Conclusion

The crisis of 2007-08 was a typical central-bank-induced boom and bust, an illustration of the maxim that central banking is the disease that it affects to cure.

[Rewrite all of this a bit stylistically].

When a bubble bursts disastrously, the critical question is not why it burst – it burst because it was a bubble! – But how it could have been blown up into the dimensions that made its bursting so dire an event. The answer to that is here, as it is often, some version of the “greater fool” theory.

Sooner or later the greatest available fools will be the ones already in possession, and then the situation proves unsustainable, and unfortunate -- not just for them, but for a variety of counter-parties who have come to depend upon those who turned out to be the greatest fools.

Listen to the cheerleader moral support that the greatest fools were getting as late in the process as December 2007. "There is no recession. Despite all the doom and gloom from the economic pessimistas, the resilient U.S economy continues moving ahead—quarter after quarter, year after year—defying dire forecasts and delivering positive growth. In fact, we are about to enter the seventh consecutive year of the Bush boom."

So said Larry Kudlow, cable TV economics maven. It's important not to let these blowhards go utterly uncorrected as the realities they denied smack us in the face. Its important because otherwise naive folk might think Kudlow is saying something of significance the next time he bloviates.

So let the record show: a boom is the necessary preface to a bust. Bubbles can't burst until they've been blown. The "Bush boom" for which Kudlow was still cheerleading even as it disappeared, like the Clinton boom before it, was a central-bank promoted drinking binge, necessitating an awful hangover.

And geniuses like Kudlow are the alcoholics at the party who are always saying, "I've only had two or three."

That's how an alcoholic counts, by the way.

One, two, three, four, two-or-three, two-or-three, two-or-three.

This is the dynamic that Greenspan enabled and even encouraged through monetary policy. Especially after the 1998 LTCM crisis, investors had the impression that the Fed would act as the greatest fool, and rescue any large institution in trouble as necessary.

Blaming, and cracking down on, leverage or speculation on this basis is rather like responding to an outbreak of rickets by cracking down on Vitamin D peddlers.

The way forward begins with the repealof the legal tender laws. [Explain.]

ECMH, A Tidy Theory

Some notes toward what will eventually become chapter 9 of my book, "ECMH, A Tidy Theory."

The efficient capital markets hypothesis is the view that, given minimally liquid and transparent markets, publicly listed securities will trade at prices that fully reflect all available information.

Comes in three varieties: weak; semi-strong; strong. Discuss each. Here is a helpful link for an analytical take.

I. Some consequences:

A) even the weak version indicates that stock price movements are random. This is counter-intuitive. If markets are rational, shouldn't they be predictable, i.e. non-random? Isn't a "random walk" what a drunk does?

B) if you believe either the strong or the semi-strong version, you will conclude that an investor without material non-public information can never beat the market. It is impossible to beat the market unless you are a crook!

C) Thus, the type of advice that legions of well-paid Wall Streeters are paid to give is worthless. Active asset management in general is worthless. Hedge funds are a star system that preys on the gullible, etc.

Those are the consequences. Let's clear up a couple of misconceptions about the theory:

II. Misconceptions

A) That giving credence to ECMH requires the view that all traders are rational. Consider micro and macro cosms, brain cells, etc.

B) That you can give credence to ECMH and still beat the market by taking a contrarian position.

III. Arguments

But why should we believe the theory in any of those forms?

I won't make this presentation a historical one. This chapter needs to be analytic. Still, near the end I can introduce a historical fact, that though it has its roots in classical economics, the clear formulation of ECMH had to wait for 1965, and publications by Eugene Fama and Paul Samuelson.