10.28.09
Market Theory of Efficiency Not to Blame for Crisis
I am relieved to find an analysis of the financial crisis from a veteran which points to real causes underlying the crisis we’re recovering from. Wharton’s Jeremy Siegel, professor of finance, just makes sense. Here’s his take:
Rating agencies that rated subprime mortgages as investment grade made faulty assumptions about continuously rising home prices. The yields on these mortgages were high in spite of their investment grade rating (and markets were right to be suspicious of them, thus adding a higher risk premium). Wall Street, reaping fat rewards, and Congress, happy of the American Dream being realized by more, ignored red flags along the way. Government-sponsored Fannie Mae and Freddie Mac helped fuel the subprime boom.
This misreading of economic trends did not reside within the private sector. Large financial firms put their shareholders at risk and their leverage threatened the entire financial system. The Fed failed to see these problems. His summation: financial firms drove too fast, the Fed failed to stop them, and housing deflation crashed the banks and the economy. The Great Moderation — a period of less fluctuation in GDP, industrial production, and employment since WWII — is still alive though temporarily dazed.
See WSJ Opinion page Oct. 27, 2009, “Efiicient Market Theory and the Crisis.”
