Are The Markets Efficient?

Global financial markets

Miguel Navascués | There are people who still believe the markets are efficient. When I say people, I mean a lot of people. Some of them unwittingly, of course. But the “progressive” academics, those who theorise about the matter, they believe in it consciously and defend it militantly. Its greatest defender is Eugene Fama, who won a Nobel Prize for Economy for this just a few years ago. The only thing to say is that Eugene believes that the 2008 financial crisis demonstrated the efficiency of the markets.

Of course it depends on what you call “efficiency”. In this case, efficiency means that the markets always put an equilibrium value on the prices at which goods (a share, an ABS) are trading. Equilibrium does not mean “stability” in this case, but if X is worth A and a minute later is worth A/100, it’s because some new information has appeared which has caused players to reassess the value of X. Both A and A/100 are in equilibrium, or at least are on the path which leads to equilibrium/Tanto A como A/100 son de equilibrio, o al menos siguen la senda que lleva al equilibrio. Rubbish.

 The 2008 crisis is living proof that the markets get it wrong, and very often. Another Nobel prizewinner – funnily enough in the same year as Fama – was Robert Shiller, who does not believe in the efficiency of the markets. On the contrary, he believes in their overvaluation or undervaluation, because the behaviour of the markets tends to be excessive in one sense or the other. A bubble is the result of overvaluation, which cannot be efficient because everyone bets that prices will continually go up.  This is clearly not efficiency.

When this bubble is financed with increasing debt on the part of the buyers, and the banks who lend to these buyers, it’s difficult to see the logic behind it. If there are also intermediaries who remove the risk via instruments which allow them to resell their assets to others, with an AAA rating, when they are worth much less, where is the efficiency in that?

For there to be efficiency, there would have to be accessible information. But as Keynes said, we can only glimpse some impressions of the future, broad strokes, which are impossible to define. The statistic models of probability are based on data from the past which is no longer valid for the present. In reality, these models are just ad hoc justifications for being able to continue to make money by speculating for another day. What goes up comes down, but no-one knows when this is going to happen.

Then there are the sellers, whose job is to place these instruments with people who haven’t got the slightest idea. But they have this pipe-dream about taking on debt at today’s low interest rates. Go ahead! Because the whole ideology of the euro is based on the markets being efficient.

 *Image: Foter

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://