The central error in the popular post-crisis consensus was the idea that naive believers in the self-policing efficiency of markets led us over the precipice. Greenspan was painted as the high priestof this laissez-fairy-tale delusion, and people seized on a moment when he appeared to plead guilty: Under the pressure of congressional questioning, he confessed to a “flaw” in his pro-market ideology. What Greenspan meant was that all belief systems — whether pro-government or pro-market — are imperfect. But that subtlety was lost. Quoted and requoted without proportion or context, Greenspan’s purported mea culpa threatened to define his legacy.
.. Bestsellers by two Nobel Prize-winning behaviorists — Daniel Kahneman and Richard Thaler — encouraged people to see the crisis as proof that this new science had been ignored, as did contributions from the sublime storyteller Michael Lewis.
.. Contrary to myth, Greenspan himself never believed that markets were efficient. In his youth, he wrote lucidly about bubbles and crashes and regarded market inefficiencies as so obvious that he sought to exploit them by day trading
.. As Fed chairman years later, Greenspan frequently reminded his colleagues that periods of prosperity could be punctured by “irrational exuberance” in financial markets.
.. political constraints, not intellectual failures, prevented policymakers from curbing the housing mania. Nobody remembers that in 2001 the Greenspan Fed banned the most abusive subprime mortgages, for the good reason that the ban was circumvented. But why was it circumvented? The answer is that the capture of Congress by financial lobbies ensured the balkanization of regulation into an alphabet soup of agencies, many of them underfunded and ineffective.
.. Nonbank mortgage lenders, for example, came under the authority of the Federal Trade Commission, which had no resources to conduct preemptive supervision. Small wonder that the sharp practices in the industry became egregious, or that nonbanks continue to dominate today’s mortgage business.
.. The Greenspan Fed also tried to force more capital into the banks it supervised, but it soon realized that this would drive risk-taking into various “shadow banks” that lay outside its authority
.. Greenspan also pushed for tougher regulation of the Federal National Mortgage Association and Federal Home Loan Mortgage Corporation (a.k.a. Fannie Mae and Freddie Mac), the government-backed mortgage giants, presciently observing that they posed “a systemic risk sometime in the future.” Fannie’s lobbyists hit back with a TV ad warning Congress not to back the Greenspan plan. That buried it.
.. The important lesson of the crisis is not that markets are fallible, which every thoughtful person knew already. It is that essential regulations — the sort that the supposedly anti-regulation Greenspan actually favored — are stymied by fractured government machinery and rapacious lobbies.
.. Even today, the financial system has multiple overseers answerable to multiple congressional committees, because all this multiplying produces extra opportunities for lawmakers to extract campaign contributions.
.. Vast government subsidies still encourage Americans to take big mortgages; Fannie Mae and Freddie Mac still operate, despite endless talk of breaking them up. And although post-2008 regulations have ensured that banks are better capitalized, the lobbyists are pushing back. Merely a decade after the Lehman bankruptcy brought the world economy to its knees, the Trump administration is listening to them.
Is efficient-market theory becoming more efficient?
Theory is changing traders’ behaviour. And vice versa.. The idea helped inspire the creation of index-trackers’.. They command around 20% of all assets under management today.
.. But the efficient-market hypothesis has repeatedly been challenged. When the American stockmarket fell by 23% in a single day in October 1987, it was hard to find a reason why investors should have changed their assumptions so rapidly and substantially about the fair value of equities. Robert Shiller of Yale won a Nobel prize in economics for work showing that the overall stockmarket was far more volatile than it should be if traders were adequately forecasting the fundamental data: the cashflows received by investors.
.. For information to be reflected in prices, there had to be trading. But why would people trade if their efforts were doomed to be unprofitable?
.. the average Joe has no hope of beating the market. But if you devote enough capital and computer power to the effort, you can succeed.