(Note: This is a re-post with minor edits. I once posted this summary in my old blog in 2009, which does not exist now).

The Origin of Financial Crises: Central Banks, Credit Bubbles, and the Efficient Market Fallacy (by George Cooper)

This book argues that if we are to break out of the damaging cycle of booms and busts, all participants should recognize the proper role and limitations of macroeconomic policy. The writer points out that there are inconsistencies in macroeconomic policy, wherein:

• policy makers will let market move freely when asset prices are increasing even further when warnings of bubbles are all around, with the defense of the Efficient Market Theories (EMT, that assets prices are always and everywhere at the correct price, that markets move naturally only toward equilibrium, and new equilibrium only exists if a new external event occurs);
• but strangely when asset prices begin falling policy makers will take corrective action immediately, not letting the market correct itself (by keep cutting interest rates or other means, which only delay crises, and at worse times by means of bailouts).

Interesting question regarding validity of EMT: if EMT holds true, why do we need the existence of central banks if the theory tells us that markets are efficient and should be left to their own devices?

The writer offers a better theory, that is the Financial Instability Hypothesis developed by Herbert P. Minsky, which suggests that financial markets are not self-optimizing, or stable, and certainly do not lead toward a natural optimal resource allocation. In other words, in contrast to EMT, financial markets are inherently unstable. Accepting this new theory means we need better tools to deal with randomness, better risk management, new monetary policy (the one that accepts economic contraction as a normal part of a healthy vibrant economy).

In its concluding remarks, this book stresses the importance of changing our mindset from one unquestioning faith in market efficiency to one that accepts the need for governance of aggregate credit creation.

For me, it’s refreshing to read this book’s simplified history of money (and history of central bank and its changing and conflicting roles), in the attempt to show when in the history market/price instability or inflation appeared:

1. Barter exchange evolved eventually into gold exchange. Gold exchange made it easy for everyone in exchanging goods; then gold became a store of value (there would have been inflation/deflation cycles linked to harvests, wars, disease etc, but on average markets are stable).
2. Gold money (coins) made trade easier. Further development: Occasionally government will do re-coinage or debasement (by demanding population to turn over their coins and have them replaced by new worth-less coins) and thus extra money will flood into the system and there would be inflation (but once price established inflation would stop).
3. Gold certificates and the start of credit creation: Since gold coins were troublesome, merchant banks then started issuing certificates of gold deposit (depositors would hold certificates stating entitlement of gold coins deposited in a bank). Merchant banks soon realized that they would have always available gold coins deposited with them (since depositors very rarely came back to collect it and inflows and outflows of coins on most days cancel one another out), thus came up with their own money making ruse by issuing their own certificates and lending them to merchants in return for interest. This started first serious instability (and note that financial instability could occur under gold standard): as more banks lent this way, there were risks of bank runs that was when defaulted loan(s) could psychologically brought rumors that a bank will have problems in fulfilling its obligations to depositors since it had less coins than the total of certificates it issued.
4. Creation of central bank: Problem of bank runs was resolved by a system in which risks are pooled and shared and any troubled bank would be supported so that panic would be prevented, by creating a bank for banks: a central bank, as lender of last resort. Central bank will defend any troubled bank by honoring its obligations; the unintended consequence was moral hazard: depositors would treat all banks as equally secured and so would seek out the ones paying highest interest thus would make banks enter risky lending practices. This problem was then resolved by a new system in which banks could not lend unchecked, gold reserves would be collected together at the central bank, only one type of certificate issued by government (i.e. money). So now government took control of monetary system, it could print money based on the gold reserves and at times change the conversion rate (in time of needs, government will print more money using the same base of gold reserves, creating inflation or declining value of money).
5. Bretton Woods and the global gold standard: Post World War II agenda was to ensure global currency regime that would help all sides rebuild their economic infrastructure. At a conference in the American resort Bretton Woods, it was agreed that all major currencies would be valued against the US dollar at a fixed exchange rate. US Dollar was fixed at USD35 per ounce of gold. Further development: By late 1960s re-industrialization outside America was so successful that trade position was reversed that America was buying more than it was selling (i.e. trade deficit for America, net outflow of US dollar). To maintain the fixed exchange rates, non-US countries were obliged to recycle the trade surplus back into America in the form of US government debt (in other words, trade deficit created debt for US).
6. End of gold standard (fiat money): US debt became even larger due to Vietnam War and so US government had to resort to printing itself more money to pay off its debts, thus more number of dollars for constant gold reserves. Some informed non-US government then decided to request to convert their dollars into gold. On August 15th 1971, Nixon decided to refuse all requests for conversion, devaluate the currency and US dollar ceased to be a certificate of gold deposit currency, thus the end of gold standard. Governments were now free to print money at will; some governments printed more and more money thus created inflation spiral. After this departure from gold standard, central banks were given the job of maintaining price stability by preventing governments from printing too much money, and additional role to ensure economic recessions were avoided.

