Don't Blame EMH for the Credit Crisis

In Wednesday’s Wall Street Journal, Jeremy J. Siegel comes to the defense of the Efficient Market Hypothesis (EMH). I agree that blaming EMH for the credit crisis a stretch. There’s a lot wrong with EMH, but I don’t think we can hang our current mess on it.

I’m still skeptical that the government can or should act to break investment bubbles. My issue isn’t EMH-centered -- that prices are always right. Instead, I just don’t trust the government, nor am I convinced that a burst bubble is for the general good. As Daniel Gross has pointed out, bubbles can be very good things.

This one time, let’s leave EMH alone. To me, the real mystery around EMH isn’t whether it’s true or not, but how could anyone have ever believed it?

Comments

[bob adamson:]

Mr. Elfenblein, you suggest that a bubble may be a good thing, or at least not a bad thing. Surely you are not suggesting that the debt bubble that set the stage for the banking crisis of October of 2008 should have been left to grow unhindered (i.e. that the ‘July, 2008 massacre’ by the US Fed was an unwarranted interference with the free market). Wouldn’t the distortions in currency and commodity prices, the pyramiding of consumer, commercial and government debt (particularly the secularized debt and derivative component thereof), the growth of international trade imbalances etc simply have continued to grow exponentially for some further period until some later event triggered a crisis in even more dyer circumstances than that faced last October?

Oct 28 06:09 PM

[untrusting ...:]

Strange that you would think it a mystery that anyone could actually believe in EMH. Many of the so-called professionals on Wall Street and in the investment sector have touted it for years. And since you seem to be such a big supporter of the pundits on WS, your mystery claim is pretty strange. BTW, a pretty good buying opportunity is presenting itself for you bulls and dip-buyers, so can we assume you are buying every chance you get here?

Oct 28 11:28 PM