If you haven’t been affected by the economic crisis in one way or another, a) you’re very lucky and b) where do you live?! I want to move there!
This past year has seen many of us who don’t really have an interest in the business section of the newspaper sneak a peak to try and make sense of it all.
Every economist was trying to get their head (and ours) around what had happened. Even the Queen of England wanted to know why no one had predicted the crisis?
In this discussionon the BBC’s Radio 4 this morning (8:45 London time to help you find it on the page), Economics editor of the Telegraph Edmund Conway and Andrew Lilico, chief economist at the Policy Exchange think tank, debate the emotion in economics and whether the the so-called efficient markets theory still holds.
Here on WHYS we’ve dedicated hours trying to look at different angles of why we are where we are at the moment with the financial crisis and if the free market is to blame for the world’s plight. We’ve even asked if testosterone was to blame for the extensive risk taking that took place behind the walls of the City and Wall Street.
Regulation was the word de jour. Many of you said that governments should regulate the market and make sure things are stable and rational. But doesn’t that assume that we as humans are stable and rational?
Let me put it another way.If Markets are run by humans who are likely to react to major events and behaviours, how rational or stable do we expect the markets to be? Is human emotion the one thing you can’t regulate?
Take the Internet boom or the housing boom before it crashed. If you strip it down to basics isn’t this merely humans (people who run the markets) reacting to other human behaviour (those who went on a spree buying houses they can’t afford)?
“Is The Market Rational? No, say the experts. But neither are you–so don’t go thinking you can outsmart it.” That’s the headline of Justin Fox’s article written back in 2002 and reiterated in his book The Myth of The Rational Market.
This is a blog from an NPR radio program called Planet Money where they speak to Mr.Fox about the issue. They say:
“Anyone who has spent any time looking at the stock market has to think there’s at least a decent chance the whole thing is crazy — prices pinging around, investors making crazy bets, regulators trying to figure out who’s flouting the byzantine rules.”
So without getting too concerned with the semantics and definitions, is it realistic to expect financial markets to always make sense when they are run by humans who will inevitably make (in this case very expensive) mistakes? Are the financial markets only human?
And , more importantly, can we stop another recession from happening if humans are in charge of the market?
Have you been rushed into an investment because everyone was doing it and thought it was a good idea? Have you bought a house a little too soon because you were desperate to get on the property ladder? Were these decisions (and be honest) a result of careful calculations and readings of the market or were they made as part of a trend, a ‘if everyone is buying stocks I might as well do the same’ state of mind?
Madeleine adds: Mary in Oregon has just sent us this article by a former head of the IMF. It gives a very interesting perspective on the crash from the developing world.