If you want to get between the covers with your favorite econ nerd this season, I recommend Alan Blinder’s After the Music Stopped: The Financial Crisis, the Response and the Work Ahead. Written by the former vice chairman of the Federal Reserve, this deserves a place among the top reads on the Great Panic and its aftermath.More
If you are invested in an index fund, you can thank Eugene Fama of the University of Chicago, one of the three Americans to win the Nobel Prize in economics. Fama’s research indicated that trying to time the market or pick stocks was a fool’s errand. Instead, asset prices already reflect all the information known. This important piece of “efficient markets theory” gave rise to index funds.
But even Nobel laureates can’t get it right all the time (President Obama, Nobel Peace Prize winner, recently wanted to bomb Syria). Brad DeLong of UC, Berkeley posted an astonishing interview of Fama by the New Yorker’s John Cassidy, in which the new Nobel laureate pretty much denies that bubbles happen and claims that the housing crash could only be seen in hindsight.
And even if the crash caused the recession, which Fama denies, it was because of people getting Fannie and Freddie loans, not because of a fundamental failure in the market driven by private-sector greed, leverage and risk-taking. Even your humble economics columnist called the housing crash, so c’mon. The “free market” hothouse of Chicago grows exotic flowers.
But wait. Another winner is the estimable Robert Shiller of Yale, who did pioneering research into how markets can be very inefficient. Chris Dillow does a good job of sorting out their positions and how they can be reconciled. (Lars Peter Hansen, also of Chicago, was the third winner announced today).More