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Studies Confirm Huge Wealth Loss of Middle Class

By: masaccio Tuesday August 26, 2014 1:38 pm

Chart from Saez and Zucman, link in post. Remember, total wealth of bottom 50% is effectively zero, so this chart is the middle class as Piketty defines it.

Three recent studies using different data sets and methodology show the horrendous losses inflicted on what used to be the middle class by the Great Crash. In March, Emmanuel Saez and Gabriel Zucman presented a preliminary report on net worth showing a loss among the bottom 90% from about 36% of total house wealth to about 25% between the peak in 1984 and 2013. The Russell Sage Foundation estimates that the median net worth was worth about 20% less in 2013 than in 1984. A report From the Census Bureau says that the median household net worth fell nearly 7% between 2000 and 2011. These findings confirm the work of Edward Wolff in a 2012 study.

Median wealth hardly tells the whole story. It would be helpful if these researchers would provide data by decile, but most data is by quintile. So, take a look at the bottom two quintiles, the bottom 40%, as reported by the Census Bureau. The lowest quintile has a negative median net worth: the median person’s debt is $6,029 more than the value of that person’s assets. In 2000, the median was also negative, at -905 dollars. The second quintile saw its median drop in half, from $14,319 to $7,263. The median of the third quintile also dropped, from $73,911 to $68,839, a 7% drop. Only the fourth and fifth quintiles saw a rise in the median. (P. 12)

The report of the Russell Sage Foundation confirms the drop in the bottom half. It also shows that net worth declined at the 75th percentile. In 2003, the net worth was $302,221. It rose to $367, 959 in 2007, and fell back to $310,412 in 2009 and then continued dropping to $260,405 in 2013. Even at the 90th percentile, there was only a $26,246 increase between 2003 and 2013, from $736,853 to $763,099. (Table 1).

The Saez-Zucman results are even more extreme. The chart above (click to make it bigger) reflects the changes in middle class wealth. They call it the bottom 90%, but they say that the bottom 50% has a total net worth effectively equal to zero, as the other studies more or less confirm. Thus, this chart reflects essentially the net worth of the 50th to the 90th percentiles. This is the group Thomas Piketty calls the Middle Class, as I discuss in more detail here. As you can see in the chart, the share of net worth of this group has fallen dramatically since its peak in the mid-80s, when Reagan was in office. Business assets have fallen dramatically as this group is no longer a significant part of the business life in this country. The percentage ownership of equities and bonds has fallen below net non-mortgage debt, and disappears. Pensions are down, and housing is down. Debt has risen.

Saez and Zucman report that the people in the bottom .9% of the top 1% have seen no significant increase in wealth. The gains in wealth have only gone to the top .1%, and most of those gains have gone to the top .01% of US households. The top .1% have net worths in excess of $20 million. The top .01% share of national wealth has risen 400% in the last 35 years, and now exceeds its peak in 1929.

There were approximately 121 million households in the US in 2012. That means that substantially all of the gains in net worth in the country went to just 121,000 households. Among them, these families control at least 22% of the total wealth of the country according to Saez and Zucman. These households are our new Oligopoly.

The trend lines are clear. The Oligopoly will get richer. The middle class will disappear in a few years.

Politicians don’t care. The Republicans are ecstatic: it shows that markets are working and heavily rewarding the most moral and superior among us. The Democrats don’t care. They’re happy to talk about income inequality, but they can’t bring themselves to mention the growing Oligarchy, the vanishing middle class, or the sickening poverty of the bottom 24 million households.

The country we grew up in is dying.

 

Control of Markets in Foucault’s The Birth of Biopolitics

By: masaccio Thursday March 13, 2014 12:39 pm

Michel Foucault says that liberalism is the reaction to monarchy*. As monarchy lost its grip, governments retained their despotic reach. The nation-state assumed the role of the monarch, and exercised unlimited power inside its borders. Foucault explains that the only limits were the legal rules that had grown up under monarchies. The judicial system searched for limits to the power of the state in ancient laws, and the prescriptions of the natural law as then understood. The despotic reach of the nation-state included especially the markets, which were regulated both to prevent fraud and deceit, and to insure a just price, one that took into account the interests of the consumer, the worker, and the merchant. Because of the tight regulation and the juridical underpinnings, Foucault calls this version of the market a site of justice, a “site of jurisdiction.”

