Burton Malkiel's paper defines EMH to mean (roughly) "it's hard to beat the market, but of course prices could be way off at any particular time" (yes, Virginia, there are bubbles). This is what I refer to as a weak version of EMH.
Arnold Kling highlights the following talks (click through for links):
Foote, Girardi, and Willen ask whether, given expectations for ever-rising house prices, the institutional and regulatory details make any difference. If people expect house prices to rise faster than the rate of interest, then that creates in their minds a profit opportunity. One way or the other, the market will develop the financial instruments that allow people to exploit that apparent opportunity. I do not think I can endorse this view, but it is interesting.
Thomas Philippon asks how the financial sector came to be as large and profitable as it did. He argues that it is not because finance became more efficient or added more value to the economy. [ "In the absence of evidence that increased trading led to either better prices or better risk sharing, we would have to conclude that the finance industry's share of GDP is about 2 percentage points higher than it needs to be and this would represent an annual misallocation of resources of about $280 billions for the U.S. alone." ]
Brad DeLong asks why economists could not predict and explain the economic downturn. He argues that financial panics, in which the market's assessment of the safety of financial assets changes sharply and suddenly, are rare events that are outside the realm of typical theoretical models and statistical analysis. I am left with further questions. Which is abnormal, the faith that people had in financial assets before the crisis, or the lack of faith that people had after the crisis? And does government intervention to try to supply safe assets constitute the solution or the problem?
The Case-Shiller housing index shows that housing prices have more or less tracked inflation for the last century. Current prices are about where they should be according to the trend. No recovery to the bubble prices can be expected.
ReplyDeleteBrad DeLong says, "It's not our fault. Expecting us to predict such rare events is expecting too much."
ReplyDeleteWhy quote this guy?
Economics is a pseudoscience. But! Its subjects is important. Someone needs to be blamed. Most econ students are ideologically reliable. So credentialism works its magic and it doesn't matter that economics is pseudo-rigoruos astrology.
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ReplyDeleteWaiting for new posts very shortly.
Scott