[ExI] Greed + Incompetence + A Belief in Market Efficiency = Disaster

[Stathis Papaioannou]

2009/1/30 BillK <pharos at gmail.com>:

> GMO's quarterly update, by Jeremy Grantham has an enjoyable rant
> blaming believers in the efficient market theory for the economy
> crashing.
> <http://www.gmo.com/websitecontent/JGLetter_4Q08.pdf>
>
> Quote:
> The incredibly inaccurate efficient market theory was believed in
> totality by many of our financial leaders, and believed in part by
> almost all. It left our economic and governmental establishment
> sitting by confidently, even as a lethally dangerous combination of
> asset bubbles, lax controls, pernicious incentives, and wickedly
> complicated instruments led to our current plight. "Surely none of
> this could happen in a rational, efficient world," they seemed to be
> thinking. And the absolutely worst aspect of this belief set was that
> it led to a chronic underestimation of the dangers of asset bubbles
> breaking – the very severe loss of perceived wealth and the stranded
> debt that comes with a savage write-down of assets.
> ---------
>
> The believers in efficient 'free markets' as the answer to everything
> seem to be having a hard time of it these days.

Please note that there are two possible meanings for "efficient market
theory". The more common one in economics is the idea that the market
prices a security to reflect all the information available, so that it
is in general not possible for a speculator to beat the market unless
he has special information:

http://en.wikipedia.org/wiki/Efficient_market_hypothesis

The article cited is talking about something quite different: the idea
that if markets are left free from government interference that will
always be for the better. This has come to be accepted as indisputable
fact by neocons since the early 1980's, with Reagan and Thatcher its
most influential proponents. The result has been a 25 year debt
bubble, so that the US economy came to consist largely of retail and
financial services. The bubble has now well and truly burst and it
looks like there is no escaping years of relative poverty for both
debtor and creditor nations ahead.


-- 
Stathis Papaioannou