By the last half of the 1700s, the formal regulatory structure was overwhelming. It is here that Foucault places the beginnings of Liberalism, which he describes as self-limitation of government, based on markets. Foucault describes this transition as a change from a regime of jurisdiction to a regime of truth, a regime of “veridiction.” P. 30, et seq. The underlying idea of markets as a regime of truth is this:

… the market appeared as something that obeyed and had to obey ‘natural,’ that is to say, spontaneous mechanisms. Even if it is not possible to grasp these mechanisms in their complexity, their spontaneity is such that attempts to modify them will only impair and distort them. … when you allow these natural mechanisms to function, they permit the formation of a certain price … which will adequately express the relationship, a definite, adequate relationship between the cost of production and the extent of demand. P. 31

This price is a kind of truth, a truth about production and consumption of certain goods and services. This kind of truth enables us to examine the activities of government regulation to see whether they make sense. This means that the market is a “site of verification-falsification for governmental practice.”

It is meaningful in the sense that at a particular point in time, one can use it to make statements about observable facts, and a way to judge whether particular statements are true or false; in other words, this kind of truth is the basis for a kind of truth-telling discourse. Thus, government is the object of the truth-telling regime. The field of political economy doesn’t look at justice or rights, it merely measures outcomes. Political economy reveals “the existence of phenomena, processes, and regularities that necessarily occur as a result of intelligible mechanisms.” P. 15 Foucault gives the example of the truth that people move to areas where wages are higher. I’d add that this is not truth in some momentous sense, about life or the universe. It’s merely a way of gauging the effectiveness of some governmental action.

It is important to note that Foucault places this transition at a time when the writings of Adam Smith was writing about invisible hands, and François Quesnay was explaining that markets are part of the natural order of things. Perhaps we don’t need to call on magic to make use of Foucault’s insight.

Foucault says the use of the market as a site of veridiction of government means that good government is no longer a government that is directly measured by justice, but according to truth, the truth of the market. Does that mean that markets are no longer subject to fraud? Does it mean that markets are no longer subject to the demands of citizens, to the demands of society for justice, to the demands of the poor for some elemental fairness? I don’t think so.

A Starting Place for Combatting Neoliberal Theory

By: masaccio Friday March 7, 2014 7:52 am

If we are to believe Hegel – or Collingwood – no age, no civilization is capable of conceptually identifying itself. Leszek Kolakowski, Modernity on Endless Trial, p. 1.

The aide said that guys like me were “in what we call the reality-based community,” which he defined as people who “believe that solutions emerge from your judicious study of discernible reality.” … “That’s not the way the world really works anymore,” he continued. “We’re an empire now, and when we act, we create our own reality. And while you’re studying that reality—judiciously, as you will—we’ll act again, creating other new realities, which you can study too, and that’s how things will sort out. We’re history’s actors…and you, all of you, will be left to just study what we do.” Ron Suskind, Faith, Certainty and the Presidency of George W. Bush.

Amsterdam Flower Market

The problem facing anyone who wants to provide a useful counter-narrative to the dominant understanding of the state of a culture is to find a place to stand from which the counter-narrative can make sense to people locked into the dominant narrative. It isn’t obvious how to do this. Consider the problem facing people who want to argue that the notion of “free market” is meaningless in the absence of an understanding of the social and regulatory structure in which every market is embedded, whether we call it a free market or something else. It’s like getting people to see the two perspectives in an optical illusion: how can you force people to see the two when they only see one and don’t care that another exists?

