If you read in Spanish I wrote this little note on the last Bank of Sweden Prize in Memory of Alfred Nobel. Also, you may want to read the interview given by Eugene Fama to John Cassidy from the New Yorker in 2010. He says many things, but I would like to point out just a few.
John Cassidy (JC): So what caused the recession if it wasn’t the financial crisis?
Eugene Fama (EF): (Laughs) That’s where economics has always broken down. We don’t know what causes recessions. Now, I’m not a macroeconomist so I don’t feel bad about that. (Laughs again.) We’ve never known. Debates go on to this day about what caused the Great Depression. Economics is not very good at explaining swings in economic activity.
JC: There were some people out there saying this was an unsustainable bubble…
EF: Right. For example, (Robert) Shiller was saying that since 1996.
JC: Yes, but he also said in 2004 and 2005 that this was a housing bubble.
EF: O.K., right. Here’s a question to turn it around. Can you have a bubble in all asset markets at the same time? Does that make any sense at all? Maybe it does in somebody’s view of the world, but I have a real problem with that. Maybe you can convince me there can be bubbles in individual securities. It’s a tougher story to tell me there’s a bubble in a whole sector of the market, if there isn’t something artificial going on. When you start telling me there’s a bubble in all markets, I don’t even know what that means. Now we are talking about saving equals investment. You are basically telling me people are saving too much, and I don’t know what to make of that.
JC: Back to Chicago economics. Is there still anything distinctive about Chicago, or have the rest of the world and Chicago largely converged, which is what Richard Posner thinks?
EF: The rest of the world got converted to the notion that markets are pretty good at allocating resources. The more extreme of the left-leaning economists got blown away by the collapse of the Eastern bloc. Socialism had its sixty years, and it failed miserably. In that way, Chicago theory prospered. Milton Friedman and George Stigler were fighting that battle pretty much alone in the old days. Now it is pretty general. An experience like we’ve had rehabilitates the remnants of the old socialist gang. (Laughs) Unfortunately, they seem to be in control of the government, at this point [emphasis added].
Financial markets do not cause recessions, and we do not know why recessions happen. Also, Friedman was fighting communism (I guess Keynes was a commie), and Obama is a Socialist. This is a ‘Nobel’ for the Tea Party. No comments.
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