Before the GFC journalists and columnists seldomly mentioned financial market efficiency. Not only was the efficient markets hypothesis (EMH) not a hot topic, but I think that journalists realised that the market efficiency has a precise definition and without a complete understanding of that definition they might come unstuck by discussing the EMH. But now it is trendy, almost compulsory in some quarters, to mention the EMH as a primary cause of the GFC and disparage it wherever possible. Here are some examples of discussion of the EMH.
1. From the FT on 27 October 2009 “… and a belief in efficient markets proved wrong. These beliefs must be abandoned.” This is an example of the common usage of the EMH as a straw-man. Nobody believes that financial markets are perfectly efficient. Grossman and Stiglitz proved in 1982 the impossibility of perfectly efficient markets. All financial markets are inefficient to a greater or lessor degree.
2. John Quiggin writing in the AFR on 5 Nov 2009. “With the spectacular failure of the efficient markets hypothesis over the last two years, it is no longer possible to put any faith in general claims about the superiority of the private sector”. This example shows that “failure” of the EMH can now be used to explain anything.
3. Brian Toohey in the AFR on 14 November 2009 quoting Jeremy Grantham “… it is worth noting that every valued job created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real production, as symbolised by all the nuclear physicists on proprietary trading desks.” This quote is an example of the desire to talk about market efficiency leading respected columnists a long way from their area of expertise.
4. The Economist on 12 December 2009 in the Economic Focus column “If markets were truly efficient, carry trades ought not to be profitable because the extra interest earned should be exactly offset by a fall in the target currency”. This example makes my point that journalists used to be reluctant to discuss market efficiency for fear of demonstrating that they don’t understand basic finance concepts. But now even newspapers of the quality of the Economist are happy to publish anything that discusses market efficiency, regardless of how uninformed the commentary is.