On Wed, Oct 16, 2013 at 7:06 PM, michael yates <[email protected]> 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): > [...] > > 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." > If you read the whole interview, it is even worse than what this summary suggests. The circularity of his logic will make your head spin. Fama is like Asimov's famous witch doctor who can never lose no matter what happens to his patients: if you didn't get cured, obviously you just didn't have enough faith! Here's an example where he uses Modigliani-Miller in one sentence and immediately turns around and repudiates it in the next. How do you argue with a moron like that? http://www.newyorker.com/online/blogs/johncassidy/2010/01/interview-with-eugene-fama.html ---------------------snip *Let’s say the government did what you recommend, and forced banks to hold a lot more equity capital. Would it then also have to restructure the industry, say splitting up the big banks, as some other experts have recommended?* No. If you think about it...I’m a student of Merton Miller, after all. In the Modigliani-Miller view of the world, it’s only the assets that count. The way you finance them doesn’t matter. If you decide that this type of activity should be financed more with equity than debt, that doesn’t particularly have adverse effects on the level of activity in that sector. It is just splitting the risk differently. *Some people might say one of the big lessons of the crisis is that the Modigliani-Miller theory doesn’t hold. In this case, the way that things were financed did matter. People and firms had too much debt.* Well, in the Modigliani-Miller world there are zero transaction costs. But big bankruptcies have big transaction costs, whereas if you’ve got a less levered capital structure you don’t go into bankruptcy. Leverage is a problem...
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