Belief in the fairness of these fantasy markets persists in the face of factual evidence that markets as currently arranged benefit the rich at the expense of everyone else. That’s because the rich make the rules. They buy legislators to make rules that favor them. They influence administrative rule-making proceedings. They load the benches with judges who support their insistence that rules should be changed or enforced differently, and then they forum shop to make sure their cases are heard by friendly courts. They make rules directly, through contracts that are enforced harshly by courts and reinforced by governments with criminal sanctions and draconian civil penalties.

The rules have distributional consequences. The rules fix things so that some win and some lose, and the proof is that changing the rules results in different people winning and losing. When rich people make the rules, they benefit and the rest of us pay. All this is obvious to anyone who is paying attention.

Even that isn’t enough for a huge majority of our fellow citizens. They are certain that markets are a product of inexorable natural laws, and that the operation of those natural laws produces the best possible results in any economic sphere, and that any government interference in the workings of those natural laws will produce worse outcomes for everyone. This magical thinking pervades the discussion of political issues with respect to the economy.

I think a good first step towards creating a counter-narrative to the evil economic ideas of the neoliberals is to find a place to start that precedes the stale debates of the talking heads. It is in that vein that we find Michel Foucault at the beginning of his series of lectures at the College de France, The Birth of Biopolitics*. If we really want to talk sense about government, we can’t start with the universals that everyone uses. He ignores such terms as “sovereign”, the “people”, “subjects”, “civil society”. He is not interested in trying to deduce practice from those universals. Actually, if you think about it for a minute, it becomes clear that such an activity, trying to deduce concrete practice from universals, is doomed, as the Suskind quote says, and the George W. Bush and the Barack Obama administrations show in practice. Instead, in this series of lectures, he starts with the actual practice of government, and tries to understand how the universal ideas fit into the actual practice. In this way, perhaps, he will avoid the problem laid out by Kolakowski. In this way, he hopes to avoid the problem set for academics by the anonymous aide in the Suskind quote.

My plan is to write first about Foucault’s history of the development of neoliberalism, and then to address directly the general assertion of neoliberals that markets are part of the natural order of things. In a nutshell, I intend to show that markets are not an emergent phenomenon. They are highly contrived and unnatural forms of exchange.

Background Reading

Thank Heaven Larry Summers Isn’t Fed Chair

By: masaccio Friday January 24, 2014 6:19 pm

We need to be very serious about the needs and feelings of the rich, according to Not Fed Chair Larry Summers


Everyone, especially Barack Obama, just thinks Larry Summers is the smartest guy in the room, even if America’s Top Whiner Jamie Dimon is in the room. Maybe so. But his interpersonal skills are worse than Mike Huckabee talking about women. So it’s no surprise shortly after the news cyclists were telling us that 85 people have as much wealth as the poorest 3.5 billion humans on the planet, Larry gets on the boob tube’s silliest channel, CNBC, to explain that we mustn’t do anything about inequality that involves in any way reducing the wealth of the filthy rich.

We shouldn’t be jealous and envious of the obscenely rich, he claims; instead we should find the magic beans that will grow the economy. Larry you ignorant money slut. The economy has been growing for decades, but the stinking rich are taking all the growth for themselves. They aren’t creating jobs, they’re forcing workers to take less. Did you miss the Boeing destruction of a portion of the Seattle middle class? Did you miss Target firing a bunch of people because its IT department can’t handle basic data security? Did you miss the part where the gigantic slaughterhouse corporations want to speed up the lines and privatize meat inspection to increase profits at the expense of workers and meat-eaters? Did you notice the manipulations of Freedom Industries and the efforts of its owner to take the assets and run after poisoning Charleston WV? No, I guess those things don’t show up in your pointless DSGE models, do they?

Try inputting this factoid into your massive intellect, O Great One: The rich take all the money and leave nothing for anyone else. Once you have that fact firmly fixed in your quantum computer brain, then tell us how you plan to get them to stop.

