Are people really serious about Eugene Fama being favourite for a Nobel? It can’t be for insights like these:
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.
I find this extraordinary: a man claiming to be an empiricist, saying what must have happened, because otherwise it would not suit his theory. We have independent readings on the mortgage, housing, credit markets and the real economy – we can SEE which order they came in.
I have already commented on failings of the Right in this crisis. The Efficient Market bit has taken a particular pounding as a result of some of the wacky defences it has mounted, including “an alarming speech by Dubya made us all panic“. Hard not to disagree with the headline: “Chicago School of Economics Circles the Theoretical Drain”
UPDATE: Scott Sumner defends Fama, on the line of “how come the Economist can’t time bubbles”; I link you to my reply. Knowing a market is at daft levels, and being able to trade it profitably, are wholly different things