Letters – 8th Annual Year in Ideas – NYTimes.com
Robert Skidelsky argues that the “failure” of the efficient-market hypothesis over the last year proves that laissez-faire economics is dead and Keynesian economics should be the foundation of a new economic structure. But the efficient-market hypothesis, as defined by its inventor, Prof. Eugene Fama of the University of Chicago, states an “efficient” securities market is one in which, given the available information, actual prices at every point in time represent very good estimates of intrinsic values.
What has become clear over the last months is that the market did not have all the information to correctly set prices. The government’s role should be to ensure that the markets are supplied all the information to ensure their efficiency — not to pursue its current path of eliminating the market function via subsidies and political meddling.
Hmm! As an admirer of Keynes I do tend to favor all that fancy government meddling when times are tough. That is an interesting viewpoint, though. Markets can’t function when information is terrible, and a good responsibility for government would be that of bursting obvious bubbles before they grow too big.
(By the way, next time we’re in such a bubble—oh, those days seem so quaint—remember not to believe anyone when they insist that this time is different…)
(Incidentally, how many of our recent crises began with naïvely believing information that was obviously bad but fitted what we wanted to hear? I’m going to guess all of them.)
(One more thought… perhaps the God that governs the universe has a counterpart in high finance, but he’s a highly vengeful, cynical god who’s kind of a cosmic con artist that we constantly need to stay ahead of. Oh! There I go, revealing my secrets…)