We’d love to hear your plan for sweet-talking the thugs on Wall Street into ending their thievery through financial fraud, pension rip-offs, sleazy interest rate swaps, and all those other innovations you and your buddies at DE Shaw love so much. We’d love to hear about all the new jobs created by the tax avoidance activities of GE, Apple, Google, Starbucks and every other global enterprise. We’d love to hear how you plan to get corporate giants to quit funding ALEC, and quit buying slimy politicians to do their bidding at the expense of the rest of us.

We can’t wait to hear your plan for restoring bargaining power to workers when labor force participation rates have fallen to 35 year lows, and it isn’t retiring baby boomers, either. We’d love to hear how suddenly states will start paying for education as a social good instead of funneling money to test-driven corporate charter schools and sleazy on-line “universities”. We’d love to hear about your plans for waking up the Congress to take any action that might in any way help whatever’s left of the middle class or the hopes of the poor to escape poverty, when their primary goal is obviously to feed the rich with the scraps of the safety net that remain, and pacify their bases with their family values. Instead, I expect we’ll be hearing about your plan to keep corporate profits at ludicrous levels, so as not to hurt the stock prices of your hyper-rich friends.

Get a grip, Summers. You might be the smartest guy in the world, but that doesn’t mean you know anything about human nature. That’s the real reason you aren’t Fed Chair. We think you are an idiot. Maybe an idiot savant, but an idiot.

Here’s another factoid that might help you see reality. As Krugman puts it, leeches and rentiers will not go gently into the euthanasia Keynes promised us.

Professors of Inequality

By: masaccio Tuesday January 7, 2014 3:06 pm

Aggregate Cash and Cash Equivalents for US Firms, SOURCE: Compustat.
It’s just not enough to create jobs. They need more, much more.

Laurence Kotlikoff, a “professor of economics at Boston University” and entrepreneurial financial guy, got space in the New York Times to explain that getting rid of the corporate income tax would be great for workers. Kotlikoff worked for Reagan as an economics adviser, so we can guess that he believes deep in his soul that the only reason for corporate taxes is to punish the success of the deserving rich. Fortunately, there are people in touch with reality who remember just why we tax corporations. From Citizens for Tax Justice:

First, the personal income tax would have an enormous loophole for the rich if we didn’t also have a corporate income tax. A business that is structured as a corporation can hold onto its profits for years before paying them out to its shareholders, who only then (if ever) will pay personal income tax on the income. With no corporate income tax, high-income people could create shell corporations to indefinitely defer paying individual income taxes on much of their income.

Second, even when corporate profits are paid out (as stock dividends), only a third are paid to individuals rather than to tax-exempt entities not subject to the personal income tax. In other words, if not for the corporate income tax, most corporate profits would never be taxed.

Third, the corporate income tax is ultimately borne by shareholders and therefore is a very progressive tax, which means repealing it would result in a less progressive tax system.

Kotlikoff sputters that his excellent model shows that if you give the rich more money, they’ll magically create some jobs. The Tax Analysis Center, which he heads up, uses a model his company created for profit, one supposes, and is supported by the National Center for Policy Analysis. That worthy entity describes itself this way:

Our goal is to develop and promote private, free-market alternatives to government regulation and control, solving problems by relying on the strength of the competitive, entrepreneurial private sector. We bring together the best and brightest minds to tackle the country’s most difficult public policy problems — in health care, taxes, retirement, education, energy and the environment. In doing so, we propose reforms that liberate consumers, workers, entrepreneurs and the power of the marketplace.

Sure, explains Kotlikoff, these guys are right wing nutcases, but I’m a distinguished non-partisan guy, just trying to nick a few bucks from the nutcases to support myself and my family. And, get this, his model is Dynamic! And isn’t it amazing that his model gets the results that please his donors and the NCPA? And it has one good, and five nations!

And if we just do this, we get growth!

