Free Market Meltdown.

• Author: Conniff, Ruth
• Position: ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism - Book review

ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted

Capitalism

By Yves Smith

Palgrave Macmillan. 362 pages. $30.

Why are so many of the best Wall Street watchdogs women? From regulator Brooksley Born, who sounded the alarm about the derivatives shell game, to lawyer and TARP overseer Elizabeth Warren, to financial journalist Bethany McLean, who exposed Enron, add the name Yves Smith, a twenty-five-year veteran of the financial services industry, including stints at Goldman Sachs and McKinsey & Co., and the creator of the finance blog Naked Capitalism. Smith, like Born, Warren, and McLean, is a brilliant financial analyst who has made a practice of pointing out when the smartest guys in the room aren't so smart after all.

One hint at a reason for women's overrepresentation among Wall Street's detractors appears early in Smith's new book, ECONned: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism .

She describes Yale economist Robert Shiller recounting how, as a member of the economic advisory panel to the Federal Reserve Bank of New York, he felt the need to "soft-pedal his concerns about the developing real estate bubble: 'In my position on the panel, I felt the need to use restraint. While I warned about the bubbles I believed were developing in the stock and housing markets, I did so very gently, and felt vulnerable expressing such quirky views. Deviating too far from consensus leaves one feeling potentially ostracized from the group, with the risk that one may be terminated.' "

Maybe women, who don't have such a comfortable place at the table, are more inclined to question economic group-think.

That is exactly what Smith does so well in this book. Starting at the very beginning, in straightforward but not simplistic prose, she debunks everything you thought you knew about economics, from the supply-and-demand graph to the conventional wisdom that you should diversify your investments.

Along the way, she also exposes mainstream economists' naive faith in free trade, deregulation, and the self-correcting nature of markets.

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In her first few chapters, Smith gives a powerful indictment of neoclassical economics, and the mandarin class of economists who subscribe to this "Potemkin science, all façade and no substance."

"Leaders at the U.S. Treasury and the Federal Reserve are still clinging desperately to a failed orthodoxy that in turn helped create and now serves to...