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History, Causes and Solutions – Saving Capitalism From Itself

Trouble_with_Markets_Roger_BootleThe Trouble with Markets charts the cause of the Credit Crunch or Roger Bootle's Great Implosion. It is a surprisingly optimistic, and well considered view of the future.

It is a delight to find a book on finance and economics as readable as The Trouble with Markets. For once here is a book that explains the whys and wherefores of the Credit Crunch in language that will be readily understood by the interested reader without a background in economics or high level financial services.

The Trouble with Markets or Saving Capitalism from Itself is written by Roger Bootle, one of the City’s top economists with a track record of successfully forecasting major market changes. He wrote the Death of Inflation which is now considered an important work and has become a best seller. He returns to some of its ideas in The Trouble with Markets.

The book is in three parts that map the journey into the Credit Crunch and outlines the likely path out of its consequences. Bootle then moves on to consider the future of capitalism itself.

The Great Implosion; The History, Causes and Consequences of the Credit Crunch


Although the overall failure of the Credit Crunch or Great Implosion, as Bootle calls it, are complex; the individual elements of the collapse are straightforward. Many are based on psychology rather than economics and others on greed supported by the lack of a truly competitive financial market.

Also Roger Bootle looks at history and compares actual behaviour with academic economic theory which fails to reflect the reality that people are social and do not behave entirely in the sole interest of the individual or family. Many do things for the greater good or altruistic reasons which moves market performance away from its theoretical ideal. Regulators, policy makers and bankers have lived in a blinkered and unreal world that feeds a culture of greed.

The Trouble With Markets; How They Work and Fail

According The Trouble with Markets this is supported by the failure of investors to assert their rights; especially institutional investors whose executives are on the same gravy train as the bankers. It is then all compounded by the supine behaviour of regulators, to assert their rights by financial service “professionals” and public policy all conspired to create the environment where such behaviour is rewarded.

Add in the global financial imbalances with the inherent fragility of the financial services industry and it was a house of cards waiting to collapse.

The author makes his points calmly and clearly. It should be understandable by any concerned reader – and everyone should be concerned as these are people managing the pensions of everyone

From Implosion to Recovery; Surviving the Downturn and Prospering in the Recovery

Roger Bootle provides advice as to what individual investors, governments and central banks should do during and to facilitate recovery. Encouragingly in The Trouble with Markets Bootle suggests that things need not be as bleak as many suggest. Indeed he expresses concern that investors and commentators could talk the world into an avoidable depression.

If the various groups accept more realistic gains then there could be a three phase recovery and the first stage may actually be well under way – no one will know until after the event. The “gains” of the period prior to the Great Implosion were unrealistic and they came at the expense of other's losses and the eventual collapse of the market. However gains closer to the long-term run rate should be achievable but some investment sectors, such as property, may take a generation to fully recover.

Bootle argues that government spending in the UK and many other countries is already too high so taxes should be reduced to allow individuals and companies to increase spending rather than increasing taxes to fund government spending. He also points out that government borrowing is not lost but forms part of everybody’s pensions and other savings. Ultimately it will be repaid so Bootle does not subscribe to the simplistic need for deficit reduction – his view is that if recovery proceeds it will, to a large extent, take care of itself

Saving Capitalism From Itself and Its Future

Interestingly The Trouble with Markets does not suggest that more regulation is required but that more effective use of better rules is needed and possible. There is a warning there for politicians and policy makers to be thoughtful rather than reactive.

Complex Ideas in Plain English – Good Advice for Investors

All in all Roger Bootle has produced a remarkably readable and considered analysis of the Credit Crunch or Great Implosion. All politicians, financiers and individual investors should read it carefully and act accordingly. First they should all learn what real wealth is and how it is actually created; little of it in financial services - greater humility is required by bankers.

In particular investors should not use investments products they do not understand. If a financial adviser cannot explain an investment they either do not understand it themselves or are seeking to confuse their client. This book shows that complex financial matters can be explained in plain English that any intelligent person can understand.

The Trouble with Market, Saving Capitalism from Itself (2009, ISBN: 978-1-85788-537-8) by Roger Bootle is published in hardback by Nicholas Brealey Publishing at £18 (US$29.95)


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Quick Thoughts

Has Military Action Ever Dissuaded Tyrants?

Syria - flagIn his speech before the war in Iraq Tony Blair, the UK Prime Minister, argued that not intervening would send a message that tyrants would feel at liberty to act without consequence. By military action in Iraq, he argued, those who would perpetrate atrocities would think twice. There would not seem to be any evidence, before or since, that would back up that contention.

We now have David Cameron, the current Prime Minister, making essentially the same arguments – do politicians ever learn from history?


Government Spending is not Driver of Growth

Parliament Square London IC02001If more public spending is the only way to create growth then surely governments have become too large a part of the economy? Government is about spending and has little to do with creating wealth.

The best government can do is move wealth from individuals and business to those who serve government.


Capped Bonuses, There May be Trouble Ahead

Politicians do not seem to be good at imagining unintended consequences. The cap on bankers’ bonuses, however popular, may be counter-productive in reducing risk.

Dark Stormy Skys and Beauty Often CoexistIf a smaller proportion of a trader’s income is at risk if a trade goes wrong they may pursue high-risk opportunities to get that big win. If it works they guarantee the full bonus and could also use it to negotiate a higher salary (and bonus) for the following year. If it fails the downside is limited by the capped bonus to a smaller part of overall income. At the end of the day traders are competitive and gamblers at heart so will they be more likely to pursue the big win when their own risk is limited?

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