbera contends that mainstream thinkers need to form a new economic paradigm by embracing the insights of free market champions like Joseph Schumpeter and the cautionary wisdom of Hyman Minsky. Financial market mayhem comes with the territory in a free market system. Nonetheless, innovators and their bankers still offer the world the best chance for a prosperous twenty-first century. Economists, policymakers, and investors must begin to redefine their understanding of free market capitalism. The Cost of Capitalism will set them on that course. A Street economist's strategy for managing market madness A punchy and relevant book on our present distress that has, at its core, one very big and useful idea. Portfolio Heeding the lessons of the last few years, as documented in this book, may help both financiers and government policy makers find ways to reduce some future costs of capitalism without sacrificing all the potential rewards. The New York Times [Barbera] challenges the blind faith in free markets. The Economist Barbera ... [is] one of the few commentators actually saying something interesting and innovative about the crisis. Asia Times " The Cost of Capitalism is a must-read and a thoroughly enjoyable onefor those who want to understand the Crisis of 2008 and hammer out a new framework for decision making." Jared L. Cohon, President, Carnegie Mellon University "Readers who absorb the lessons of this book will be armed with more than mere technique; they will acquire an attitude that will make them better investors for the rest of their lives." Paul DeRosa, Principal, Mt. Lucas Management Corp. " The Cost of Capitalism translates the economic diagnoses and theories of my father, Hyman Minsky. It captures the vivacity of a post dinner conversation not coincidentally my father's favorite forum for elaborating, educating, and entertaining." Diana Minsky, Art Historian, Bard College "Lucid, intriguing, brilliant! Barbera combines the uncertainty and speculation of Keynes with Schumpeter's "Creative Destruction" and Hy Minsky's "Deflationary Destruction" into a tasty stew." James R. Schlesinger, former Director, Central Intelligence Agency "Long ago, Bob taught me that if you don't know Minsky, you don't know nothing. This work shows the path out of nothingness." Paul A. McCulley, Chief Investment Officer, Pacific Investment Management Company "Barbera's recommendations are profound in their simplicity. Let us hope Wall Street, Main Street, Washington, and academia embrace them." Jack Rivkin, former Chief Investment Officer, Neuberger Berman "This is truly an extraordinary book that should be of great interest to an extremely wide audience from Wall Street practitioners to economics and finance scholars." Louis Maccini, Professor of Economics, Johns Hopkins University From the panic of 1987 to the tech-bubble burst of 2000, the past two decades have witnessed a series of financial crises, each more disruptive than the last. Unfortunately, they all seem like dress rehearsal for today's debacle. In hindsight, the precipitating factors responsible for each crisis seem clear, yet, in every case, mainstream economists and policy makers were caught off guard. Why didn't they see it coming? What should they have known but didn't? And, most critically, how must they adjust their thinking going forward? In the Cost of Capitalism , Robert Barbera provides compelling answers to all these questions. In the process, he offers the most cogent analysis yet of today's crisis and explains how to manage the ever present potential for mayhem intrinsic to free market economies without stunting innovation and growth. At the core of Barbera's thinking are three assumptions: first, boom and bust cycles have been stoked since 1985 by finance, not inflation; second, Main Street stability paradoxically invites excessive risk taking on Wall Street; and last, these things set the stage for small setbacks to deliver cataclysmic consequences. Barbera applauds current efforts to unabashedly infuse public money into the global economy. It's the only way, he says, to prevent another Great Depression. And, looking beyond the crisis of the moment, Barbera contends that mainstream thinkers need to form a new economic paradigm by embracing the insights of free market champions like Joseph Schumpeter and the cautionary wisdom of Hyman Minsky. Financial market mayhem comes with the territory in a free market system. Nonetheless, innovators and their bankers still offer the world the best chance for a prosperous twenty-first century. Economists, policymakers, and investors must begin to redefine their understanding of free market capitalism. The Cost of Capitalism will set them on that course. MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict MuPDF error: syntax error: invalid key in dict Contents 12 Preface 14 Acknowledgments 20 Chapter 1 The Postcrisis Case for a New Paradigm 24 Part I: Financial Markets and Monetary Policy in Perspective 36 Chapter 2 The Markets Stoke the Boom and Bust Cycle 38 Chapter 3 The ABCs of Risky Finance 48 Chapter 4 Financial Markets as a Source of Instability 60 Chapter 5 Free Market Capitalism: Still the Superior Strategy 78 Chapter 6 Monetary Policy: Not the Wrong Men, the Wrong Model 94 Part II: Economic Experience: 1985-2002 104 Chapter 7 How Financial Instability Emerged in the 1980s 106 Chapter 8 Financial Mayhem in Asia: Japan’s Implosion and the Asian Contagion 116 Chapter 9 The Brave-New-World Boom Goes Bust: The 1990s Technology Bubble 130 Part III: Emerging Realities: 2007-2008 144 Chapter 10 Greenspan’s Conundrum Fosters the Housing Bubble 146 Chapter 11 Bernanke’s Calamity and the Onset of U.S. Recession 162 Chapter 12 Domino Defaults, Global Markets Crisis, and End of the Great Moderation 172 Part IV: Recasting Economic Theory for the Twenty-First Century 182 Chapter 13 Economic Orthodoxy on the Eve of the Crisis 184 Chapter 14 Minsky and Monetary Policy 200 Chapter 15 One Practitioner’s Professional Journey 214 Chapter 16 Global Policy Risks in the Aftermath of the 2008 Crisis 228 Notes 240 References 248 Index 254 A 256 B 256 C 257 D 258 E 259 F 260 G 261 H 262 I 263 J 263 K 264 L 264 M 264 N 266 O 266 P 266 R 266 S 267 T 268 U 268 V 269 W 269 Y 269 The Postcrisis Case For A New Paradigm -- Part 1. Financial Markets And Monetary Policy In Perspective : The Markets Stoke The Boom And Bust Cycle -- The Abcs Of Risky Finance -- Financial Markets As A Source Of Instability -- Free Market Capitalism: Still The Superior Strategy -- Monetary Policy: Not The Wrong Men, The Wrong Model -- Part 2. Economic Experience: 1985-2002 : How Financial Instability Emerged In The 1980s -- Financial Mayhem In Asia: Japan's Implosion And The Asian Contagion -- Brave-new-world Boom Goes Bust: The 1990s Technology Bubble -- Part 3. Emerging Realities: 2007-2008 : Greenspan's Conundrum Fosters The Housing Bubble -- Bernanke's Calamity And The Onset Of U.s. Recession -- Domino Defaults, Global Markets Crisis, And End Of The Great Moderation -- Part 4. Recasting Economic Theory For The Twenty-first Century : Economic Orthodoxy On The Eve Of The Crisis -- Minsky And Monetary Policy -- One Practitioner's Professional Journey -- Global Policy Risks In The Aftermath Of The 2008 Crisis. Robert J. Barbera. Includes Bibliographical References (p. [225]-230) And Index. CNBC regular Robert J. Barbera offers a crystal clear explanation of the financial market crisis of 2008 While mainstream financial analysts are stringing together ad hoc explanations for the financial crisis of 2008, a relatively small group of economists saw this coming. In The Cost of Capitalism, Robert J. Barbera explains why. Barbera makes the case that investors and policy-makers can reduce the risk of truly gruesome outcomes if they better plan for the violent economic storms, which history confirms are always over the horizon. Investors will learn how to gird themselves for the roller-coaster ride that is free market capitalism; policy makers will find out how to plan for crises they know will occur at some point; and academic economists will rethink their pursuit of ever more elaborate mathematical models that bear no resemblance to the real world. The message is simple: Stop pretending that people are always rational and that markets are always efficient—and be prepared for market mayhem. Financial markets and monetary policy in perspective The markets stoke the boom and bust cycle The ABCs of risky finance Financial markets as a source of instability Free market capitalism : still the superior strategy Monetary policy : not the wrong men, the wrong model Economic experience : 1985-2002 How financial instability emerged in the 1980s Financial mayhem in Asia : Japan's implosion and the Asian contagion Brave-new-world boom goes bust : the 1900s technology bubble Emerging realities: 2007-2008 Greenspan's conundrum fosters the housing bubble Bernanke's calamity and the onset of U.S. recession Domino defaults, global markets crisis, and end of the great moderation Recasting economic theory for the twenty-first century Economic orthodoxy on the eve of the crisis Minsky and monetary policy One practitioner's professional journey Global policy risks in the aftermath of the 2008 crisis. Examines the financial crises of the past two decades to offer an analysis of the current recession, and argues for a new economic paradigm that limits the potential mayhem of the free market without sacrificing innovation and economic growth.