Inefficient Markets Hypothesis Back In Fashion: Analyst

The US Federal Reserve joined other institutions to rescue Silicon Valley Bank’s account holders after it collapsed.

Photo Insert: With 2008 and the current SVB fiasco, we now appear to believe in the inefficient markets hypothesis.

At the moment, it seems financial markets can do no right, wrote Edward Price, principal at Ergo, a global economic intelligence firm, a former UK trade official, and teacher at New York University’s Center for Global Affairs, for Barron’s Daily.

Price stressed that with the West victorious, “democracy was secure. Everything was going to be easy and amazing forever.

The wine flowed like water. Every evening was spring… In fact, we were taught to believe in the efficient markets hypothesis… Financial markets could do no wrong. Any correction was an equilibrium. Any outcome, good. Central bankers just sat back and watched. Only financial markets mattered.”

With 2008 and the current SVB fiasco, we now appear to believe in the inefficient markets hypothesis.

“Apparently, financial markets can do no right. Any correction is, possibly, a crisis. Any loss, a rout. Central bankers are on the very edge of their seats. Only financial stability matters?”

Before, the financial sector effectively privatized the prerogatives of the state and seized economic policy… When the inevitable realization came—that all this new wealth was fake—Uncle Sam came to the rescue.

Simple. Hence bailouts. Hence quantitative easing. Hence more than a decade of ultra-low interest rates.”

And so, a question. To nationalize or to de-nationalize Wall Street? The inefficient markets hypothesis would lobby for the former. The efficient markets hypothesis would lobby for the latter.

But both ideologies miss the point. Just as there is a business cycle, there is a cycle of thinking about business cycles, too. After a while, we’ll swing back to free markets again. But right now, it appears we doubt that markets will ever work again.

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