Eugene Fama, known as the father of modern finance, said that the financial markets were "demonstrably efficient" during the financial crisis in 2008 and 2009. Fama, who is credited with developing the efficient markets hypothesis, also told about 550 attendees at the Investment Management Consultants conference in Chicago that Modern Portfolio Theory (MPT) also worked during the crisis.
Markets are not "perfectly efficient," Fama conceded, but it's a "good model" of the world. "Diversification is your buddy," he added, referring to MPT. It was as true "in 2008 as it was in 1953," when Harry Markowitz, a graduate student at the University of Chicago wrote his thesis about MPT that would one day earn him a Nobel Prize. Fama himself is the Robert McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business.
When conditions in the economy and the financial markets reach extremes, markets tend to move together, Fama said. Undiversified portfolios "become even riskier" in such periods.
At the onset of recessions, it's natural all or most markets experience price devaluations. "That's [the market's] job," Fama said. "It did it very well."
One obvious question is what was the casuality factor? Fama acknowledged this was a tricky issue. "You can't empirically tell whether" the economy caused the markets to tumble or whether the markets dragged the economy down with it. Macroeconomists, he added, don't have a very good record at predicting recessions.
Fama singled out government policies dating back to the early 1990s encouraging home ownership as a big factor in the Great Recession. "Income inequality was already becoming a problem" and policymakers wanted more Americans to have a stake in the economy, he said, adding that home ownership seemed to be the perfect vehicle for this.
Fama Says Markets Were 'Demonstrably Efficient' in 2008-09
October 7, 2013
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It doesn't help when the regulators and rating companies do not do their job. Lack of accountability at all levels makes me nervous. Credit Rating Companies Favoring Borrowers Paying Most Credit-rating companies routinely award higher rankings to debt issued by banks and corporations that pay them the most, a conflict of interest that may escape Congressional efforts to change the way they do business. -- http://tinyurl.com/6fm58sb SEC Chairman Cox Admits Deregulation Caused Crisis Christopher Cox, Head of the SEC, who admitted the credit crisis was due to deregulation, burned the oil wells as the Republicans left the White House along with all of the various agency heads. http://tinyurl.com/7frecql Under Pressure, Administration Eased Lending Rules WASHINGTON (AP) --The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents. http://tinyurl.com/5casnp It seems to be a cycle: boom-bust, boom-bust.