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Nothing up my sleeve

The longer I’m alive, the more I think economists are the academic version of Gypsy palm readers: They charge you a lot of money to make stuff up about the future, then when it doesn’t work out, you go back to them for more advice. Watch Eugene Fama, founding father of the efficient-market hypothesis, scuttle sideways like a crab:

So what is your explanation of what happened?

What happened is we went through a big recession, people couldn’t make their mortgage payments, and, of course, the ones with the riskiest mortgages were the most likely not to be able to do it. As a consequence, we had a so-called credit crisis. It wasn’t really a credit crisis. It was an economic crisis.

But surely the start of the credit crisis predated the recession?

I don’t think so. How could it? People don’t walk away from their homes unless they can’t make the payments. That’s an indication that we are in a recession.

So you are saying the recession predated August 2007, when the subprime bond market froze up?

Yeah. It had to, to be showing up among people who had mortgages. Nobody who’s doing mortgage research—we have lots of them here—disagrees with that.

So what caused the recession if it wasn’t the financial crisis?

(Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.)

Haha! But the really funny thing about the efficient-market hypothesis is that we know market prices are correct because they are set by markets. Got that? It’s the same reason the Bible is God’s word – because He said it is. In the Bible. Hilarious!

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