Tuesday, March 31, 2009

Efficient Markets?

Economist Scott Sumner has a very interesting post on his blog about the efficient markets hypothesis as it relates to recent turmoil in the financial markets (thanks to my former econ prof Greg Mankiw for pointing to this great post on his own blog). One of my favorite excerpts from Sumner's post is:

So the anti-EMH argument for regulation must be based on the following; bankers are irrational and make lots of foolish loans. Regulators are rational and can see that these loans are too risky, and can protect bankers from hurting themselves. At a theoretical level this doesn’t even pass the laugh test.