The Fearful Rise of Markets: Problems and Solutions for Today

by: Jim Van Meerten

This weekend in the Financial Times, John Authers does an abstract of his new book: The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns and How to Prevent Them in the Future.The Fearful Rise of Markets: Short View of Global Bubbles and Synchnonized Meltdowns

The abstract is pure genius, I can't wait to read the book. To me a genius is anyone who can take complex subjects, boil them down and explain them in such simple language that even I can understand them.

He outlines the problems with the markets as:

Other People's Money -- He explains how in the 1950's most people played the market with their own money. Only 10% of the NYSE volume was institutional. Now most money trading in the market is managers playing with other people's money. Only their job and bonus is at stake.

Herding -- Professional investors all seem to go to the same investments and cause them to become overpriced. They all aim for the same benchmarks thus limiting their investment universe.

Safety in Numbers -- Asset Allocation through diversification caused people to invest and take risks in investments they didn't understand. By forcing investment in assets that did not correlate to the rest of the market, the new money rushing in caused a new correlation. Then when one sector failed they all failed.

Moral Hazard -- There was an impression that the markets were protected and all was safe. Someone was looking out at what was happening and someone would always bail out failures.

He then goes on to offer suggestions on the solutions.

Moral Hazards -- Banks and financial institutions either need to be broken up so that if they fail their smaller size makes it no big deal. They can then be allowed to fail. If the shareholders are at risk, they might not allow risky ventures

Herd Mentality -- Change the way managers are paid. If they are paid on size and short term performance they will go along with what everyone else is doing.

Other People's Money -- You should not be able to take on a risk and then package it and sell to others. You should have to retain a piece of the risk so you have skin in the game.

This article and hopefully the book will be must reading for those few of you that really want to know why the fiasco happened and how we can prevent it in the future.

Disclosure: No positions mentioned