From an efficient to a viable international financial market

Abstract

The US-made grand financial crisis is a natural experiment. We have witnessed the grand failure of the linear equilibrium theory of the efficient market and the emergence of the non-linear evolutionary theory of the viable market. Four observations reveal where the equilibrium theory of asset pricing and business cycles went wrong: the exchange rate resonance driven by US business cycles, the mesofoundation of macro-fluctuations, the endogenous nature of persistent cycles in financial and macro-indexes, and the trend collapse and higher moment risk in the derivatives market. The new perspective, which is analogous to the theory of nonlinear population dynamics in continuous time, provides a better alternative for understanding complex causes of the grand crisis, including systematic failure in the mortgage security market, unprecedented concentration in financial markets, unfettered speculation in commodity and currency markets, deregulation and liberalisation of financial markets. A new international financial order can be achieved if a robust international antitrust law is developed and applied, and a Tobin tax on foreign exchange transactions can be established through global efforts. American disease of financial power, China puzzle of high savings and China’s