Academic

WHY DID WE HAVE A FINANCIAL CRISIS? Because regulators didn?t believe in efficient markets. ?If re?

By Glenn Reynolds

WHY DID WE HAVE A FINANCIAL CRISIS? Because regulators didn’t believe in efficient markets. “If regulators had been true believers in efficiency, they would have been considerably more skeptical about some of the consistently high returns being reported by various financial institutions. If the capital market is fiercely competitive, there is a good chance that high returns are attributable to high leverage, high risk, inside information, or dishonest accounting. True believers in efficiency would have looked more closely at the leverage and risk-taking positions of Lehman Brothers, Bear Sterns, AIG, Freddie Mac and Fannie Mae, and banks and investment banks generally. They might have questioned the source of the trading profits of hedge funds like Galleon, and discovered some using inside information. And they would have been exceptionally skeptical of the surreally high and stable returns reported over an extended period by Bernie Madoff.”

Full post as published by Instapundit.com on March 18, 2010 (boomark / email).