By Dr Marco Annunziata
During the instruments of economics, Annunziata's shiny and gripping ebook indicates how the worldwide monetary challenge was once brought on by a failure of management and customary feel within which all of us performed a task. The insights of this transparent and compelling research are crucial for studying definitely the right classes from the trouble, and seeing new threats round the nook.
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Extra resources for The Economics of the Financial Crisis: Lessons and New Threats
Agents who do not possess the desired qualities have an incentive to behave as if they did, in an effort to “fool” others (bluffing in poker is an example). That, in turn, forces those who truly possess the qualities to try to identify signals which can be considered as truly distinguishing, signals that cannot be imitated by others. In the case of the financial crisis, every bank had a strong incentive to signal that it had a healthy balance sheet in order to reassure depositors, investors and counterparties, so as to avoid a withdrawal of deposits, a drop in its share price, and a drying up of funding sources.
It is internally inconsistent to argue that the EMH had been universally embraced by market participants and thereby played a major role in triggering the crisis. Asset bubbles do indeed flag a glaring contradiction with the EMH: investors who jointly pump more and more money into an asset market in the common unshakable conviction that prices will continue to rise clearly do not believe that the current price reflects all available information – they do not believe in the fundamental assumption of EMH.
The EMH has also been blamed for spawning the capital asset pricing model (CAPM), which frames investment based on a trade-off between risk and return. Like most economic models, the CAPM has its flaws, but its underlying principle does not seem so pernicious, especially compared to the soothing belief that high return could be obtained at zero extra risk, which led to unreasonably compressed spreads on risky assets on a global scale. These criticisms set up the EMH as a straw man by outlining its most extreme version, and then arguing that (a) it has been universally and uncritically accepted until now, and (b) the recent crisis has finally exposed it as a glaring fraud.