(Note: This is a re-post with minor edits. I once posted this summary in my old blog in 2009, which does not exist now).

Book Title: The Autobiography of Malcolm X: As Told to Alex Haley

I was interested to read this autobiography because of a book titled “Impossible Man”, story of life of Michael Muhammad Knight, who read Malcolm X’s autobiography upon a friend’s suggestion, who was so inspired by the book that then he embraced Islam, and even further studied Islam in Pakistan, although for some reasons he had later said his goodbye to Islam.

Born on May 19, 1925 as Malcolm Little, he spent his childhood years in Lansing, Michigan. His father, Earl Little, a Baptist minister, was murdered allegedly by white supremacist group, and this made his mother suffered from mental breakdown and sent to an institution; around 1937, Malcolm and some of his siblings was to leave their home and stayed at different houses.

Because of trouble he had with a teacher, he was expelled and moved to a detention home in Mason, Michigan. He then studied at Mason Junior High School, got good grades and even elected as a class president. A turning point was when a teacher told him to be realistic in his career plan, to consider maybe carpentry instead of his dream to become a lawyer. He then drew away from white people and after finishing eighth grade he moved to Boston to live with his half-sister in 1940.

In Boston he was attracted to the town’s ghetto section, get a shoeshine job at a dance ballroom, exposed to the night life and enjoyed dancing so much; he was known as Red (for his reddish hair). In 1941, his sister, who disliked the things going on with him in Boston, found him a job in a Boston-to-New York train as a dishwasher and later a sandwich man.

He later settled in Harlem, New York, working as a waiter in a restaurant, where he was exposed to experts in crime: drug peddlers, those involved in numbers industry (lottery), pimps, thieves and burglars. He eventually involved and did all crimes he learned from those experts. He was then known at as Detroit Red (for he was from Michigan and Detroit was more well-known than Lansing), and finally was caught for burglary and got ten-year sentence in 1946.

And so began the prison episode of his life. He was called Satan for his anti-religious behavior, but later was introduced to Nation of Islam by his siblings, who learned Islam (that is the version of Nation of Islam) as the natural religion for black men. This Nation of Islam was founded by Elijah Muhammad who was appointed as prophet by Mr. Wallace D. Fard (who is the “Allah in Person”). Nation of Islam’s important belief is that Original Man was black and all white people are the devils (whom originally created by black scientist in the past). The devil white men then had murdered and kidnapped, brought many black men to the West and enslaved them and cut them from all knowledge of their own kind, their language, religion and past culture. It’s in the Nation’s belief that Christian religion was injected to the black men as a curse, to teach them to worship an alien God with the same pale skin, blond hair and blue eyes as the slave-masters, to brainwash the black men that white men are superior. These teachings affected Malcolm so much, it’s so easy for him to accept them as truth from all his experiences living as black man in America. He read a lot in prison and wrote letters to Elijah Muhammad.

After being released from jail on parole in 1951, he formally joined Nation of Islam, received his “X” last name that symbolized the lost of his true African name, so he became Malcolm X. He was then appointed by Elijah Muhammad as minister, active in recruiting members and building the Nation’s temples (later called mosques) in some cities. As the Nation became larger, it got more media attention, and Malcolm X was like a spokesperson for the Nation talking to the media, academic institutions, and talking at rallies. Nation of Islam’s followers were known as Black Muslims.

In 1963, Elijah Muhammad expelled Malcolm X from the Nation for his comment on JFK assassination. But Malcolm X believed that the real reason for it was his discovery that Elijah Muhammad had been betraying Nation of Islam by conducting adultery. Since then he got constant death threats. He then formed Muslim Mosque, Inc., an organization aiming to eliminate political oppression, economic exploitation and social degradation suffered by Afro-Americans.

In 1964, he made the pilgrimage to Mecca, which transformed his belief. He was touched by the spirit of brotherhood practiced by people of all colors and races in the Holy Land. He met Muslims from all over the world, he met white Muslims as well. That changed his former belief that all white men are the devils. He wrote about this experience to America, his “Letter from Mecca”, signing it with his Islam name: El-Hajj Malik El-Shabazz. (He later confirmed Muslim Mosque Inc.’s religious affiliation with mainstream Islam). He met important persons from the Islam and Africa World. He then visited Lebanon, Egypt, Nigeria, Ghana, Liberia, Senegal, Morocco and Algiers. He realized that there need to be communications between the independent nations of Africa an the American black people. In 1965 he again visited Middle East and Africa.

On February 21, 1965, he was assassinated while speaking at a rally at Audubon Ballroom, New York. Some allegedly Black Muslims were indicted for his murder.

Additional Facts:
Elijah Muhammad died in 1975, and soon after his son Wallace or Waarith Deen Mohammed renamed the organization “The World Community of Al-Islam in the West” (became the American Society of Muslims and rejected his father’s theology and accepted whites as fellow worshipers and forged closer ties with mainstream Islam. Later in 1978 Nation of Islam was revived by Louis Farrakhan.