The autopsies of the financial crisis are beginning to appear. One of the more thoughtful, albeit disturbing is from Justin Fox at the Harvard Business Review. He suggests three pillars of modern macroeconomic theory have taken big hits:
- Efficient market hypothesis (EMH): investors act rationally in the long-term and markets are informationally correct.
- Capital asset pricing model (CAPM): assets are priced by their risk
- Maximizing shareholder value
This critique pretty much undermines much of what we all believe about open markets - not a comforting thought.
In the early 1930s, policy errors by governments and central banks turned a financial crisis into a global economic disaster. In 2008 the financial shock was at least as big, but the reaction was smarter and the economic fallout less severe. We actually had learned something in the intervening three-quarters of a century about how the economy and the financial system fit together.
But we hadn’t learned everything—and we still haven’t. In fact, macroeconomists and finance scholars clearly forgot some important lessons along the way. And the seeming success (compared with the 1930s, at least) of the 2008 bailouts and subsequent government and central bank actions may actually dilute the lessons of the recent crisis. In the 1930s and 1940s, the financial system was essentially built anew, with tight regulation and drastically changed attitudes about risk and responsibility. That approach surely had its costs, but it ushered in a financial-crisis-free era in the United States and Europe that lasted for decades. This time around, the system has survived more or less intact. That seems like a good thing, on balance; but it may also mean we’ll be having more learning experiences soon. [More]
While unsettling, it also fits with my growing belief that markets evolve to elude participants. It's almost a predator-prey model. It also leads me to think that the growing complexity of our markets should send us warning signals about what to expect from efforts to master them.
Fox suggests more, not fewer, market shocks even as we build financial instruments to seemingly manage them. We may simply be shuffling risk and disguising it better and faster.
In such an environment, the low-velocity and rudimentary nature of farmland stands as a stark contrast. I think we could see a significant part of our land price be contributed by the relative lack of sophistication of the asset. Which would give us a formula something like this:
P = IV + CV + SV, where
IV = intrinsic value of capitalized returns
CV = control value (for farmers, primarily) for future generations
SV = simplicity value for understandability and low maintenance (cash the rent checks annually)
Regardless, the macroeconomic community is in the throes of self-loathing, and are certainly not offering rosy pictures of the future.