More evidence that, to some economists, certain things don’t exist in the world unless they can not only be modeled, but be predicted by said models, comes via this story at Casey Research in which Doug French takes Nobel Prize winning dismal thinker Eugene Fama of efficient market hypothesis/theory fame to task for some ridiculous lack of common sense.
The New Yorker’s John Cassidy asked Fama how he thought the efficient-market hypothesis held up during the financial crisis. The new Nobel laureate responded:
“I think it did quite well in this episode. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.”
When Cassidy mentioned the credit bubble that led to the housing bubble and ultimate bust, the famed professor said:
“I don’t even know what that means. People who get credit have to get it from somewhere. Does a credit bubble mean that people save too much during that period? I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.”
No matter the facts, Fama has his story and he’s sticking to it.
“I think most bubbles are 20/20 hindsight,” Fama told Cassidy. When asked to clarify whether he thought bubbles could exist, Fama answered, “They have to be predictable phenomena.”
This explains a lot – unfortunately…