Book Review: The Fearful Rise of Markets

The first question the reader may ask is, "Why another book on the financial crisis?" Many of these books are repeating much of the same material, adding less and less to our understanding. This is not true of The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How To Prevent Them in the Future (FT Press, 2010). This new book offers a new approach and conclusion. It is systematically organized, easy to read, well researched, and shows a sophisticated understanding of the capital markets. The author has had a good vantage point to observe the crisis, and what caused it. John Authers is investment editor and columnist at the Financial Times.

The book uses an historical time line, starting with the 1962 launch of Fidelity's Magellan Fund, which began the trend of asset managers using "other peoples" money and herding together to create investment performance. The next step was the 1969 launch of the first money market fund; this took away some of the core business of banks, prompting them to look for new, often risky business. Each of the significant events along this timeline are analyzed in a separate chapter, and the reader begins to see how the financial markets evolved into a structure that culminated in the global crash.

The most important change was that different markets and asset classes started to move in a synchronized way. The impact was greatly magnified by the speed of modern communication and the increase in debt leverage, which swept aside the hoped for risk reduction of asset class diversification. An overreliance on computer models caused many to miss the increased risks. Institutional herding upset traditional correlation theories and propelled the markets to disaster. Governments were forced to move the toxic debts onto the balance sheets of their central banks. Lehman was allowed to fail to show the lessons of moral hazard. The resulting collapse in global markets forced governments to inject moral hazard protection back into the banks. Those who understood this made big fortunes.

Now that markets and economies are in recovery, confidence is returning. But as the book points out, the pattern of "synchronized and self-reinforcing trading" are now "embedded in the global markets DNA." We have not seen the last chapter or chapters.

–Bill Hayes