Fama's claim that the EMH worked well in the 2008 crisis made me think of an architect being questioned about the deaths of many trying to escape a burning theater he had designed. "The single exit was adequate. If people had heeded the signs saying 'Walk Don't Run' they all would have gotten out."
On the other hand, I agree with Fama that there was an economic crisis that triggered the financial crash. The tragedy millions have experienced and more millions will is that the economic problem hasn't been described in conventional discourse. The income distribution prevents fuller employment and recovery. Stimulus and tax reform cannot deal with this, so on we go, speeding on the spinning wheel. Gene On Oct 16, 2013, at 5:06 PM, michael yates wrote: >> From a Jan. 2010 article in the New Yorker by John Cassidy (for a > devastating (but difficult, for me anyway, analyses of EMH, see Modern > Political Economics by Yanis Varoufakis, Joseph Halevi, and > Nicholas Theocarakis): > > "In the course of a few days, I talked to economists from various > branches of the subject. The over-all reaction I encountered put > me in mind of what happened to cosmology after the astronomer > Edwin Hubble, in 1929, discovered that the universe was expanding, > and was much larger than scientists had believed. The profession > fell into turmoil. Some physicists stuck to the existing theories, > which posited a stable universe. Others, Albert Einstein included, > tried to adapt the old models to Hubble's data. Still others > attempted to come up with a new account of how the galaxies > formed; it was this effort that ultimately produced the theory > of the big bang. > > Fama, whom I interviewed in his office at the Booth School, > was firmly in the denial camp. A short, wiry man of seventy, > with cropped hair and wearing a short-sleeved flowery shirt, > he looked more like a retired marine in Miami Beach than like > one of the founders of modern finance. Beginning in the > nineteen-sixties and seventies, Fama, who holds the title of > Robert R. McCormick Distinguished Service Professor of Finance, > propounded the efficient-markets hypothesis, which underpinned > the deregulation of the banking system championed by > Alan Greenspan and others. I asked him how this theory had > fared in the recent crisis, which many, myself included, have > described as an example of gross inefficiency. Fama was unruffled. > "I think it did quite well in this episode," he said, traces > of his native Boston audible in his voice. "Stock prices typically > decline prior to a recession and in a state of recession. > This was a particularly severe recession. Prices started to > decline in advance of when people recognized that it was a > recession and then continued to decline. That was exactly > what you would expect if markets are efficient." > > The emphasis that Fama placed on the stock market surprised me. > Surely, I said, we had experienced a giant credit bubble, > which eventually had burst. "I don't know what a credit > bubble means," Fama replied, his eyes twinkling. > "I don't even know what a bubble means. These words have > become popular. I don't think they have any meaning." Fama > wasn't kidding. He became so tired of seeing the word "bubble" > in The Economist that he didn't renew his subscription. > "People have become entirely sloppy," he went on. > "People have jumped on the bandwagon of blaming financial > markets. I can tell a story very easily in which the > financial markets were a casualty of the recession, not a > cause of it." > > The crux of Fama's argument was that the economic slowdown > predated the collapse of the mortgage market, in 2007. As > job and income growth slowed, he said, some homeowners > couldn't make their monthly payments, especially the > subprime borrowers who had taken out the riskiest mortgages. > With delinquencies and foreclosures rising, banks and other > financial institutions that had invested heavily in > subprime-mortgage bonds suffered big losses, which > prompted them to cut back their lending to others. > "As a consequence, we had a so-called credit crisis," > Fama said. "It wasn't really a credit crisis: it was an > economic crisis." > > Fama's story was logically consistent, but it appeared to > contain a big gap. If the mortgage blowup didn't cause the > recession, what did? When I raised this question, Fama laughed. > "That's where economics has always broken down," he said. > "We don't know what causes recessions. Now, I'm not a > macroeconomist, and I don't feel badly about that." > He cackled again. "We've never known. Debates go on to this day > about what caused the Great Depression." > > A theory of the economic downturn that relies on inexplicable > gyrations in the economy didn't sound like a great advance, > but Fama seemed content with it. He insisted that the real > culprit in the mortgage mess was the federal government, > which instructed Fannie Mae and Freddie Mac to buy subprime > mortgages and mortgage securities. "That was a government > failure; that was not a failure of the market," Fama said. > According to figures quoted in the Washington Post, > Fannie and Freddie's purchases accounted for less > than a third of the subprime market at the height of the boom. > When I pointed out that private investors bought most of the > subprime securities issued, and the two big government-backed > mortgage companies considerably less, Fama said simply, > "How much does it take?" > > In addition to accusing the government of causing the subprime > problem, Fama argues that it botched its handling of last > fall's financial crisis. Rather than bailing out A.I.G., > Citigroup, and other firms, Fama says, the Treasury > Department and the Federal Reserve should have > allowed them to go bankrupt. "Let them all fail," he said, > with another laugh. "We let Lehman fail. We let Washington > Mutual fail. These were big financial institutions. > Some we didn't let fail. To me, it looks like there > was not a lot of rhyme or reason to it." He conceded > that the entire financial system might well have shut > down for a period, but he expressed confidence that > investors and healthy banks would have stepped in to > buy the good assets of the collapsed firms, and that, > within a week or two, the system would have been operating > again. "It pretty much stopped for a week or two, anyway," > he said. "The credit markets stopped for more than a week or two." > > Fama was no less genial on the subject of Posner. "He's not an > economist," he said. "He's an expert on law and economics. > We are talking macroeconomics and finance." Even when > I brought up Paul Krugman, who had criticized efficient-markets > thinking in a recent essay in the Times Magazine, > Fama's equanimity was unshaken. "My attitude is this," > he said. "If you are getting attacked by Krugman, you must > be doing something right."" > _______________________________________________ > pen-l mailing list > [email protected] > https://lists.csuchico.edu/mailman/listinfo/pen-l _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
