The efficient market hypothesis increases the likelihood of panic by encouraging participants to adopt the same mechanical approach to investing. Dave rated it liked it Apr 08, Thomas Rones rated it it was ok May 09, A rant by a hedge fund manager. Max Baker rated it it was amazing Feb 20, Janko rated it liked it Nov 22, The rated it really liked it May 24, Thanks for telling us about the problem. Brian Sullivan rated it really liked it Sep 18, Carry rated it it was amazing Dec 30, This book is not yet featured on Listopia. Nitin Mathew rated it really liked it Feb 11, This book review is for my own reference.

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The financial crisis was no exception in this regard, though in the case of multi-billion dollar hedge fund manager Andrew Redleaf, he in fact alerted clients in December of to the coming credit troubles. As he put it in a client newsletter nearly four years ago, "Sometime in the next twelve to eighteen months there is going to be a panic in the credit markets. Though both are "staunch Republicans who believe Ronald Reagan was the greatest president in our lifetimes", Panic is in no way partisan.

To Redleaf and Vigilante the crisis was authored by both parties, or, in their articulate prose, "Crony capitalists on the right and socialists on the left united as always behind their most fundamental belief, that wealth is to be captured by power and pull rather than created in the minds of men. Considering the widely held view that one factor in the meltdown had to do with a Wall Street establishment that was "heedless of risk", the authors argue the opposite; as in investors "were so obsessed with risk that they became terrified to live by their own judgment.

Indeed, it is the notion of efficient markets and modern portfolio theory MPT that take a thorough beating throughout the book. Redleaf and Vigilante feel that MPT concentrates too much on the mechanics of markets, while ignoring the underlying entrepreneurialism "minds of men" that truly drives ours and any vibrant economy. To the authors, MPT is essentially a cop out, or safe haven for money managers "trying to support capitalist lifestyles with only bureaucratic talents.

Captive to the notion that markets are always right, and that the money that actually moves markets is always the smart money, a great many investors bought into the view that with seemingly all the smart money flowing into increasingly suspect mortgage securities, those securities must have been more credible than rational analysis would suggest. Indeed, as they point out in impressive detail, the conventional wisdom concerning "smart money" is very definitely faulty. Specifically they note that on average, "mutual fund managers consistently fail to outperform the market and usually underperform after fees and transaction costs are taken into account.

Concerning the crisis itself, Redleaf and Vigilante helpfully walk readers through a rapidly degrading mortgage market, one that was increasingly infiltrated by "fly by night" mortgage originators eager to shove money out the door without regard to the underlying fundamentals of the borrowers. And far from a subprime crisis as so many assume they note that defaults among poor credit risks alone could never have caused so much damage , this was in many ways to them a crisis of fealty to efficient markets as institutional managers, bolstered by dumb money chasing performance created by financial wizardry, trusted market history in terms of mortgage defaults over simple rationality, and their own ability to analyze securities.

To the authors, capitalism was betrayed by Washington and Wall Street as the "conjurers" who crafted mortgage securities achieved "their most cherished dream", which "was to isolate money management from flawed human judgment, including their own.

As with all the books, there were surely disagreements and questions. But there lies one of the problems with Panic in that as Wealth and Poverty makes very plain, crazed rushes to housing are hardly new. Not only did their houses tend to rise in value about 20 percent faster than the price index, but with their small equity exposure they could gain higher percentage returns than all but the most phenomenally lucky shareholders.

They also decry how structured finance transformed a quiet mortgage market into something much worse. Maybe, but to complain about financial advances is somewhat of an empty protest. Early on they note that ignorance, not a lack of liquidity is the father of all panic, and there they finger the structure of mortgage securities for making investors oblivious to what was within. In addition to calling the crisis, Redleaf predicted the crash, suggesting ahead of October during that year that the proliferation of equity futures would cause a great deal of carnage.

To the authors, "the reign of risk is at the root of repeated crises in modern financial markets. Further on Redleaf and Vigilante argue that "the one thing the investor must do is accurately identify the risks particularly relevant to any investment and go about eliminating them as thoroughly and inexpensively as possible. Regarding the latter, the notion that excess money fixes anything seems to pervert the Ricardian view that the only perfect money is that which is stable in value.

Rent controls, anyone? Regarding the response to the collapse of Bear Stearns, Redleaf and Vigilante suggest that its bailout was handled properly. Ignorance, caused by government, once again sowing panic. Most would disagree, including apparently the authors, but it was the bailouts themselves that turned what should have been merely painful into something quite horrific.

Indeed, the authors describe a period of market calm after the defaults and mortgage-firm bankruptcies began in , and this seemingly speaks to how very inefficient markets were, and presumably are. Maybe, but it says here that the defaults and bankruptcies were once again a positive sign of the markets rendering their negative judgment on that which was bad, and that had the government simply relaxed and done nothing as this writer argued in the spring of , there never would have been a crisis.

This might sound good, but it also defies basic economics. High prices of anything always and everywhere foretell lower future prices for the profit-interested being compensated for parting with what is limited capital. To use force in order to make cheap what the markets deem expensive is to ensure the wasteful accession of limited capital, all the while driving away potential sources of new funds.

The bailouts only made things worse by virtue of them damaging an economy that necessarily needed to be relieved of non-economic ideas. Intervention that began in and continues to this day signaled to investors that somewhat dormant governments were re-asserting themselves within the global economy, and there was born the biggest crisis of all.

All of these quibbles are in no way meant to detract from an excellent book. At the same time, this reader still awaits the book that lacks any pretense of being subtle, and which instead makes plain that while Wall Street oversaw gargantuan errors, those mistakes alone could never have caused the Panic of


BOOK REVIEW: Andrew Redleaf & Richard Vigilante's Panic



Panic: The Betrayal of Capitalism by Wall Street and Washington





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