It is just stupefying that progressives are supposed to treat this drivel as actual argument. Let’s call it the argument from MyModel, which is in every case to be contrasted with the argument from MyObservedReality. MyObservedReality says that as of 2011, corporations were sitting on $5 trillion in cash and cash equivalents, according to this January 2013 report of the Federal Reserve Bank of St. Louis. (h/t Tax Justice Network, which says Kotlikoff is an ignorant putz (my translation: they’re nicer than I am)). This enormous number includes cash held abroad as well as the amount held domestically; domestic holdings are currently estimated at about $2 trillion. Financial Accounts of the US, p. 67. MyModel proclaims that if we increase that $5 trillion by several more trillion, jobs will magically appear.

Maybe they’ll fly out of Kotlikoff’s MyModel and into the real world.

Philip Mirowski To Discuss Neoliberalism in Sunday Book Salon

By: masaccio Friday November 15, 2013 4:02 pm

Our Sunday Book Salon gives us a chance to discuss neoliberalism with Philip Mirowski, author of Never Let a Serious Crisis Go to Waste: How Neoliberalism Survived the Financial Meltdown. Most people have a general idea of some of the theories of neoliberalism, especially the general idea that markets should be the dominant force in society. Mirowski traces the roots of this idea to Frederich Hayek and his Mont Pelerin Society. This group expanded and morphed into what Mirowski calls a Russian Doll approach to formulating and implementing a strange notion of humans as consumers and workers and nothing more worth mentioning. It serves the interest of right-wing billionaires, who are glad to fund it.

We can see the influence of those ideas in the Chicago School of Economics, and in economics generally, as the perhaps more humanistic approach of the worldly speculator, John Maynard Keynes, has disappeared. Here’s a sample of one current argument in economics from Simon Wren-Lewis. He says that New Keynesian models describe consumers as perfectly rational actors who have the ability to borrow money as they need it.* If they get a tax cut, they assume it will be followed by a tax hike, so they save the money to pay their taxes later. The minor change in their lifetime income resulting from a tax cut doesn’t affect their spending. They use borrowing to smooth out fluctuations in their incomes. Does that describe anyone you know or have ever known? Why would you make policies out of that trash?

These and many other ideas are at one level just theoretical constructs needed to make it possible to crank out mathematical formulas to describe the economy and guess at the impact of changes in government policy and changes in private sector behavior. Of course, that kind of modeling has been a massive failure.

But, for neoliberals, it’s more than just theory. Their goal is to manipulate human beings into becoming creatures just like these constructs. And they are achieving their goals. We saw it in Jennifer Silva’s book, Coming Up Short, as the young working class people she interviewed see themselves as entrepreneurs of the self, making investments of their time and borrowed money in themselves, hoping to make themselves marketable. If they succeed, as a few have, they think it is because of their efforts alone. If they fail, they think that too is their fault, and that it is fair that they alone should suffer the consequences. In either case, they don’t think it’s fair that some people get help from the government. If the government doesn’t help them, why should it help anyone else?

The fundamental evil of this approach is that it hides a crucial reality of life from the victims. The people who nurture and organize the manipulation and those all-powerful and all-knowing Markets are exempt from the strictures of those markets. They are the elect, the authorities, the Priestly Keepers of Secret Knowledge. They are not like you and me. And neither are their creatures, Corporations. These new Corporate Persons are not to be subjected to laws created through some semi-democratic process, and neither are their human operators, at least at the highest, Jamie Dimon/Lloyd Blankfein level, any more than the people who lie for the National Security Branch of government are subject to the law. These exalted Heroes are beyond the understanding of mere humans, they are God-like Creatures, whose gift it is to comprehend the Oracles of the Market and translate them into punishment and rewards for us little elements of social groupings. And if you don’t believe me, just check out the CEO-worshippers on CNBC and in the business magazines.

Here are some posts taking up Mirowski’s ideas; I hope they will help encourage discussion on Sunday. See you there!

