Friday, Mar 20, 2009
Markets are not efficient or rational
FT: Why the Turner report is a watershed for finance
Lord Turner is the UK’s man for all seasons. A few years ago, he fixed pensions. Today, it is finance. “Over the last 18 months, and with increasing intensity over the last six, the world’s financial system has gone through its greatest crisis for at least half a century, indeed arguably the greatest crisis in the history of finance capitalism.” This is the report’s starting point. It advances two explanations for this disaster: exceptional macroeconomic conditions – particularly the emergence of excess savings in large parts of the world – and reliance on “the theory of efficient and rational markets”.
Posted by mountain goat @ 01:07 PM (816 views) Add Comment
6 Comments
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1. mountain goat said...
As usual to read the whole article paste "Why the Turner report is a watershed for finance" into google
2. 51ck-6-51x said...
... or if you want to be a dodgy baxtard: pay £1 for a 4 week trial subscription to the FT, register for online content and cancel your subscription before your second direct debit.
3. icarus said...
This is Economics 101 bolted on to a recommendation not to leave the stable door open next time. The problem isn't about rational or irrational markets, it's about Wall Street fraud. It's about an incestuous, interlocking cartel of players on Wall Street backed by the complicity of ratings agencies.and a government that was determined to remove controls and transparency in order to allow its friends to do what they liked. Securitised junk was saleable only because banks colluded to make it seem that the underlying assets had several reliable sources.
4. mountain goat said...
Icarus I agree with your point about corrupt insider players. I think the centre of this is JP Morgan. Every act of corruption and manipulation weakens the system to the point where it topples.
There is also the points on risk models which is separate from corruption. "if everybody believes in the same (faulty) risk models, the system will become far more dangerous than any individual player appreciates; and if everybody relies on their ability to get out of the door before anybody else, many will die in the inferno." This has happened in this crisis probably on a scale never seen before and will provide endless room for analysis and study in the future I imagine. Global economy and global communications are probably a big factor in its cause. Everyone hears the news at the same time and stampedes to the door at the same time to use the analogy above.
5. icarus said...
mountain goat - yep, but the opacity and manipulation at the core gave rise to wildly optimistic risk models or to smoke & mirrors that made risk impossible to price (just as most government actions now are doing). Indeed, nobody understood the diffusion of risk, the concentration of systemic risk or the value of any collateral backing. The whole Wall Street project was to make big enough bets to move markets (create bubbles) and to exit just before the top was reached. Under these circumstances investors look vainly for the right signals and are highly prone Pavlovian behaviour - jump on bandwaggon at one signal and flee to the exits on another.
6. devo said...
2. 51ck-6-51x said... or if you want to be a dodgy baxtard: pay £1 for a 4 week trial subscription to the FT, register for online content and cancel your subscription before your second direct debit.
That's a rather short-term solution 51ck!
Is there something you're not telling us?