The anti-market narrative of the crisis

by Russ Roberts on April 25, 2010

in Gambling with Other's $, Uncategorized

Louis Uchitelle reviews 13 Bankers by Simon Johnson and James Kwak in the New York Times Book Review and nicely summarizes what has become a mainstream view of the crisis:

To put it bluntly, as this book does: the efficient-market hypothesis does not work. It never has. Markets are not self-­correcting. Left to their own devices, bankers at the biggest institutions can’t seem to stop themselves from speculating with borrowed money until they inevitably crash the system.

Those poor impulsive bankers. They can’t seem to stop themselves and that’s how we know that markets aren’t self-correcting. Ignore the weird (and common) conflating of the efficient market hypothesis and market stability. Let’s just look at market stability and the idea of leaving bankers to their own devices. That’s supposed to mean “unregulated.” Ignore the fact that financial markets are regulated in all kinds of ways.

Just focus on that phrase “can’t seem to stop themselves.” They just keep driving the financial vehicles off the cliff using all that borrowed money. Does the fact that the government often reimburses the lenders in the name of preserving financial stablity have something to do with bankers’ inability to stop themselves?

Does the quest for complete stability have something to do with the failure to achieve stability?


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