Excel Finance Class 102: In The Short Run Financial Markets Can Be Inefficient Mispriced Assets

In the Short run financial markets can be inefficient. Markets Are Efficient Only In The Long Run - in that prices eventually tend to correct. In the short run prices can be incorrect and resources can be misallocated. In this regard (because markets can have incorrect prices (think of CDO) and misallocate resources), markets are never efficient. But that sort of makes sense because we are human, and we make mistakes, and we do not always act in a reasonable way, whatever reasonable means...

[excelisfun]

I agree 100%.

Because mispriced assets incorrectly allocate resources and because many people are unnecessarily hurt by bubbles and bust, the markets are not efficient.

It amazes me that the textbook that I am using for this class, glosses over these VERY important points.

more below...

[excelisfun]

The Austrian economists looked to low interest rates as a measure of when markets would misallocate resources. And Certainly there were people out there who provided data about that fact that some thought rates were too low.

[excelisfun]

Further, it seems unreasonable at all levels (house owners to investment banks) that people would lend and borrow with no proof of income or assets. Still further, it seems unreasonable that Alan Green Span could say they had no metrics to measure whether or not there was a bubble. Simple debt to asset ratios to gage overheated markets have been around since at least Irving Fisher.

[excelisfun]

I seems unreasonable to me to ignore the fact that some internet stocks were priced high even though there were no past revenues, or that house prices (collateral for securities) were high compared to fundamentals. At minimum, if you were buying and selling securities (or houses) and did not acknowledge facts like these, yes that does seem unreasonable.

[excelisfun]

You said: A free unregulated market is not as efficient as a regulated one.
Another way to say that is: If there are no police, people cheat a lot more than when there are police. I guess, for the latest crisis, since Greenspan and others (many since the Supply-side economic revolution under Reagan and Thatcher) were the police, it was as if the markets had no police.

[polvotierno]

but even in the long run the market is not efficient... Why? because booms and busts are not efficient. As more stable trend over time is more efficient. .... and you achieve a stable trend only with efficient regulation of the financial market... A free unregulated market is not as efficient as a regulated one...