Financial crisis is the phrase of the moment, but despite many attempts, few members of the commentariat have ventured satisfying and succinct explanations of its origins. There have been a few laudable tries, and George Cooper's short treatise can be added as one of the more incisive of the bunch. In the book, Mr Cooper, an asset manager who cut his teeth at Goldman Sachs and Deutsche Bank, delivers an engaging, ruthlessly contrarian take on how credit creation, central bank policy and misguided market theories have led to a succession of bubbles and crashes these past few decades.
His argument boils down to this: central bankers who guide monetary policy on the assumption that markets are efficient - that every piece of knowledge and every risk is reflected accurately in the market price - have turned out to be completely wrong, and just as misguided are the central bankers (like those at the European Central Bank) who see monetary policy as a means of combating inflation.
Borrowing from an alternative school of economic thought, Cooper argues that central bankers should prick asset price bubbles by raising interest rates to slow down credit growth when it gets out of hand. This is something that the current generation of central bank governors have explicitly refused to do, saying there is no way to be sure whether stocks, houses or any other assets are in the midst of a bubble or whether they are merely increasing in price at a rapid rate.
Cooper doesn't offer a bulletproof solution to this conundrum. He says the rate of credit creation should be one basis for interest rate decisions, but that's a bit problematic given the many overlapping ways in which credit creation can be measured. Still, the book is a surprisingly lucid read, given its subject matter, and is worth checking out if you're interested in understanding how central banks evolved, how credit creation works and the ills of our global financial system. Publisher: Harriman House: 2008 Ratings Explained ★★★★★Excellent ★★★★Very good ★★★Good ★★Poor ★Dire * Asa Fitch