Homo Economicus Replaces the Middle Class
How We Govern Our Selves and Ourselves
Konczal, Douthat and Neoliberalism
The Neoliberal Quantum State Theory of Markets
The Blighted Future of the Middle Class (more by Silva on neoliberalism among working class young people.)
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*Here is Wren-Lewis in his own words:

Basic NK models employ the construct of the (possibly infinitely lived) intertemporal consumer. To explain, these consumers look at the present value of their expected lifetime income, and the income of their descendents if they care about them (hence infinitely lived). This has two implications. First, temporary shocks to current income will have very little impact on NK consumption (it is a drop in the ocean of lifetime income). The marginal propensity to consume out of that temporary income (mpc) is near zero, so no multiplier on that account. Second, a tax cut today means tax increases tomorrow, leaving the present value of lifetime post-tax income unchanged, so NK consumers just save a tax cut (Ricardian Equivalence), whereas OK consumers spend most of it. However NK consumers are sensitive to the real interest rate, so if higher output today leads to higher inflation but the nominal interest rate remains unchanged, then you get a multiplier of sorts because NK consumers react to lower real interest rates by spending more.

So far, so different. But the NK consumption model assumes that agents can borrow whatever they need to borrow. There are good theoretical reasons why that is unlikely to be true (e.g. asymmetric information), and even better empirical evidence that it is not. Empirical studies that look for ‘natural experiments’, where agents obtain an unexpected increase in post-tax income which is likely to be temporary, typically find a mpc of around a third (even for non-durables), rather than almost zero as the basic intertemporal model would predict.

Saturday Art: Judith Beheading Holofernes Again

By: masaccio Saturday November 9, 2013 11:33 am

Judith Beheading Holofernes by Artimesia Gentileschi, 1593 – 1656


Judith Beheading Holofernes usually hangs in the Uffizi in Florence, but if you are in Chicago, you can see it at the Art Institute until January 9, 2014. I saw it with Ruth Calvo and Spudtruckowner when they passed through town. I wrote about this painting here, and the discussion holds up pretty well on this seeing. I’d add two points.

First, there are spurts and spots of blood on Judith’s breast and arm that are very visible as it hangs here and less clear at the Uffizi. The droplets are three dimensional and the exact color of blood. The spurts seem a bit thin to me, but they capture the butchery. Judith has rolled up her sleeves, as has the maid, and they are working at this killing.

Second, take close look at the mattress. Look at the trails of blood in the folds as if the blood were seeping flows on the silk sheets. Look at the patch of blood flattened into the sheet under Holofernes’ left shoulder. These details demonstrate the mastery of Gentileschi.

I heard a lecture on the painting from the curator. She said that artists at that time were categorized by the nature of their works: flower and nature painters at the bottom, portraits higher. At the top were history painters, and Gentileschi was one of the very few women thought capable of making history paintings. She discussed at length the fact that Gentileschi was raped by one of her father’s artist colleagues, and the impact this had on her work. I think all art has to stand on its own, without reference to the history and the explanations of the artist. This painting may reflect back to the experience of rape, and may be motivated by revenge fantasies, but it clearly stands on its own. You don’t have to know her life to see the brutality. Perhaps the primary impact of the rape is that Gentileschi chose subjects for her paintings that allowed her to harness and direct her rage into her work.

There are several other versions of this painting in the same room. There is this painting by Lucas Cranach the Elder, with a typical Cranach figure, somehow spider-like, holding a gruesome head. There is a monumental nude version by Jan Sanders van Hemessen and an odd version from Felice Ficherelli which is on this page with a whole group of paintings of this subject.

The Art Institute provided a wonderful addition to this story, a fabulous short sword of the kind Judith is using. It makes everything about this painting more real.

Economics Prize Goes To Neoliberal Eugene Fama

By: masaccio Tuesday October 15, 2013 2:31 pm

Eugene Fama accepting the Morgan Stanley American Finance Association Award, 2008. No, really. You can’t make this stuff up. Via Wikipedia

The Bank of Sweden Nobel Memorial Prize in Economic Science awarded a pile of money to Eugene Fama, Robert Shiller and Lars Peter Hansen. Fama teaches at the University of Chicago Booth School of Business, and made his contribution years ago in the promulgation of the efficient market hypothesis. Shiller is at Yale; his contribution was showing that the markets are loaded with irrational and inefficient activity, meaning that they aren’t efficient. It was impossible to miss the point that a profession in which people holding diametrically opposite views win a major honor must be rotten at the core.

