Saturday, August 8, 2015

Fama on the Financial Crisis...

Gene Fama, winner of the 2013 Nobel Prize in Economics, joined Russ Roberts on the EconTalk podcast to discuss markets and the financial crisis in 2012. Fama's contribution to finance is, at best, the most important among any other economist and, at worst, among the best. However, some in the media (i.e. Peter Schiff) and even some in smaller academic circles question whether or not Fama deserved the prize. I've never met him, but I have heard him speak a time or two and, up until recently, I didn't care to form an opinion about Fama and the Nobel Prize. I'm a certainly a fan of his work, but regarding the merit of the Nobel Prize, his discussion with Russ Roberts was finally the clincher for me.

When Roberts walked through the financial crisis in order to set the stage for the discussion, he talked about the crisis being brought about by the collapse of the housing market in 2007. Fama interrupts Roberts and says the recession may have been brought about by a number of things including the stock market crash in late 2008. Roberts, a little confused, says, "So, you are going to reverse the causation". Again, Fama interrupts and says, "I'm not saying I know. What I'm saying is I can tell the whole story just based on the recession. And I don't think you can come up with evidence that contradicts that. But I'm not saying I know I'm right. I don't know. I'm just saying people read the evidence through a narrow lens... And the rhetoric acquires a life of its own.."

Finally, an economist - Nobel Laureate no less - finally admitting that he doesn't know the cause of the financial crisis. It seems as if everyone has an opinion and, to steal a phrase from Fama, the rhetoric starts to acquire a life of its own.

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