Title: Infectious Greed: How Deceit and Risk Corrupted the Financial MarketsAuthor: Frank Partnoy
Publisher: PublicAffairs
Pages: 496
ISBN: 978-1586487843
ISBN: 978-1586487843
Much has been written about the spectacular financial meltdown of 2007 - 2008. Much will continue to be written about it. We are still experiencing the repercussions of this panic and will continue to do so for the foreseeable future. These events have generally been presented to the public as being from a bolt out of the blue. The argument goes that no one could have predicted the meltdown beforehand. It is like a force of nature that appeared suddenly to wreak havoc. Needless to say, these arguments are total nonsense.
An event of this magnitude does not appear out of the blue. There is a build up period which can often be long. Mr. Partnoy's book casts an eye on this build up period by tracing the roots of the current crisis. The financial system plays a critical role in an economy. Under controlled conditions, it helps the economy to grow strongly. However, what happens when the controls are removed?
This experiment has been carried out since Ronald Reagan's presidency. There are two definite consequences to controlling the financial markets (or any other type of market for that matter). One is that there is great stability. The other is that innovation is exceedingly slow. The basic idea behind removing the controls on the financial markets was to increase the pace of innovation in the sector. Under the influence of the Chicago School economists (specially Milton Friedman), it was thought that the sector would police itself effectively since no player can afford loss of reputation since any financial company which loses the confidence of its customers faces the very real possibility of a sudden collapse.
Infectious greed traces what happened when this idea was put into practice. As the book highlights, the pace of innovation amongst financial firms increased dramatically. Radically new financial products and new forms of financial organizations quickly appeared on the scene. Many (but not all) of these products and organizations gave superior returns to their clients. At the same time, greed played a major part both amongst the financial market players and among the clients. Vast bonuses attracted the best minds away from other sectors into a sector whose basic role is that of an intermediary.
While all of this was going on, many "experts" specially among the academia were cheering on these new innovations. The general public which included the business community was assured that these new products made for a better, safer, stronger, less risky financial system. So what if the new products required literally a PhD in Physics and Maths to understand? That just indicated how effective they were in reducing and indeed even eliminating risk. However, unbeknownst to nearly everybody including the financial participants themselves, these new innovations ended up vastly increasing systemic risk. The few dissenting voices were dismissed contemptuously and ignored.
All this is traced out in painstaking detail by Mr. Partnoy. The book highlights the role that greed, hubris, stupidity and arrogance played in creating conditions that inevitably led to the meltdown. The book does not simply trace the contours of the brave new financial world as it was being created. It also makes recommendations to prevent another, perhaps even worse meltdown in the future. The tragedy is that despite the clear warning that this book represents, no lessons seem to have been learned. Definitely a must read if you want to understand the origins of the current financial malaise.