Economists took a more polite stance. Krugman noted the issue, but says it makes sense. “Fama’s work on efficient markets was essential in setting up the benchmark against which alternatives had to be tested; Shiller did more than anyone else to codify the ways the efficient market hypothesis fails in practice.“ Krugman added that Fama has said some “foolish things” since the Great Crash.

Binyamin Appelbaum noted the contradictions in his news article in the New York Times. He seems to think Fama did something useful by showing the value of index funds as compared to stock picking, while Shiller predicted the stock market crashes of 2000 and 2008. Brad DeLong put up a bunch of the stupid things Fama has said, but had the grace not to mention that he and several others have an important paper debunking Fama’s ideas. DeLong has many good things to say about Shiller, but maybe that’s because he credits Shiller with influencing his decision to become an economist. Mark Thoma collected a bunch of testimonials, if you care.

The key thing to understand about the efficient market hypothesis is that it is a central plank in the neoliberal platform. It says that markets know all and process all information perfectly at all times. Therefore, government intervention is bound to be a disaster, interfering with evolutionary social forces beyond human understanding and slowing the transition to a better world that only markets can bring us. (See Philip Mirowski, Never Let A Serious Crisis Go To Waste, p. 343.)

Eugene Fama gave an interview to John Cassidy of the New Yorker in 2010, when Fama had had plenty of time to think about the Great Crash. Cassidy asks Fama how the efficient market hypothesis held up.

I think it did quite well in this episode. Stock prices typically decline prior to and in a state of recession. This was a particularly severe recession. Prices started to decline in advance of when people recognized that it was a recession and then continued to decline. There was nothing unusual about that. That was exactly what you would expect if markets were efficient.

It worked perfectly, says Fama. Prices in the stock market started to decline before the Great Crash, just as the efficient market hypothesis predicts. A recession started before the Great Crash, in fact, before August, 2007 he says, and before mere humans knew there was a recession, but the market knew, which is why stock prices declined. Then after mere humans figured it out, the Great Crash came. In fact, stock prices kept rising until late December 2007, and then dropped back to 2006 levels for most of 2008, before dropping precipitously in late 2008, as these two graphs show.


There was no bubble, says Fama, allowing that he doesn’t know what the word means. The whole mess is the fault of the government, specifically Fannie and Freddie. Cassidy says their contribution was negligible, which it was, so Fama retreats to this quote: “Laughs. Well, what does it take?” Cassidy says correctly that the private sector was the dominant force in mortgages. Fama retreats into absurdity:

Well, (it’s easy) to say after the fact that things were wrong. But at the time those buying them didn’t think they were wrong. It isn’t as if they were naïve investors, or anything. They were all the big institutions—not just in the United States, but around the world. What they got wrong, and I don’t know how they could have got it right, was that there was a decline in house prices around the world, not just in the U.S.

Fama doesn’t acknowledge the fraudulent nature of the entire mortgage finance sector, beginning with CNBC cheerleading for housing, moving to fraudulent and deceptive mortgage lending, false statements on loan documents, false appraisals, and ultimately fraudulent sales of RMBS backed by fraudulent bond ratings.

The interview is packed with similar condescending and arrogant nonsense. It isn’t “foolish”. Fama intentionally dumps his specially prepared load of garbage into the public discourse to confuse people, and to defend his failure and that of the entire economics profession to do anything useful.

”””’
UPDATE: John Cassidy has his own response, here. Here’s a taste:

After living through a stock-market bubble and a credit bubble in the past decade and a half, we can be quite sure that financial markets are sometimes chronically inefficient. The only outstanding question is how far this inefficiency extends.