Standard macroeconomic theory did not help foresee the crisis, nor has it helped understand it or craft solutions. This columns argues that both the New Classical and New Keynesian complete markets macroeconomic theories not only did not allow the key questions about insolvency and illiquidity to be answered. They did not allow such questions to be asked. A new paradigm is needed.
Tag: efficient markets hypothesis
To me, much of the argument about whether or not markets are efficient misses the point. There are conditions, it seems, under which markets seem to do a great job of managing risk, keeping the cost of capital reasonable, and allocating capital to its most productive use, and there are times when clearly this does not happen. The interesting question, in that case, becomes what are the conditions under which the former seems to occur.
MPT is based on a number of assumptions, some of which are more restrictive than others. The question is whether the sum of those assumptions is so far off the mark that it renders the entire theory absolutely useless. Effectively the question is whether EMH, and with it MPT, should be ditched altogether.
Below is a framework that delineates the ideology and economics of two groups of economic thought that are much talked about in the wake of the Credit Crisis: the Chartalists and the Austrians. These two groups are considered outside of the mainstream and this is important because many economists and market pundits in both camps predicted the global credit crisis while almost no mainstream economists did. The questions are why and what separates them from mainstream Keynesians and Monetarists and from each other?
George Soros makes the case for economics as a social science using his theory of reflexivity. Here are some additional thoughts to help understand why markets fail.
Fred Sheehan argues that it is unlikely that Ben Bernanke will raise rates. He says either the market or a successor will do so. He adds that there are several similarities between current trends and those in 1994, a year when many institutions were left destitute. Historical analogies can help us imagine what might happen, but identification of differences should be noted too.
By Claus Vistesen The past week has shown the dark side of media coverage and the analysis of current events. It is a test on just how much information you stuff down the public’s throat. In the narrowness of my own world, the financial industry has a tendency to produce an extra amount of hyperbole in situations of geo-political tensions […]
By L. Randall Wray The following is a paper given at the ASSA conference in Denver this past week for a panel organized by James Galbraith, titled Pressures on the Paradigm, sponsored by Economists for Peace & Security. The Queen famously asked her economists why none had seen the global crisis coming. Obviously the answer is complex, but it must […]
This is me thinking out loud (on paper). Comments are appreciated. During crisis we often see economics come toe-to-toe with ideology because government becomes a more openly active player in our lives. This crisis has been no different. It is one reason I saved a space in my credit crisis timeline to outline government action (see the part labelled "Government […]
By Marshall Auerback and Edward Harrison. Marshall’s view Ed has asked me to deal specifically with the issue of Ricardian equivalence, the theorem used by anti-government proponents to argue that fiscal deficits are counterproductive and that cutting deficits in the middle of a recession will actually be good for the economy. It suggests that when a government tries to stimulate […]
“When data contradicts theory in a discipline like physics, there is excitement amongst scientists […]. When data contradicts theory in finance, there is dismissal.” Robert Arnott Big shift to passive Active management in the equity field is a notoriously difficult art. In fact so difficult that more and more investors give up and go passive instead. If you can’t beat […]
The following is the text of a James K. Galbraith’s written statement to members of the Senate Judiciary Committee delivered this May. Original text is here. Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record. I write to you from a […]